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Trying to wrap my mind around the implications of the FED instituting negative interest rates kinda makes my brain hurt, as I didn't major in economics and I honestly don't fully understand the (overly) complicated game of monkeying around with the economy by changing the variables.
But I have nevertheless been trying to understand it. And watching the debate with some fascination. Due to the severe economic downturn and disturbing rise in unemployment from the mandatory shutdown of most businesses basically overnight, we have been left with trying to figure out the best way to move forward, in hopes that we can rebound and recover from this in several months, instead of several years. Or even a decade or more.
Those are some high stakes. And already the FED (Federal Reserve) has slashed interest rates to near zero %, or to zero %. Meaning banks and institutions can borrow money from the central bank with very very little to no interest, as a way to boost/stimulate the economy. Or at least it's a way to stop the bleeding. And in turn banks can pass those savings on to regular consumers and small businesses needing capital. That's my rudimentary understanding of it anyways.
This has positive and negative consequences it seems. It does encourage more money to flow instead of being hoarded or saved, at least that's the theory. But it also hurts those making passive income from savings accounts, as banks are now encouraged (and are) dropping interest rate earnings, in some cases to 0%, meaning its no longer making you any money to have your savings parked into a savings account. And that in turn might push you to invest your money into something more risky. And if everyone slowly turns to riskier investments, and the economy doesn't respond well overall, that could lead to even deeper issues that we won't soon recover from.
From my understanding, all of that will be magnified if the FED decides to drop interest rates into the negative. Meaning instead of 0% or near 0% interest rates, it could be -3% (a number floating around). And in essence banks could actually be paid to borrow money, as they would have to pay back less than they borrowed. So it would be a no-brainer to borrow.
As long as the banks aren't allowed to hoard money for long periods of time, and are incentivized to put that money out into the market, where it eventually falls into the pocket books and bank accounts of the average consumer, it would seem a possible way to even further stimulate the economy. And loans could be issued at lower to no to even negative interest rates on consumer loans like mortgages, auto loans and small business loans.
But where I get dizzy head is thinking about all the ways it could go wrong, and I feel I have too much of an elementary understanding to this complicated debate. There's fears of inflation, and deflation, and still money hoarding. And of course people at large investing into more risky investments, that over time blow up in our face...
Anyone here understand negative interest rates? And the implications (pros and cons) of doing that? Or just have an opinion on this? Seems like the further we get into this and the economy starts to look more like its headed for a 'depression' instead of a 'recession' the more likely the FED will entertain this idea. So is it a good, bad, great or terrible idea?