Is Negative Interest Coming To America?

“You’re money is no good here” used to mean someone was picking up your tab at a restaurant or country club. It was a gracious gesture, a courtesy and a compliment. Today the term means the world is awash in so much cash that really — we don’t want your money — especially if your money is in the form of US currency.

If you don’t believe it, consider that one of the world’s largest banks is now charging wealthy clients a fee for cash holdings. According to the Wall Street Journal, the Bank of New York Mellon now says “that customers that have deposited more than $50 million into their accounts since the end of July will face an annual fee of at least 0.13% of the excess deposits. The fee would rise if the one-month Treasury yield dips below zero.”

Think about what this means: If you give your $50 million plus to the nice folks at the bank they will not pay you interest if Treasury rates fall below zero because there’s no interest being paid by the government PLUS they will change you .13 percent on the account balance for the privilege of holding your dollars. That means there will be an annual $65,000 cost to park $50 million.

There’s a term for this: Negative interest. Honest. It means you pay the bank.

We have seen this before.

Just before World War II U.S. securities had negative interest levels. As Forbes magazine explained nearly 20 years ago, “T-bills got so popular that for brief periods between 1938 and 1941 they carried negative interest rates.” (See: “A Brief History of Stock Fads,” September 14, 1992).

Why would anyone give money to a bank in exchange for negative interest?

One explanation is that it’s safer to keep money in a bank account than a mattress. Another reason is that a minimal loss is better than alternative “investments” where losses might be even greater.

Sadly, we have a country awash in cash at the very time the economy needs more spending. The catch is that:

  • Workers can’t spend when job prospects are uncertain.
  • Employers can’t hire when sale prospects are unclear.
  • Banks can make money because their basic cost to access capital ranges from 0 to .25 percent — money they gleefully loan to credit card borrowers at 29.99 percent.
  • Mortgage interest rates are at record lows — but home loans are tough to get because home values remain unsure.
  • Home prices cannot rise because the huge numbers of foreclosures which remain unsold.
  • Retirement accounts produce no meaningful income, meaning large numbers of people who saved and saved now face poverty.
  • Heirs and heiresses can’t get lofty interest returns on the money left to them by Mummy.

The government — which CAN spend the money that could re-invigorate the economy — is being choked.  Effective tax rates — what’s actually being paid and not just what rules call for — are at the lowest levels in decades so the government cannot fund needed programs. The result is that a meaningful end to the current economic crisis is being stalled by the small-government, no taxes crowd that created it.

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1 Comment on "Is Negative Interest Coming To America?"

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  1. Renaldo says:

    Europe now has official negative interest bank rates. See: The new new thing: Negative interest rates — but will they work?

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