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.
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.
I discussed this back in February in Safes Sold Out in Japan: Customers Hoard Cash in Response to
Negative Rates.
Mike “Mish” Shedlock
