LONDON (MarketWatch) – Central banks have slashed interest rates to nothing. They have printed money on a vast scale. Where that has not quite worked, and if we are being honest that is most places, they now have a new tool. Negative interest rates. Across a third of the global economy, money you put in the bank does not only generate nothing in the way of a return. You actually get charged for keeping it there.
That is already producing strange, Alice-in-Wonderland economics, where nothing is quite what it seems. Governments want you to delay paying taxes as long as possible, the mortgage company pays you to stay in the house, and cash becomes so sought after there is even talk of abolishing it.
But the real problem with negative rates may be something quite different.
As a fascinating new paper from the St. Louis Fed argues, they are in fact a form of tax. They impose a levy on the banking system that has to be paid by someone – and that someone is probably us. That may explain why central banks and governments are so keen on them. Hugely indebted governments are always in the market for a new tax, especially one that their voters probably won’t notice. But it also explains why they don’t really work – because most of the economics in trouble, especially in Europe, are already suffocating under an impossible high tax burden.
Negative interest rates have, like a fast-mutating virus, started to spread across the world.
This post was published at David Stockmans Contra Corner on May 18, 2016.
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