As you might have heard, in August Denmark’s third largest bank Jyske started offering negative interest rates on mortgages, and both Jyske and UBS in Switzerland are charging clients for depositing large sums. The reason they are doing this is that their respective central banks have had negative rates for a long time and that it seems the current monetary policy climate is here to stay. Therefore their view is that the most viable strategy is to push the costs of negative rates on to their depositors. This week’s post is a discussion of negative rates for individuals, about what it means and if it will be the key to reaching that elusive inflation goal.
I want to start to start by discussing what negative interest rates for deposits and mortgages will mean for regular people and how it fits in our theoretical frameworks. First though, I think it’s vital to underscore that this is truly unchartered territory and that any predictions, by me or anyone else, are just predictions. Most economic theories of which interest rates are a factor there’s an assumption that rates will remain positive. With negative interest rates not only in the somewhat distant (for the average person) realm of high level monetary policy most theories can be thought to be relevant as the most parts of the economy doesn’t feel the effects of negative rates but as banks push costs to their depositors we end up in a new macroeconomic climate for which most economic theories were never intended. For example, it’s hard to imagine how the IS-LM model would work with a negative equilibrium interest rate. I recently wrote a post asking if our theories of monetary economics are outdated and while that’s up for debate, it’s fair to say that a lot of our theories are outdated in a world where mortgages have negative interest rates.
The next point I want to discuss is whether or not negative rates in the real economy is a good thing. Intuitively I would answer that it’s a bad thing, low income earners have more of their savings in bank accounts than high earners and they certainly don’t deserve being punished for not having the resources to store their wealth in assets such as stocks or bonds. Of course, we’re not at a point where everyone is offered negative rates, only those with large deposits which makes sure that only those who can afford negative rates are given them. This presents some other problems however, the main virtue with commercial negative interest rates from the perspective of a policymaker is that it incentivises spending which could spur growth and inflation. But when banks only give the wealthy negative rates then the incentive to spend might be negated as the wealthy are more likely to shift their savings to assets which give returns, furthermore the wealthy have a much lower marginal propensity to consume which reduces the growth and inflation that commercial negative rates might have brought. In other words, given that only the wealthy are charged for depositing it seems that the only ones benefiting from commercial negative rates are the banks which are able to push some cost on to their depositors.
I’ve made my position abundantly clear on the blog, I dislike negative interest rates and Quantitative Easing (QE) as I think these sorts of policies will trap us in the liquidity trap forever. With the European Central Bank restarting Quantitative Easing and the Fed being dovish expect more to follow suit and start giving regular people negative rates. Intergenerational inequality, an entrenching of the upper classes, and less stable economies are in my view guaranteed outcomes from continuing on the path of QE and negative interest rates. Giving depositors negative interest rates is a step in the wrong direction which will make the path back to normalcy harder, longer, and further off.
If you liked this blog post you might be interested in this one about how the Euro and the gold standard are similar, and if you want to read my previous posts about monetary policy you can find those here. You can find me on Twitter and I’d really appreciate it if you shared this blog post with a friend or co-worker. Have a great day and come back next week for a new blog post.
Written by Karl Johansson, founder of Ipoleco
Cover Photo by Markus Winkler from Pexels
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