The Folly of Negative Interest Rates
Negative interest rates are another misguided attempt by the Central Banks of these countries to increase bank lending. What they are hoping for is, if they charge banks for depositing money, banks will decide to make more loans to earn more interest and not leave their reserves at the Central Bank and watch it deplete from deposit fees.”
“However, we had seen this scenario before, when the Central Banks of the world instituted quantitative easing. Here in the United States, bank reserves jumped from $46 billion in 2008 to around $2.7 trillion today. During this time, respected economists, journalists, and politicians opined about possible inflation caused by commercial banks lending those recently acquired reserves.”
“A Central Bank penalizing banks for having too many reserves, when it was the Central Bank’s bond purchases (quantitative easing) that had credited the banks with the reserves in the first place, suggests a quote from a famous but misguided economist, Karl Marx, that history repeats itself “the first time as tragedy [the financial crisis], the second time as farce [negative interest rates].”
The folly of negative interest rates will hopefully, be the wake-up call needed to move the economy from one over-reliant on finance and banking for debt-fueled growth to an economy “built on the blocking and tackling of economic growth: entrepreneurship, education, manufacturing, investment, and infrastructure.”
These are the opinions of financial advisor Tim Hayes and not necessarily those of Cambridge Investment Research. They are for informational purposes only, and should not be construed or acted upon as individualized investment advice.