What are negative interest rates?
The Federal Reserve is the bank for the American economy.
The United States Treasury is the lender for the American government.
In Europe, it’s the European Central Bank. In Japan, it’s the Bank of Japan. In China, it’s the People’s Bank of China.
Lenders in those nations can park their money overnight or long-term with those lenders. They do that for safety sometimes because they know if anything ever went wrong (read: market crash), they could eventually get their money back from those central banks based on the taxing power of the governments behind them.
In an effort to persuade, cajol, or even force those large private lenders (think Citigroup in the US, Mitsubishi Bank in Japan, or Deutsche Bank in Europe) to lend out money — central banks are offering a negative interest rate.
In a simplified narrative, those central banks are saying, “We aren’t going to pay you interest for parking your excess cash here.”
It’s the major governments and economies of the world, “Don’t deposit your money here. Loan it out!“
And the consequence is simple enough. It’s an attempt to force banks to lend money.
They are purposefully making themselves more ugly (negative interest rate) than the alternative (lending to you and me and companies of the world).
If you hand over $100 to (for example) the Bank of Japan for 10 years, you will only get $99 back.
For some lenders, this is a small penalty to pay to insure that they will get their money back.
So across the board and across the world, interest rates are low.
Negative interest rates are an attempt for governments and central banks to get private lenders to open up their wallets to stimulate the economy.
We’ll see if it works.
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