Negative Interest Rates Steal From You

Negative Interest Rates Will Cost You Money

Bank Run With Interest Rate Change
Change in Interest Rates Causes Commotion. Keystone

This affects you.  You never heard about negative interest rates a few years ago, or even a few months ago, but the term has been cropping up more and more in the news.

Negative interest rates?  Understandably, since most people have never heard about them, they probably don't understand what they are, or why they matter.

Well, they do matter, and they will affect you directly.

Typically, when you have savings in a bank account, the banking institution pays you a very small amount of interest on your money.

 This amount used to be more substantial several years ago, but now the percentage is almost anemic, usually less than 1%.

This means if you keep $100 in your bank account, a year from now it will be more like $101.  You are getting a tiny reward, or slight payment, for keeping your funds with the institution.

Of course, monthly account fees, overdraft interest, and a whole host of other impacts usually evaporate a lot more than the interest payment you received.  Yet, it is still cute that they try to seem like they are rewarding savers.

Things are changing now, however.  Those changes are coming in the form of negative interest rates.

Europe started it, with their banking institutions dipping into negative interest rate territory.  Now your $100 in the bank will become $98 over time, and eventually $95, then $93...,  It all depends how long you leave the cash in the bank, and how negative they go with the rates.

Besides all the fees and other costs, the banks (with the lead of the European Union's Central Bank) now take some of your money.  The savings just sitting there slowly gets whittled down over time.

The misguided theory is that, by punishing savers, it will encourage people to take their money out and spend it.

 This would be expected to then give the economy a boost.

Really, it just signals that the Central Bank failed to juice the economy, despite trillions in money printing.  It also illustrates that there in an underlying problem of slow growth, which the country has been able to fix.  And of course, after an early potential boost with consumers buying TVs and cars, the populace is left without any savings.

What could go wrong?  

The world watched the European experiment, concerned that they would be a run on banks - people would trample each other in their frenzy to take all their cash out.  The concerns over such an outcome proved to be unfounded, and most people didn't change their behaviours at all.

This emboldened other central banks around the world.  Japan was next, just dipping into negative rate territory last week.  After 25 years of recession, Japan thinks they can fix everything by stealing some of the savings of the people.  Again, what could go wrong? I'm sure this will all be just fine, and Japan will spring back to growth (yes, this is massive sarcasm).

There are two major points to consider here.

1.  The negative interest rates start slow so people don't get freaked out, but they can be pushed deeper and deeper.

 When the bankers realize they aren't causing panic, and that the policy is doing absolutely nothing to stimulate the economy, they will double-down.  Expect negative rates to go even more negative, and your savings to be stolen at an even faster pace. 

2.  Negative interest rates will be coming to America next.   After failures to get the economy going, even after near-zero rates for a decade, and trillions in money printing, the Federal Reserve is running out of tricks.  This last one is going to be the big finale.