Negative interest rates are a hot topic lately. They are already in use in Europe, Japan, and elsewhere. There is even talk that they may be coming to the USA. What an absolutely terrible idea. Those pushing it are pursuing a small, theoretical, short-term benefit at the price of a large, long-term cost.
“The bad economist pursues a small present good that will be followed by a great evil to come.”
— Frederic Bastiat
The intent of negative interest rates is to get the economy going by forcing banks to lend their excess reserves and penalizing individuals for saving so they will go out and spend, spend, spend. While this might give a slight bump to GDP in the short term, it would be a disaster for the long term. A great deal of capital would be misallocated to uneconomic endeavors, and much of the population would be broken of their habit of saving, perhaps for good. It would likely also finish off the attachment most people have to the current system of currency and finance. If you can’t rely on a dollar being a dollar, then why not bitcoins or gold?
Individual savers already suffer the hardships of negligible returns and their purchasing power being eaten away by inflation. To charge them a fee to save would be insult on top of injury. To tax saving is to tax virtue, and when you tax something, you get less of it. This can only be bad for individuals and society as a whole. What virtue we have left should be encouraged, not punished.
Resorting to a negative interest-rate policy would be to turn reality on its head. And markets and investors would likely see it as a desperate act that means things are much worse than they thought. This is an idea whose time will never come.
“The economy is a complex, nonlinear, adaptive system where short run effects are often opposite of long run effects.”
— Eric Falkenstein
See also:
Negative-Rates Fallout Makes ECB’s Task Harder
Zone of Competence 