Why negative interest rates might not seem scary after all!

Why would anyone want to deposit or invest his money when nominal interest rates are negative?

Would you prefer to hold cash, like the Argentine currency above, or keep your account when rates are negative?

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For years, economists have dubbed imposition of negative interest rates as “a tax on holding money.” No one cherishes losing money. Under a negative nominal interest rate of -2.0%, $100 in an account will be worth $98 a year's time.

Negative nominal and real interest rates have been part of monetary history.

When inflation and bank charges on your checking accounts are accounted for, your money might eventually turn out to be under a negative nominal returns regime. Zero interest rates, which most persons tend to accept, turn out to be real negative interest rates. Other reasons why you might not realize you are already accepting negative interest rates, according to an article by Nouriel Roubini are:

• Banks having excess cash reserves will have no option but to accept negative interest rates.
• In Switzerland and Denmark where the capital gains are large compared to the price to pay for negative rates, negative interest rates have been allowed to exist.
• If the Eurozone encounters a deflation, then the negative nominal interest rates become positive real rates of return.

Yet, many would cringe at the prospect of losing money in the bank. Negative rates are attractive to many countries especially when the economy is in a downturn. One, it reduces savings because the opportunity cost of savings, consumption, has become higher. Boosting consumption will jumpstart growth and induce positive inflation. Central banks and banks will impose negative interest rates to try to stabilize the economy.

This implies that countries that impose negative interest rates should be launching projects or investments that offer alternatives to bank checking accounts and deposits especially productive infrastructure projects before people run the risk of saturating themselves with cash. Thomas Hirst thinks banks might be hardest hit. They might have to endure reduced profits or raise the interest rates on their loans.

The potential for a storm is evident. The ECB is aware of this. So, why should investors worry when the Swedish and eurozone experiment hasn’t failed?