Negative Interest Rates: Have They Backfired Already?

Anyone with an ounce of common sense knows that negative interest rates cannot occur naturally, can only occur with government or central bank intervention, have nothing to do with free markets, and must fail eventually.

by Mish

That’s two to four strikes against them, depending on how one counts duplicate ideas.

The question at hand is: Have negative interest rates backfired already?

The Wall Street Journal discusses the “early evidence” in Are Negative Rates Backfiring?

Two years ago, the European Central Bank cut interest rates below zero to encourage people such as Heike Hofmann, who sells fruits and vegetables in this small city, to spend more.

Policy makers in Europe and Japan have turned to negative rates for the same reason—to stimulate their lackluster economies. Yet the results have left some economists scratching their heads. Instead of opening their wallets, many consumers and businesses are squirreling away more money.

When Ms. 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.

Recent economic data show consumers are saving more in Germany and Japan, and in Denmark, Switzerland and Sweden, three non-eurozone countries with negative rates, savings are at their highest since 1995, the year the Organization for Economic Cooperation and Development started collecting data on those countries. Companies in Europe, the Middle East, Africa and Japan also are holding on to more cash.

There is a growing suspicion that part of problem may be negative rates themselves.

“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.”

Low interest rates should encourage consumers and businesses to spend by depressing returns on savings and safe assets such as government bonds. Such spending should create demand for goods, help lift sagging inflation and boost economic growth.

Unintended Consequences

The last paragraph above is rather amusing. Consumers have proven economists wrong (once again).

Data Reflects Anecdotes

Here are a few more anecdotes from the article. Anecdotes do not constitute data, but the data reflects the anecdotes.

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 Germany, Europe’s largest economy and a nation known for thrift, savings as a percentage of disposable household income rose to 9.7% in 2015, according to preliminary data from the OECD. That is the highest rate since 2010, and the OECD expects the savings rate to rise further this year, to 10.4%.

In December, Ms. Hofmann, the Korschenbroich fruit vendor, used her Christmas bonus to buy two 10-gram bars of gold. She has since bought more and has put it, and every euro she can set aside, into a safe at home, saying she doesn’t trust banks. “Every time I check my savings account, it makes me want to cry,” she says.

Money in the Safe

In Japan, the threat of negative interest rates on savings accounts did not spur spending except on safes to hoard cash.

Mike “Mish” Shedlock

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