Will negative interest rates dominate monetary policy in 2016?

The Bank of Japan (BOJ) rocked headlines Friday when the central bank announced it would be introducing negative interest rates. In order to spur economic growth, the BOJ set interest rates at minus 0.1 percent, and Governor Haruhiko Kuroda, who first said he wasn’t interested in this type of policy, confirmed that the country could go further into negative territory if it needs to.

Negatives rates aren’t popular among the populace, but it seems the decision wasn’t popular at the BOJ either. The move was approved in a 5-4 vote, with Takahide Kiuchi, Sayuri Shirai, Koji Ishida and Takehiro Sato dissenting the decision. They argued the rate could cripple the financial system and have very little effect on the overall economy.

Japan, says policymakers and supporters of the monetary action, had no other choice to improve its economy. With its debt exceeding quadrillion yen, consumers wary of spending and its exports not meeting previous records, the Japanese government is really setting itself up for something devastating to happen in the coming years.

Simply put: Japan is desperate. Just take a look at some of these reports:

From the BBC:

“The country is desperate to increase spending and investment.

“Japan has been desperate to boost consumer spending for years. At one point it even issued shopping vouchers to stimulate demand.”

From the New York Times:

“Moving to negative rates reflects a measure of desperation on the part of central banks. Their traditional tools have been largely exhausted, as most countries’ interest rates have been pushed to almost nothing.”

From the Wall Street Journal:

“Japan’s central bank stunned the markets Friday by setting the country’s first negative interest rates, in a desperate attempt to keep the economy from sliding back into the stagnation that has dogged it for much of the last two decades.”

From CNBC:

“Bank of Japan’s negative rates are ‘economic kamikaze’.”

The Asian economic powerhouse isn’t alone in this, however.

Economic activity all over the world has been tepid. Despite the level of debt governments have taken on and the various forms of quantitative easing programs central banks have implemented since 2008, economies aren’t growing. It seems negative interest rates are the last refuge of the scoundrels, er, central bankers.

Other central banks have adopted the policy of subzero rates in recent years, including the European Central Bank (ECB), the Swiss National Bank (SNB), the Riksbank in Sweden and the Dansmark National Bank in Denmark. (Illustration from MarketWatch.)

Both the Federal Reserve and the Bank of Canada (BoC) noted that negative rates are on the table if any sort of economic calamity transpires. In fact, the Fed, according to Chicago Fed Bank President Charles Evans, thought about imposing negative rates before Europe launched its own version of quantitative easing.

The idea of the United States instituting negative rates isn’t outside the realm of possibility. The U.S. economic and stock market bubbles are on the cusp of popping, while the Canadian economy is sputtering along (SEE: Falling loonie, rising food prices, selfie-obsessed PM – a look at Canada’s economic collapse). It’s quite likely North America will be embracing subzero rates within the next couple of years.

What will this mean for you as a consumer? Instead of receiving interest on your savings, you will be charged just for the financial institution to hold your money. The purpose of the move is to encourage banks to lend money at will to small businesses and consumers. The unintended consequences are vast.

Is that a problem? Take a gander at economist Walter Block’s views on subzero interest rates:

“A basic principle of Austrian economics is that the originary rate of interest (the rate of discount of future goods compared to present, otherwise identical, goods) can never be negative. The reason for this arises not because capital is productive, nor out of man’s psychology. Nevertheless, in spite of the foregoing, there are many benighted souls who insist upon the possibility of a negative rate of originary interest. They are continually discovering cases which “prove” their conclusion. The number of such examples has reached such proportions that it seems advisable to take account of them in a systematic way. Accordingly, this paper is devoted to classifying them in a manner that makes the most intuitive sense: in accordance with the economic errors which are necessarily committed in their very statements.”

But Bloomberg News is right on what negative rates are signaling to markets and consumers:

“Negative interest rates are a sign of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored. They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders.”

Japan was celebrated a couple of years ago over its “Abenomics,” a mixture of stimulus and spending programs. Like most other Keynesian economic endeavors, it created only short-term success. However, Japan was right back to where it was: a weak economy, but with greater debt and obligations.

As the years pass us by since the economic collapse, it appears that central banks are running out of steam. The central bankers and bureaucrats are now out of guns to fire to incite growth. Whether it’s tax hikes, an increase in government or central bank stimulus, nothing is working.

The house (country) is broke, but the gamblers (citizens) aren’t benefiting from this. In the end, they’ll eventually just go down with the ship as well.

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