Negative Interest

Edward Tsang 2013.03.07 (web page published 2013.05.04)

Negative interest may be an unfamiliar concept. But money is just another commodity, as Rothard argued. Charging for deposits is norm. Warehouses would charge for depositing gold there. Without sufficient borrowers, and the central bank doesn't need cash (thanks to quantitative easing), negative interest make perfect sense.

The Bank of England is contemplating negative interest rates

The aim of this policy is to encourage banks to lend money out instead of depositing them with the Bank of England. The hope is to use this policy to boost the economy. I am not ready to discuss whether this policy will succeed and whether it will have expected or damaging effects. Here I shall examine whether negative interest rates is such an alien idea.

Money is just a commodity

First we must remember that money should be just a commodity. It is a commodity that everyone accepts.

Paying Interest to depositors is norm

Money is commonly acceptable. Therefore, banks can make money by lending out deposits. Banks make money with deposits, and therefore are willing to pay depositors money, in order to attract deposits. Therefore, paying interest is normal.

Charging for deposits is normal too!

Warehouses charge fees on storage of commodities. You deposit your goods at the warehouse. They look after it. Naturally they could ask for a fee for keeping your deposits.

The money market has changed

Under the current climate, banks don't have enough customers to lend money to.
Quantitative easing means Central Banks have unlimited money supply.

Negative interest is a natural consequence of the changes; central banks don't need deposits. Naturally, they charge fees.

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