The Sub-Zero Club: Getting Used to the Upside-Down World Economy

The financial world has gone mad.-Lou

Interest Rate Crash

The Sub-Zero Club: Getting Used to the Upside-Down World Economy

Bloomberg

Japanese families seem to have a sudden affinity for home safes. According to the Tokyo-based manufacturer Eiko, shipments have doubled since last fall. And in Germany, insurer Munich Re has stashed some 10 million euros ($11.4 million) worth of its own cash into vaults.

Why the squirreling? One possible reason is the creeping imposition of negative interest rates across the world, which could make it more rewarding to bypass banks—and a safe or vault is, well, more secure than a mattress.

Welcome to the upside-down world of modern monetary policy. In this new reality, borrowers get paid and savers penalized. Almost 500 million people in a quarter of the global economy now live in countries where interest rates measure less than zero. That would’ve been an almost unthinkable phenomenon before the 2008 financial crisis, and one major economies didn’t seriously consider until two years ago, when the European Central Bank first partook in the experiment. Now the ECB and the Bank of Japan are diving deeper into the sub-zero world as they seek more ways to spark inflation.

ECB President Mario Draghi currently charges 0.4 percent on the euros deposited by banks in his coffers overnight. BOJ Governor Haruhiko Kuroda, whose country knows more than most about the perils of soft inflation, knocked his benchmark down to an unprecedented -0.1 percent in January. Their counterparts in Sweden, Switzerland, and Denmark have already been running negative campaigns for a while now. The U.S. Federal Reserve has, so far, remained on the sidelines.

The overall aim, of course, is to spur banks to look elsewhere when lending their cash, preferably to spenders such as companies and consumers, who should also benefit from low borrowing costs in markets. There’s also the hope—especially in Scandinavia and Switzerland—that currencies will fall as investors seek higher returns elsewhere, lifting exports and import costs.

The policy isn’t without risks. Bank profits could be squeezed, money markets may freeze, and consumers could end up with bulging mattresses to avoid paying to keep money in a bank account. The whole effort could wind up leaving inflation even weaker—hence the tiptoe approach to cutting rates.

“I’m skeptical about the efficacy of negative interest rates,” says Barry Eichengreen, professor of economics at University of California at Berkeley. “They increase the cost of doing business for the banks, which find it hard to pass on those costs to borrowers, given the weakness of the economy and hence of loan demand. Weaker bank balance sheets are not ideal from the standpoint of jump-starting growth, to put an understated gloss on the point.”

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