Untested medicine

The idea of negative interest rates is to discourage cash hoarding and encourage investment or spending in a depressed economy. If a deposited dollar will return less than a dollar over time, the incentive is to use that dollar elsewhere.

This assumes that using the dollar elsewhere is likely to return more than less, and that the depressed economy can be lifted by a spending and investment boost from its non-government participants.

In principle, as I understand it, that is the scope and purpose, and it conceptually might make sense in a deflationary environment, in which businesses and consumers choose to wait for better bargains by penalizing them effectively for the deflationary bargain hunt.

In the current environment, the deflationary context is different, I think. If there is cash hoarding, it isn’t to negotiate for a cheaper price, but to survive. The economy isn’t depressed because of timid consumers, it’s depressed because of fear and a level of uncertainty that is inordinately high and unalleviated.

So, in this context, what would be the economic scope and expectation of a negative rate environment? To force a skittish population into higher risk? To reduce the little interest income for those who have it and turn it into an expense? To shift the burden of the economic lift from the leadership (if you will) to the followers?

The backfire possibilities are vast, considered from this perspective, and the potential side effects of this untested medicine are entirely unknown.


The markets, however, are expecting it.