What Effect Would Negative Interest Rates Have On Your Finances?

A few weeks ago I did a lecture and mentioned during my presentation that there has been a lot of talk about negative interest rates.

In simple terms, think of this as paying a fee on the money you keep in your bank account. In addition to losing out on interest, you would have to pay a fee to store your money there.

As it turned out, the day after my presentation the European Central Bank adopted a negative interest rate policy for its member firms. To be clear, member firms are large commercial banks, and these rates don’t yet apply to regular consumers.

The main reason behind a negative interest policy is to discourage institutions from storing excess capital with the central bank. In theory, what it’s supposed to do is encourage member banks to keep their surplus capital and use it for business loans and growth.

Right now there is no way for this type of policy to affect you directly as a retail customer because we are using a fiat money system, but it could become commonplace if we accept an electronic monetary system.

To prove my point, imagine that you found out tomorrow that your bank was going to start charging a storage fee on your cash. What would you do? I think most people would withdraw their money from those accounts and keep it in cash. It’s unlikely they would spend or invest it, even though that’s the purpose of imposing negative interest rates.

If we went to an electronic monetary system, the government could very easily impose negative interest rates on retail clients because there would be no opportunity to “cash out”. You would have credits that you could exchange for good and services, and these credits would exist only in the virtual world. If the government wanted to stimulate more spending or investment, they could potentially start charging you a negative interest rate.

The theory is scary enough, but how would something like this affect people who are trying to live off of interest? Not only do they see their income source cut off, but then they start losing their capital as it’s forced out into the market. I would hope the people who we entrust with our national finances think these things through before they implement something of this magnitude.

Increasing bank account fees would provide a more subtle way of imposing negative interest rates; however, if the purpose is to stimulate spending, I don’t think that padding the bank’s balance sheet would help matters.

The world today is a new place. Unlike the twentieth century, where things moved slower and our systems were easily understood, the twenty first century is evolving in ways we couldn’t have imagined. Bitcoins, dogecoins, negative interest rates, who knew? I’m thinking maybe we should take a hint from our friends in the South Pacific and adopt Yap stones. No one’s going to mess with those things!