The effects of negative interest rates

An electronic board shows stock movements. The 2008 stock market crash sent folks walking away from Wall Street. Even today, an air of fear still holds some from re-entering the market. Have investors come around?

Japan's stock market is at a six and a half month high. And that's in part thanks to expectations that Japan's version of the Federal Reserve is about to get aggressive. Or, you might say, go negative.

As in: set negative interest rates, to get investors to stop putting their money into government bonds. Negative interest rates mean you’re paying say, a central bank, to store your cash in their vaults.

Negative interest rates already exist here in the U.S., if you go buy Treasury inflation-protected securities, says Marketplace Economics correspondent Chris Farrell. These protect you from any future increase in the Consumer Price Index, but that protection will cost you -- you are actually getting a negative yield.

The rates also pop all over the world, in places like Denmark, Farrell adds.

But why would someone agree to such a seemingly raw deal?

"It reflects the fear of what's happening in Europe and the fiscal cliff and all the economic problems we've had over the last five years," Farrell says. "What's really going to happen to Greece? What about Spain? It's a flight to safety."

Governments and central bankers also like the strategy, because it helps encourage people to buy into the stock market.

"If there's a negative rate of interest, boy, banks -- they're going to start lending more," adds Farrell. "It's part of this whole process... by central bankers to try and get people to take more risks, for banks to lend more; to get demand going, to get the economy going."

Thus far though, the strategy isn't working: confidence is still shaky, and people want safety and security, not risk.

About the author

Chris Farrell is the economics editor of Marketplace Money.


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