Opinion: The possibility of negative interest rates on your deposits (pt. 2)
November 24, 2015
In part one of this two-part series, published in the Wednesday, Nov. 18, Sierra Sun, I explained how negative interest rates are not an irrational concept and how they have appeared on the European economic scene.
In this concluding part two, I will examine the likely consequences for savers/investors in Europe and the possibility that we will see similar behavior in the U.S.
The Cost to Hold Deposits at the ECB
The European Central Bank (ECB) has now let it be known that it will be considering raising the cost of deposits at the ECB, that is, a higher negative interest rate on bank deposits.
Recall from Part I of this two part series that the ECB imposes a -.20 percent charge on deposits held there by its member banks.
Up until now, the European banks have not tried to pass the negative rates on to their household/business depositors, because the costs have not been excessive. But, if the ECB moves to higher negative rates, the banks will have no choice but to consider passing on the costs.
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And, that is precisely what the ECB wants — they want the depositors to think twice about depositing, especially households, because they believe that households will spend more if they have more "cash" around.
The banks will act in various ways to recoup such costs including increasing monthly "maintenance" fees on accounts, and instituting variable "charges" for services, including charges for making deposits and charges for each electronic transaction that occurs in the account. (In Europe, all transactions are electronic — they no longer have checks — how backward is the U.S.!)
The first reaction of households will be not to deposit at all. They will turn to all cash transactions, and, of course, the underground economy (already prevalent in many places in Europe) will grow.
In order to avoid the loss of certain forms of consumption taxation (like sales taxes) that occur when the cash (underground) economy grows, the next round of government regulation comes in the form of restricting how much cash households can have.
This can include such requirements that all payroll must be done electronically (thus requiring all employees to have deposit accounts at a bank), and, as they did in Cyprus during their banking crisis a couple of years ago, restrict the amount of cash households may withdraw. Hence, households are forced to accept a negative interest rate on their deposits, i.e., really just another tax.
Let me summarize
The slow economy (actually caused by government regulation to begin with) causes the central bank to desire to push interest rates lower, on the theory that lower interest rates stimulate the economy.
When interest rates are already at zero, Quantitative Easing (QE) causes rates to become negative.
The banks will try to recoup the negative costs of deposits at their central bank by charging interest on consumer and business deposits via various forms of "fees."
In order to prevent the resultant growth of the underground (cash) economy, the government must eventually restrict cash transactions, thus forcing the public to use electronic transactions which require a bank account, and thus require households to accept negative returns on their deposits.
What I have described is happening in Europe. In the U.S., there is much concern over the slowdown in the potential growth of the economy — which is partly caused by the imposition of regulations and controls by all levels of government.
The U.S. is not too far behind Europe in its adoption of big government. With interest rates available to savers in the U.S. at generational lows, with the Fed still clinging to its zero (or near zero) interest rate policy, and with banking regulation in the U.S. regarding holding government securities vs. lending to the private sector similar to that in Europe, it is not beyond the realm of possibility that a slowdown in the private sector in the U.S. could easily result in more Fed QE and negative interest rates here. Perhaps in the next recession.
Regardless, watch for those rising bank "fees," as they are the beginning of the negative interest rate syndrome.
Robert Barone (Ph.D., Economics, Georgetown University), an adviser representative of Concert Wealth Management, is a principal of Universal Value Advisors, a Reno-based business entity. He can be reached at 775-284-7778.