The Challenge with Negative Interest Rates

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Stock Market  |  July 15, 2016  |  
george clark

Earlier this morning, a Bloomberg headline appeared in my inbox:

“German 10-Year Yield Climbs Above Zero; First Time Since June 24”

Indeed, a couple of weeks ago, figures suggested almost $12 trillion in sovereign debt traded with a negative yield. This is a result of several Central Banks pursuing an aggressive and experimental negative rates policy.

The policy decision has been puzzling to Venturi. Why? At the end of the day, this policy taxes someone — either the consumer holding savings or the financial institution absorbing the negative rate.  Basic economics teaches that taxes are a drag on economic growth (despite various politicians cloaking taxes as an “investment” in past campaigns). A Federal Reserve official recently penned a simple, insightful read on the topic and his tag line was the best: “…negative interest rates are a tax in sheep’s clothing.”

negative interest rates

Waller, Christopher J. “Negative Interest Rates: A Tax in Sheep’s Clothing.” Federal Reserve Bank of St. Louis. N.p., 2 May 2016. Web. 15 July 2016.