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| Name | Negative Interest Rates Explained |
| Video Uploader | Video From 3-Minute Explanation |
| Upload Date | This Video Uploaded At 25-01-2022 10:42:32 |
| Video Discription | The Meaning Of Negative Interest Rates The banking industry is one of the oldest industries in the world. Since the first day we see a bank on earth, most of us have already been used to the fact that we save money to the bank and they will pay interest to us regularly. This logic has been working for us for hundreds of years. However, after the emergence of negative interests, this may be totally changed in the future. Negative interests means that, instead of paying regular interests to savers, they will charge money to those who save money with them. Also, banks will pay money to people or organizations who borrow money from them as well. For most of us, this looks to be like a crazy idea. But it already happened in some countries such as Japan, Switzerland, Sweden and Denmark. What is the cause of it and what does it mean for all of us? After the financial crisis in 2008, most countries used a drastic monetary policy by cutting off the interest rates to a very low level. For example, the Fed from the United States cut the interest rate from 5% to 0.25%. The Bank Of England cut the rates from 6% to 0.25%. The European Central Bank also modified the rate from 4% to nearly zero. For some countries like Japan and Switzerland, since they already had a zero rate before the crisis, they have to lower the interest rates below to stimulate the economy. For most of the central banks, lowering interest rates is the only way to support the economy. So, from the foreseen future, we can see negative interest rates appearing in more and more countries. Many people may think that, since people need to pay the bank to save the money, many of them may choose to spend the money instead of saving it into the bank, and thus more consumer spending will be helpful to stimulate the economy. However, the truth is, when most people are thinking there is increased uncertainty ahead, they will choose to save the money instead of spending it. If they are expecting a deflation and think the goods and services will be cheaper and cheaper, they would rather save the money to get them in the future. You may also think that, for companies and people, negative interest rates can lower the cost to lend money from banks, and thus those increased loans can help stimulate the economy. However, this is also not true. Actually, lending cost is only one factor when a company decides to borrow money from banks. If the executives are feeling less optimistic about the economy, they won't increase their investment. Also, a low lending cost will help those zombie companies and those high-risk assets such as properties and virtual things, which causes more uncertainties in the future. Last but not least, if the company has too much cash but they don't want to do investment because of uncertainties, they may choose to return the cash to their shareholders via stock buyback or dividends. This will exaggerate the gap between rich and poor. This is because most fortune from the rich are from their investment assets such as stocks while most fortune from the poor are cash. Negative interest rates may also affect the way we pay for goods and services. Under positive interest rates, buyers will try to delay the payment as long as possible because the money sitting in the bank can earn extra interest for them. On the other side, sellers will normally provide some discounts for buyers who can pay earlier. A negative interest rate will totally change all of those procedures. Also, if you are a superannuation fund manager, the negative rates will impose more pressures on the performance of your funds. In a word, it is the first time we will have negative interest rates since the birth of banks. The policy makers will be facing some dilemma to deal with deflation and economic growth issues. |
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