President Reagan used to say that if the game Trivial Pursuit were designed by economists, the game would have 100 questions and 3,000 answers.
President Reagan’s quip is the title of a Tidbits feature called…“100 Questions and 3,000 Answers.” Readers of Tidbits often send questions or comments following up on a topic featured in Tidbits. This feature occasionally highlights a question or comment along with a response. Send questions or comments to firstname.lastname@example.org.
Question: I’m having trouble with the concept of negative interest rates. Why would a lender pay someone to use their money?
Response: Negative interest rates have been getting attention in financial and economic circles across the globe. In August it was reported a Denmark bank would pay a borrower -0.5 percent on a 10-year fixed rate mortgage. In other words, the bank would pay a borrower to secure a loan. In addition, central banks in Europe and Japan have reduced their prime interest rates below zero. Banks in these countries must now pay interest on cash held on deposit at the central banks rather than receiving interest income.
Central banks, like the Federal Reserve, use adjustments to interest rates as one of the tools to attempt to manage the economy. Lower interest rates reduce the cost of money and encourage consumption and investment. Higher rates increase the cost of money and serve as a brake on economic activity. In recent years, central banks in several countries have set interest rates either at or near zero, yet economic growth has been anemic or faltering. Thus, some banks have taken the unconventional approach of reducing interest rates below zero in the hope producers and consumers would rather spend and invest money than pay to keep it in savings. In effect, the policy is intended to stimulate borrowing and lending and thus economic growth. Has the policy been effective? It’s tough to know given all the uncertainties in today’s global economy.