negative interest rates and the effects on the average Joe
In: Economics
Interest rates are one of a handful of tools in a Central Bank’s toolbox, used to keep an economy stable and healthy. These tools all generally do the same thing: tighten and loosen the money supply. Traditionally, when times are “good”, CB’s tighten the money supply by raising rates and stopping quantitative easing, that way when times get “bad” they have somewhere to go with those things. Hard to lower rates during a crash if you didn’t raise them back up after the last crash was over, right?
But central banks aren’t a one-man army – monetary policy has to work hand-in-hand with fiscal policy, which the government controls, in order to ensure a stable and healthy economy. Right now, global governments aren’t doing their part, leaving central banks in a bit of a bind. The tools they have at their disposal (rates, QE, etc) have diminishing returns the further they go with them, and without matching fiscal policy it doesn’t necessarily go where it’s meant to go. This is why stock markets are at such extended highs and the rich are getting much richer at an accelerated rate, while many markers of the overall global economy are suggesting poor health for “the average Joe” – negative rates for extended times without matching fiscal policy has potential for abuse by the already-wealthy by offering access to easy free money, without providing any incentive to ‘trickle down’ that money into things like raises, bonuses, R&D, etc. Instead, they are using that money for things like record stock-buybacks to help stockholders and various other financial risk instruments (equities, real estate, bitcoin, junk bonds)
TLDR: Negative interest rates are the result of central banks not acting to raise rates when they should have, in part because governments were not doing their part with fiscal policy, and is dangerous because it both widens the wealth gap and leaves central banks poorly positioned to deal with a future recession. Short term, maybe your mortgage rate is a point lower. But long term, at the very least, far more wealth inequality and corporate influence on government along with it.
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