Imagine walking into your bank (at least metaphorically) and depositing $1,000 in your saving account with the knowledge that next year you will get $999 back. Welcome to the brave new world of negative interest rates. This Bizarro World has existed in much of the developed world for the past five years, but the odds are growing that Americans will experience what was once unimaginable.
Throughout most of history, savers rightly expected a small but positive rate of return in exchange for foregoing current consumption. Interest rates rise and fall with economic conditions and expected inflation, but logic dictates that the nominal rate must exceed zero. However, the aftermath of the global financial crisis has turned logic on its head and led central banks around the world to experiment with previously unthinkable policy prescriptions with implications that are not yet fully understood.
Policymakers were confronted with laconic growth rates coming out of the 2008 global recession, contrary to previous experience. Traditional monetary policy calls for reducing interest rates in an effort to promote business borrowing for reinvestment in expansion and capital investment. All things equal, lowering the cost of borrowing should stimulate more of it. But when rates reach very low levels, additional reductions provide little incentive to borrow, particularly if companies do not anticipate attractive returns on additional investments. This was exactly the environment that existed in 2014: long after the end of the recession, growth was still stuck in second gear. Once central banks dropped interest rates to zero, the question became: what next?
So began a risky experiment: the European Central Bank took the unprecedented step of charging banks a fee on cash reserves they held at the ECB. Several non-ECB European countries followed suit, as did Japan, in implementing negative rates on the theory that penalizing banks for holding cash would incentivize them to get busy lending.
Economists continue to debate the efficacy of negative rate policy, but the evidence suggests that it has been ineffective in stimulating growth. Nevertheless, it was generally assumed the United States was immune from negative rates given certain structural advantages and a generally more robust economy. In the throes of the coronavirus outbreak, all bets are off.