The United States Federal Reserve recently lowered interest rates. Despite that fact, many are still clamoring for lower – or even negative – interest rates. The prevailing belief is that these rates would help spur an increasingly lagging economy. Former Fed Chairman Alan Greenspan believes that negative rates are inevitable. This is in part due to conditions in other first-world countries. Several European nations – Japan, Denmark, Sweden – currently post negative rates. The European Central Bank holds a zero percent interest rate.
In contrast, the United States remains a firm positive. Near constant ranting from President Donald Trump has done little to change that fact. A negative interest rate could, theoretically, help the ailing economy. However, much of the current economic woes are a direct result of trade policy. Violent fluctuations in the stock market follow his public comments. Further, the trade war he instigated with China is harming both importers and the average American citizen.
The Benefits of a Negative Interest Rate
Negative interest rates are still an experimental policy. Implemented in a handful of countries, the intent is to drive money out of savings and into purchasing. In turn, this should – theoretically – spur the economy into growth as more money flows. In practice, this has not been the case. Instead, bank clients are finding ways to store their funds outside of the interest rate. This includes physical currency in vaults and deposit boxes.
The practice does tend to weaken the native fiat currency. This can be a useful tactic for boosting exports. A weaker currency makes local products more attractive to those in other countries. However, with the current economic situation, the impact of this is negligible at best. Other countries are either attempting the same tactic – or their trade balance is already skewed.
The Benefits of a Positive Interest Rate
Positive interest rates are a sign of stronger economic fundamentals. Economies that are already doing well can afford to keep interest rates high – incentivizing savings and strengthening currency. People will want to hold their funds in a bank to accrue interest. In turn, the banks can safely lend money out. This is how banks have been operating for centuries. Banking clients utilize savings accounts, which then allows the bank to use the funds for loans.
The associated currency will also see a boost in value. While it would make exporting more difficult, it would make importing cheaper. This is helpful for small businesses that purchase inventory from overseas. Finally, the most crucial part of a positive interest rate is cushioning. A negative rate leaves nowhere to go – a positive rate gives the Fed space to work in a real crisis. Despite opinions on the growing wave of negative interest rates around the world, the global economy continues to march through murky, uncharted waters.
Article By: Adam Stone