Instead of the bank paying you interest on money you have in the bank, you pay the bank for holding your money.
Normally, if you put $100,000 in the bank and it has a 2% interest rate, then at the end of one year, you have $102,000 in your account.
But if the bank has an interest rate of negative 2%, then you put $100,000 in the bank and come back a year later to find $98,000 in the account. The bank took $2,000 (or 2%) as a ‘negative interest rate’.
Who would leave money in the bank on those terms? Why not just store money in cash that does not lose money?
The IMF wrote a blog post in February outlining how negative interest rates would work:
Many central banks reduced policy interest rates to zero during the global financial crisis to boost growth. Ten years later, interest rates remain low in most countries. While the global economy has been recovering, future downturns are inevitable. Severe recessions have historically required 3–6 percentage points cut in policy rates. If another crisis happens, few countries would have that kind of room for monetary policy to respond.
To get around this problem, a recent IMF staff study shows how central banks can set up a system that would make deeply negative interest rates a feasible option.
In a cashless world, there would be no lower bound on interest rates. A central bank could reduce the policy rate from, say, 2 percent to minus 4 percent to counter a severe recession. The interest rate cut would transmit to bank deposits, loans, and bonds. Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.
When cash is available, however, cutting rates significantly into negative territory becomes impossible. Cash has the same purchasing power as bank deposits, but at zero nominal interest. Moreover, it can be obtained in unlimited quantities in exchange for bank money. Therefore, instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor.
One option to break through the zero lower bound would be to phase out cash. But that is not straightforward. Cash continues to play a significant role in payments in many countries.
Already there are countries with negative interest rates:
In fact, if you consider that bank interest is now already less than inflation, we are already negative, though this is only the beginning. It's all about protecting the interests of the global elite and propping up the merry go round of inflated assets. Negative interest rates would force people to move their money from negative yielding bank deposits to speculative investments such as stocks, bonds and real estate. Anything to keep the ponzi scheme from collapsing.
RBA governor Philip Lowe suggested Australia's central bank may introduce negative interest rates:
The ASX is already preparing for negative interest rates:
Yet it would not be easy to introduce negative interest rates as the IMF pointed out. If rates go negative people will just withdraw and hold cash rather than losing money held in a bank. Therefore our government is implementing this first step in order to get the ball rolling under the guise of tax avoidance.
The Australian government have proposed a bill to restrict cash transactions over $10,000 under the guise to tackle tax evasion and other criminal activities. Yet the same could potentially be used to punish people with cash deposits in bank accounts.
Currency (Restrictions on the Use of Cash) Bill 2019:
https://www.treasury.gov.au/consultation/c2019-t395788
https://www.treasury.gov.au/consultation/c2019-t395788
https://www.smh.com.au/business/small-business/anonymous-untraceable-new-cash-transaction-rules-slated-for-next-year-20190729-p52bpl.htmlI would encourage people to make a submission to Treasury by emailing blackeconomy@treasury.gov.au by 12 August 2019 to ensure this bill does not pass into law. Economist John Adams has written a submission and made it public:
Why is the government proposing this bill? Here are my concerns:
- What is the evidence that this bill will increase tax revenue and reduce crime?
- Where is the cost benefit analysis?
- What is the impact on civil liberties?
- Why are we forced to use electronic transactions through commercial banks that have fees and are not anonymous?
- Is there any assurance that banks will not introduce negative interest rates? Negative interest rates are supposed to stimulate the economy, incentivising investment by making it less attractive to hold cash, yet a negative interest policy penalise savers and retirees, robbing them of their savings and income they need from savings, and forcing capital to be allocated in nonproductive and speculative assets further inflating already ridiculous asset prices. This unjust policy moves money from savers to the the elites. We should have the option of using physical cash thereby not losing money with negative interest rates.
- Do we have any assurance that bail-ins will not occur during a financial crisis? Bail-in is the taking of depositors’ cash to bail out banks that became insolvent through the actions of the banks’ management, not the actions of depositors. If citizens are forced to move from cash to digital currency that is held in banks then much easier to enforce controls and steal the depositors money to support the banking system. Since the government enforces the taking, it is officially sanctioned theft, yet theft nonetheless.
Update 9/10/2019 - RBA governor Philip Lowe published a report outlining the effects of negative interest rates:
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