Interest rates as signs of the future.
Switzerland recently started charging its customers interest on their deposits, and it's the only instance of doing this I feel I understand. The Swiss are after all surrounded by countries which might devalue their currency, and in the past have sometimes even expropriated the funds. So, many of these potential victims are tempted to deposit money abroad to keep their own governments from grabbing it, to the point where the ability of Swiss banks to make loans is swamped with too much money. They can't use more money, thank you, and will charge you for the security of hiding money in safety. After all, every bank charges customers for using its deposit boxes purely for safe-keeping.
And the Swedes and Germans are almost in the same position. Having been victims of their own governments once, they want to retain strong currencies, no matter what, and it has proved to be a good stance to take. They have seen too many spendthrift aristocrats get out of a Rolls Royce in order to file bankruptcy proceedings. Money floods in to take advantage of safety, and the Germanic governments can thus pay lower rates to borrow for themselves,(just as long as they don't borrow too much.) Some may remember the episode when John McCain was running for President and rushed home to assure the party bigwigs he had no plans to borrow big amounts. The whole situation reduces itself to governments having a lot of unused credit if they don't borrow, and having high-interest costs if they do. That's also why there was such an uproar when Bush 41 raised taxes in spite of his promises--he was apparently going to weaken the currency, that way. Technically, it reduces itself to finding the "sweet spot" for interest rates, which will vary depending on what your neighbors do. That's how Germanic people see things.
Southern Europe, and for that matter the rest of the world, sees a different reality. To them, you must "spend money to make money", and if your thrifty neighbors will loan it to you, it benefits both, (if the interest rate is right.) You can buy infrastructure, foreign manufacture, and prosperity. With a little luck and acumen, your trade, industry, and standard of living will prosper. Unfortunately, this ultimately leads to overcapacity, which undermines prices and prosperity, raises interest rates, and leads to a crash. At that point, it is thrifty Germanic types who get to buy things cheaply with their strong currency. Back and forth; this is the business cycle, and it has happened many times. The duration of the recession between cycles will depend on the amount of overcapacity which has developed. The duration of a recession might, therefore, be shortened by printing money to assist consumption, but diluting your store of credit is not the same as increasing it. Increasing your credit by increasing your wealth is quite different, but borrowing conceals whether you are truly wealthy or not. A history of repaying your debts is what banks depend on, not the size of your car or apartment.
There can be less obvious, even obscure, causes of negative interest rates. It is supposed the promised ending of low-interest rates by the Federal Reserve will make banks hesitate to loan money, sensing an opportunity to charge higher rates later. Adherents of this theory are urging that rates be raised as soon as possible.
Others blame the Obama administration, who obviously enjoy borrowing large sums at low rates. The Fed is supposedly independent of such pressures, but the incentive is undeniable.
Still, others feel it is unnecessary to look at specific levels. If inflation is approaching, the prospect of higher future rates has the same dampening effect on present loaning incentives, and ultimately the same effect on collapsing the stimulus.
And others (primarily borrowers) seek joy in lower rates at all times, the lower the better. It represents a chilling prospect to lenders, for anyone to talk about negative eight percent, or even ten. But it suggests faster transaction speeds and electronic gadgets to replace paper money. Part of the cause of the collapse of Lehman Brothers was the increased float in world currency occasioned by globalization, breaking single big transactions into many smaller ones. The current estimate is there is American currency in circulation in the world, amounting to $4000 per living American. And how much of that is created by illicit drug trading and other crimes, is anyone's guess. The underworld isn't interested in gadgets which record transactions, such as several variants of bitcoin do.
All in all, it will be intensely interesting to see what happens to negative interest rates, once the Fed does start to raise them. If they are only a passing fad, it doesn't matter.
Originally published: Tuesday, December 01, 2015; most-recently modified: Friday, May 24, 2019