Thursday, January 22, 2015

Negative Interest Rates. Can someone explain this to me?

Would you deposit money in a bank that pays you negative interest? You could argue that with CD rates at 1% and the cost of living increase near 2% that we are already in a negative interest situation. That's not what I'm talking about. I mean real negative interest.

photo credit: via photopin cc

For example: You walk into a bank, hand over a thousand dollars, and the annual rate is negative 1%. Next year you withdraw your money and get $990.00 instead of your original one thousand.

Absurd, you say? That is what Swiss and Danish banks have just started doing. You can read about it here:

Switzerland and Denmark institute negative interest rates.

Or Google: "Swiss negative interest rates"  for many other sources.

The rationale from Switzerland, as best as I can determine, is that the Swiss Franc has become so strong against other world currencies, mainly the Euro, that Swiss exports are too expensive, and it is hurting the Swiss economy. They want to discourage depositors.

Read that again: They want to discourage depositors.

photo credit: kurichan+ via photopin cc

How can banks stay in business if they discourage depositors and have no money to loan? I'm no great financial wizard, but even I know that something here does not compute.

The article referenced above warns that this practice could spread to other countries and eventually to the U.S. I've already started thinking about where to dig holes in my back yard to hide money.

photo credit: Eselsmann™ via photopin cc

This is so upside down that I wonder if those same bankers will start paying customers to borrow money. If they want to loan me a thousand and then have me pay them back $990.00 next year, then count me in!

Seriously, though, can someone explain this to me? I just don't get it.

No comments:

Post a Comment