It was one point considered to be an economic impossibility, but it looks like it’s on its way to us all. In fact it’s already happened in some economies with terrible results. I’m talking about negative interest rates.
So, what are negative interest rates?
When you put money in a bank you will usually get a small interest payment. As a child I remember interest being described as a way to keep your funds in line with inflation. This has became more and more inaccurate over the years. Interest in now considered negligible in most standard accounts. In short, your funds will loose value in most bank accounts.
This means that you will be able to buy less with the money you leave in a bank account as time goes on.
One big contributor to this is inflation. The process of our government printing new money each year takes its value from the cash in you account. Inflation is a tax, without most people even realising they are paying it.
The problem is that inflation has limits. If a central bank over inflates its currency, it looses its purchasing power in the global markets. Inflation is not a silver bullet solution. It seems now that a new approach is on the horizon for all, negative interest rates.
This would mean that the longer you leave your money in a bank account, the lower your actual balance will become. You read that correctly.! You will have less money as time goes on. This not the same as inflation, where you hold the same balance and your money buys less. In the case if negative inflation your moneys balance actually heads towards zero.
For those of you thinking this a double tax, you will be correct. Inflation and negative interest rates mean everyone is incentivised to spend their money ASAP. The longer you hold onto it, the less it will buy. This pass the parcel economics is looking more and more likely.
The question is, will the wider western economies such as the US, and the UK survive such a move. The answer is.. maybe. But it is the a lot of the general public will loose.
The fact is, that no one has to keep their wealth stored in fiat currency. In fact gold, silver, property have been the preferred means of storage for the super rich. However it’s impractical as a day to day currency. There has never been a viable alternative until the rise of cryptocurrency. Now the general public has a way of opting out of a countries central currency.
In the situation of negative interest rates, keeping money in banks would be more expensive than holding physical cash. However keeping money in a good crypto currency such as bitcoin will allow you to avoid the double tax of inflation and negative interest rates.
If we just think about a situation, where keeping money in a bank reduces your balance. The amount of money on the books of banks will be impractical to physically print. But people will want to take their money out of the banking system. The only practical solution to this, is for the government to introduce a token to represent the cash. This is likely to take the form of a government issued crypto currency. The difference between this, and bitcoin is that bitcoin has a fixed supply of 21 million. A government backed crypto will not have this limit, and thus be issued at will by the government. This is basically just replacing cash while cutting out the banks.
The idea of negative interest rates once seems impossible, but now likely to become widespread. impact of this is not clear, but it will be interesting.