Opinion | Advanced economies swallowing negative interest rates with glee must remember this is not a cure for depression
- Negative interest rates have not encouraged spending and have fuelled inequality. Instead of relying on central bankers to tweak monetary policy, governments must initiate structural reforms. However, with a global slowdown in the offing, this is unlikely to happen
Negative interest rates don’t make sense. Yet, nearly US$16 trillion of the world’s bond market yields are in negative interest rate territory. Can this continue forever?
Negative interest rates mean that, if you lend money to someone, you have to pay the borrower rather than receive interest from him. It pays to borrow and it does not pay to be a lender. No wonder bank shares are not doing well.
Technically, if it does not pay to save, you should be spending, but why is there a lack of global aggregate demand (consumption plus investment)? The answer is that no one is confident about the future. With negative rates, it does not pay to save, but if we spend too much, we will end up in bankruptcy sooner or later. Furthermore, with markets at record highs, we don’t even know how to invest.
The first central bank to experiment with negative interest rates was the Riksbank, the Swedish central bank, in 2009. Sweden was facing high domestic savings, which meant that if the surplus funds did not flow out, there would be pressure on the currency to appreciate, especially against the neighbouring euro zone.