Negative rates don’t work. An Example From Denmark

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Отрицательные ставки не работают. Пример Дании

More and more countries introduce negative interest rates in the hope that this measure will help the economy and acceleration of inflation, but in the world there are already examples proving that this tool is useless.

Even Einstein said that there is no greater folly than to make the same actions each time expecting a different result. About doing that now many Central banks around the world.

At first they were alternately launched a printing press, a positive effect on the economy which was highly questionable. However, the asset-purchase program was launched, first one Bank, then the second and so on.

The leadership of these Central banks seem obsessed with the idea of creating a bubble in the stock assets, and because of this do not see obvious things.

After the QE program has exhausted its potential, and decided to try negative interest rates. Yes, for most countries of the Old world and Japan, this measure is brand new, so at least as an experiment to test it would be possible. If not one “but”.

There is one country where negative rates are valid for four years, and before you enter this strange tool, it would be logical to study its experience.

We are talking about Denmark. Here, negative interest rates were tested in 2012, and their main goal was the acceleration of inflation. As can be seen from the graph, since the task could not cope. As inflation declined and continued to decline.

By the way, the latest inflation data in Denmark should give the ECB President Mario Draghi food for thought. The consumer price index in the country in annual terms remained unchanged for two consecutive months.

It turns out that the truism that low interest rates lead to higher prices in the present environment no longer works. For some reason, the monetary authorities refuse to understand that negative rates cause people not to spend but to save even more.

The fact that the person understands that sooner or later he will retire, so he is saving money for retirement. However, it will not on the interest, and the savings that causes him to save, not spend, regardless of negative interest rates or something else.

In addition, if people have to pay interest on the deposited money in the Bank, it is obvious that they will save more to compensate for these losses.
 

The problem of savings

A negative interest rate certainly suggests that with the economy that is not so. Usually people encourage in their quest to save money. The penalty for savings seems to be something abnormal.

It is well known that negative nominal interest rates applies mainly to the stored in the Central Bank reserves commercial Bank. However, many savers in developed countries receive a negative income and real (after-tax) terms.

Larry Fink, CEO of investment company BlackRock, recently said that low interest rates do not bring the result you were hoping for Central Bank governors: those who are preparing to retire, should as much as possible (and no less) save for obtaining the necessary income. Similarly, low interest rates explain why a large number of pension funds corporations have a deficiency.

Many economists believe that low interest rates appear due to too big, not too small, the volume of savings. Excess savings (savings glut) indicates that income from investments fell sharply. The aging citizens of rich world lay a lot of money for their old age, while the average level of personal savings is quite low.

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