The war on cash
01 April, 2016
Imagine being charged to keep your money in the bank. As crazy as it sounds; central banks around the world have begun cutting their key interest rates below zero. First it was Europe. Now Japan is trying it.
The idea behind negative interest rates is to encourage businesses and individuals to spend and invest, rather than save. Negative interest rates theoretically encourage banks to lend money out because the value of the cash held in their vaults is ever decreasing. Because individuals and businesses don't get rewarded for saving money, they will instead choose to borrow and spend, thereby boosting economic activity.
Unfortunately, central banks are realising that the theory doesn't always play out in practice. We humans don't always behave the way the textbooks suggest we will!
The Bank of Japan is now realising that deterring saving is not the same as incentivising spending.
When negative interest rates have been imposed, savers have simply found alternative ways to protect their nest eggs. For example, sales of personal safes in Japan skyrocketed last month, with some popular models selling out entirely in some stores, according to the Wall Street Journal.
Another theoretical impact of negative interest rates is that the country's currency will devalue, making exports cheaper and imports more expensive. However, the Yen increased in value after negative interest rates were introduced in January.
The realisation that negative interest rates don't really work as long as savers have an alternative will likely have caused a major rethink of strategy by these central banks.
Despite what some people say, spending and consumption does not drive the economy. It's the exact opposite. It is production and saving that drives an economy. At the risk of handing over even more control of our savings to banks and financial authorities, we can only hope that those standing up for their right to save are successful in their plight.