anybody have a simple explanation of negative interest rates?
anybody have a simple explanation of negative interest rates?
Central bankers move rates to “zero or negative” in order to fight “Deflation” with “inflation”.
They are trying to provide an incentive for people to spend their money instead of saving it.
In the US, the FED only controls “overnight” interest rates via FED Funds (the rate in which banks borrow from each other) and the Discount rate (the rate in which banks borrow from the FED, which rarely happens).
All other rates both charged and paid are set by market participants and ultimately the level of economic activity.
Negative rates have the secondary effect or pass-through effect in which banks may and have charged people for holding their money.
So people take their money out of the banks and the Central bankers expect them to spend it.
This is the theory.
The theory is to “create” economic activity by penalizing those that save. This activity is inflationary since your purchasing power is decreasing over time. People should buy that toaster today since they will have less money if they wait until tomorrow.
Deflation is a Bitch.
If your purchasing power is increasing, people tend to wait to purchase things because they will be less expensive tomorrow.
Virtually the entire world has been caught in a deflationary cycle since 2008. There has been a so-called “race to the bottom” with rate cuts and QE*’s in a desperate effort to stimulate economic activity.
To date, all of these efforts have failed to stop the deflationary cycle. They have only paused them artificially.
IMHO, it’s going to get really ugly.
This is not a scenario in which you want to rush out and buy gold. Cash will be king.