We Finally Understand How Destructive Negative Interest Rates Actually Are | WHAT REALLY HAPPENED

We Finally Understand How Destructive Negative Interest Rates Actually Are

Submitted by Tuomas Malinen is a Chief Economist of GnS Economics and an Adjunct Professor of Economics at the University of Helsinki.

We are in the midst of a strange economic experiment. Vast quantities of negative-yielding debt are currently sloshing around the global economy. While the amount of negative-yielding bonds has dropped recently from a mind-boggling number in excess of $17 trillion, reinvigorated central bank easing across the globe ensures that this reduction is only temporary.

When a central bank pushes rates to negative, banks need to pay interest on the reserves they hold there. But they are not relieved of the obligation they have to pay interest on customer deposits, who are understandably reluctant to pay interest on money they place at a bank. Consequently, the whole earnings logic of banking goes haywire if banks are required to pay interest on loans and receive interest on deposits. As profit margins of banks are squeezed, profitability falls and lending activities suffer.

However, the problems created by negative interest rates do not stop there. In 2008, an influential article describing the economic malaise in Japan after the financial crash of the early 1990s found that instead of calling-in or refusing to refinance existing debts, large Japanese banks kept loans flowing to otherwise insolvent borrowers. That is, banks supported firms that, according to standard economic logic, should have perished. They were creating zombie corporations.

Negative interest rates foster the phenomenon of zombie corporations in two ways. First, credit is extremely cheap and in some cases you are even paid to take it (if banks acquiesce to the negative interest rates set by the central bank). Second, because negative interest rates weaken banks by destroying operating margins, they will try to avoid capital losses by extending credit to ailing or even insolvent borrowers.

Webmaster's Commentary: 

The most logical thing individual consumers, with a brain, can do, is get out of as much credit card debt as is humanly possible.

And please, at the risk of sounding like a chipped CD (and as a musician and composer, I HATE when that happens!!) please have only enough money in the bank to pay the bills; keep the rest under your personal control.

Start looking at investing in silver and gold, which are, in an of themselves, mediums of financial exchange. And with the silver, you are looking for "melt value"; not numismatic value (that is a pretty, artsy-looking coin, but has no real value, other than its melt value, to most collectors.)

Learn the "little cheats" that can make a real difference in your financial stability; and I am talking about the little things which eat up money every month, and should not. "Brown bagging" it for lunch, and bringing your own coffee/ latte to the office or to the workspace?!? This is an amazing help.

Learning to "slow-cook" meats in the oven, or crock pot?!? Another way to insure your family (even if it is a family of 1), has good healthy food, and you can freeze portions of it for later.

And to our ladies and gents out there, who are still purchasing clothing with the tags "dry clean only", please STOP IT; dry cleaning is, generally, not great for the environment, and is a money hog for your budget. If you still have a lot of stuff like this, it may be time to hold a yard sale, and then, only look for those nice bits of clothing which survive washing and drying well.

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