How much would you pay your bank to keep your money? It’s not an economic hypothetical question. Japanese and European bank authorities have been experimenting with negative interest rates. The European Central Bank is expected to drop rates further when it meets Thursday in the week ahead.
A negative interest rate is as foreign as a financial concept gets to most investors. It is supposed to penalize holding back spending. Getting paid an interest rate to save money (or invest it like buying a bond or a stock paying a dividend) is a fundamental financial concept. Not necessarily anymore.
Last week, the Japanese government sold 10-year bonds. It borrowed money. But instead of offering to pay back investors lending it money an interest rate every year, it’s the Japanese government that will get paid to borrow money.
Let that sink it. A borrower gets paid to borrow money. The lender pays extra to loan the money.
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This upturns finance from life insurance companies to banks to pension funds. Those business and investments are based on positive interest rates.
The Japanese economy is in a generation-old stagnation held back in part by deflation. Europe’s economy isn’t faring much better. For the third time in the past year, Europe saw negative inflation last month. Regularly falling prices is bad. Consumers hold off on buying stuff because they may be able to spend less tomorrow. And the next day. And the day after that.
If the European Central Bank drops deeper into negative rates, it will make it more difficult for investors to stay positive.
Financial journalist Tom Hudson hosts "The Sunshine Economy" on WLRN-FM in Miami. Follow him on Twitter @HudsonsView.