What If Negative Interest Rates Don’t Work?

Central banks around the world have been dropping interest rates to get investment up and economies growing.  Some of them have even gone to negative interest rates to get things moving.  But it hasn’t worked.  Why?

Two thoughts.  First, no matter how low interest rates are, people aren’t going to borrow to invest unless they have something they want to invest in.  If they don’t think the economy is going to grow, they are not going to invest, no matter how low interest rates are.

Second, and tied in with the first, one important part of getting people to spend and invest, and an economy to grow, is confidence.  If you’re worried or not sure how things are going to go, then you are not going to spend and you are not going to invest.  Which is exactly where we are today.

People and businesses see negative interest rates not as a sign of confidence and an encouragement to invest.  Rather, they, or at least many of them, see negative interest rates as a sign of panic and confusion.  And what do you do in that situation.  Hunker down.  You don’t spend; you save.  Which is what is happening.  The Wall Street Journal had an article on this phenomenon yesterday.  Here are some excerpts from the article on what negative interest rates are causing people to do:

“When [Heike] Hofmann heard the ECB was knocking rates below zero in June 2014, she considered it “madness” and promptly cut her spending, set aside more money and bought gold. “I now need to save more than before to have enough to retire,” says Ms. Hofmann, 54 years old.”

* * *

“‘People only borrow and spend more when they are confident about the future,” says Andrew Sheets, chief cross-asset strategist at Morgan Stanley.  “‘But by going negative, into uncharted territory, the policy actually undermines confidence.’”

* * *

“‘The signal to the consumer is that something is wrong—it’s a crisis measure,’ says Carl Hammer, chief currency strategist at Swedish bank SEB.”

* * *

“Lasse Bohman, a 63-year old newsstand worker from Stockholm, said the concept of negative interest rates is ‘weird’ and makes him want to save more for retirement rather than spend.  ‘I am just going to keep on putting money in the bank,’ he says, or ‘put it under the mattress at home.’”

* * *

“In Japan, Tatsuro Takahashi, who sells barbecue pork from his food truck in Tokyo, said, ‘I’m not interested in borrowing money to expand my business, whether the rate is lower or not.  It is riskier.’”

In a lengthy post in April 2016, I noted that Mervyn King, former head of the Bank of England, called this “radical uncertainty,” which I explained as follows:

“The measures [i.e., near zero and negative interest rates] are seen as so desperate that people think things must really be bad and they should cut back and/or do nothing.  People think that, if the authorities are willing to do this, what will they do next, which causes people and businesses to do less and spend less.”

In other words, the solution may be less in lowering interest rates and more in raising confidence, something that governments and politicians have not been good at doing lately.