The hot button topic in the global economy is negative interest rates. Some economies, like Switzerland, Denmark, and Sweden, have already adopted this policy, and the rest of the world is waiting to see if the United States might follow suit with a subzero interest rate regime of its own. If this were to happen, it would certainly have wide reaching implications, both for bond prices and the economy as a whole.
Bond prices mathematically respond to changes in interest rates in an inverse way. Therefore, rates being negative in and of themselves means next to nothing, but when the rates change from slightly positive to negative, then that points to higher bond prices.
Economically, negative interest rates are designed to spur economic growth. As savings accounts now have a cost associated with them, consumers will look to spend or invest their assets due to the cost of money being so cheap. Furthermore, negative rates will often times depreciate the domestic currency, as investors look elsewhere for higher yields, which will drive up the exports for firms operating domestically, and boost its economy. This materializes because foreigners can now buy more units of the domestic currency, which effectively reduces the cost of buying the domestic country’s products.
While negative rates look appealing on paper, they could cause a disastrous situation. People could indeed withdraw money from their bank accounts, but rather than spend or invest it, they might choose to stash it under their mattresses. A negative interest rate economy is certainly not an indicator of economic health and prosperity, so consumers might prefer the safety of hoarding their cash. Furthermore, while negative rates are often used to combat deflation, they could actually end up causing deflation. A consumer driven society is so dependent on spending that the failure to do so could set off a nasty spiral of more layoffs, lower wages, lower prices, and the incentive to wait to make any investments because purchasing power is actually increasing over time.
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