No Place Left To Rob

The Star (St. Lucia) - - LOCAL - By Michael Walker

We live in danger­ous times, and not in the way you might think. A long­stand­ing rule of eco­nomics says that in­ter­est rates can’t go be­low zero. Yet just a few weeks ago, Swe­den’s Cen­tral Bank in­tro­duced a neg­a­tive in­ter­est rate that means that other banks have to pay the Cen­tral Bank to de­posit money there, in­stead of the Cen­tral Bank pay­ing them. In the­ory, this means that ev­ery time peo­ple de­posit money into their ac­counts they have to pay in­ter­est to the bank for be­ing kind and tak­ing care of their money in­stead of the bank pay­ing in­ter­est to the ac­count hold­ers for hav­ing ac­cess to their money.

(As an aside: For decades, Swiss banks have charged their in­ter­na­tional clients neg­a­tive in­ter­est on de­posits – in other words, it has cost such clients to de­posit and keep money on ac­counts in Switzer­land. The clients ob­vi­ously felt it was worth their while to pay the bank rather than al­low au­thor­i­ties “back home” to know where they had their money. It was all part of money laun­der­ing, I sup­pose.)

When cen­tral banks in­tro­duce neg­a­tive in­ter­est, regular banks that al­ready load, some might say over­load, their clients with fees for just about ev­ery­thing ex­cept breath­ing the air in their of­fices are sud­denly faced with an ex­tra cost that could be passed on to their clients if they chose to do so. In re­al­ity, no bank has or will pass on this neg­a­tive in­ter­est rate to its cus­tomers be­cause savers would rather hide cash un­der their beds, goes the logic, than lose money by leav­ing it in the bank; banks are not be­ing kind; they are scared they will lose out if they pass on the cost.

So why neg­a­tive in­ter­est? Well, some cen­tral banks are try­ing to re­vive growth in na­tions through mas­sive pur­chases of gov­ern­ment bonds, while oth­ers are push­ing rates into neg­a­tive ter­ri­tory to re­vive slow­ing economies. The big ques­tion is whether this “new” mon­e­tary tool might be enough to re­sus­ci­tate spend­ing and push in­fla­tion back up in our part of the world. Things have re­ally changed: We live in a brave new world in which in­fla­tion rates need to climb. When my gen­er­a­tion was young we strug­gled to re­duce in­fla­tion rates, not raise them.

Neg­a­tive in­ter­est is a po­ten­tial gamechanger for cen­tral banks. Nor­mally, they stim­u­late spend­ing by low­er­ing the real in­ter­est rate, that is, the nom­i­nal in­ter­est rate mi­nus in­fla­tion. With in­fla­tion now close to zero or lower in many coun­tries, neg­a­tive nom­i­nal rates make pos­si­ble more neg­a­tive real rates.

For the most part, pos­i­tive in­ter­est rates suit both savers and bor­row­ers. It pro­vides house­holds with an in­cen­tive to save for to­mor­row rather than spend their money to­day. Com­pa­nies are prob­a­bly will­ing to pay to bor­row be­cause they plow the money into projects that prom­ise higher re­turns. But noth­ing is self­evi­dent; worry over the fu­ture can drive peo­ple and com­pa­nies to stash money away even if they re­ceive noth­ing in re­turn. Com­pa­nies can have such low ex­pec­ta­tions about the viability of new projects that only zero or neg­a­tive rates can en­tice them to bor­row and ex­pand. The truth is that de­spite cen­tral banks hold­ing real rates in neg­a­tive ter­ri­tory since 2008, very mori­bund in­vest­ment en­vi­ron­ments and low in­fla­tion rates have per­sisted.

There are, of course, fi­nan­cial ex­perts who warn against be­low zero rates on the grounds that they aren’t needed. Such in­ter­est rates, they say, might dis­rupt the fi­nan­cial sys­tem be­cause money-mar­ket mu­tual funds, un­able to prom­ise in­vestors a pos­i­tive re­turn, will close up shop. And de­pos­i­tors may sim­ply take their money out as cash – though Europe, it must be said, has not yet seen a surge in cur­rency de­mand. On the con­trary, thanks to debit cards, on­line pay­ments, etc, phys­i­cal cash has be­come rel­a­tively more bur­den­some and costly, and thus less at­trac­tive, to use. In dig­i­tally savvy Swe­den, cur­rency in cir­cu­la­tion has fallen by about 25% since 2009. For big savers such as banks and in­vest­ment funds, trans­port­ing and stor­ing hun­dreds of mil­lions of Eu­ros, Dol­lars or Francs, not to men­tion com­ply­ing with anti-money-laun­der­ing laws, is ex­pen­sive and time-con­sum­ing.

Neg­a­tive rates de­ter in­flows of so-called hot money.

A cash-free world may be just around the cor­ner, Folks, and it is sur­pris­ingly easy to get used to. In the past seven weeks I have vis­ited so far eight dif­fer­ent coun­tries, with two more ahead of me, and have not used “real cash” once. Petty thieves and other crim­i­nals are cry­ing foul: They have no one and no place to rob!

Newspapers in English

Newspapers from Saint Lucia

© PressReader. All rights reserved.