Pulse Price Report: Negative Interest Rates

Imagine if instead of getting a few dollars in interest each year for your savings account, that money was taken out of your balance instead. It’s a strange idea, paying a bank to hold your money, but we are not so removed from the world of negative interest rates.

Despite a volatile market in the past few months, the United States economy has basically recovered from the 2008 financial crises in terms of the market indices. But other countries have not been as fortunate as they continue struggling with slow growth. Switzerland, Denmark, Sweden, Japan and the European Central Bank (ECB) have all turned to the unique fiscal policy of negative interest rates to push banks toward lending money.

The central banks in all of these nations are charging private banks a negative interest rate to hold their money. In theory, this policy spurs banks to lend money to borrowers instead of hoarding cash in the vaults of the central bank. If these negative interest rates trickle down to the consumer level, an individual may be more inclined to spend money rather than save it, which adds to the desired economic activity.

But if consumers instead choose to take their money out of the bank vault and stuff it in their mattress, banks will see their reserve funds dwindle, making it impossible for them to lend.

Negative interest rates are also used to overturn currency deflation. In deflationary periods, consumers do not spend money because they expect prices to fall. Why buy a new car today when it will be $1,000 cheaper in a month? But if you are paying interest on that month of saving money, then you might be more inclined to just buy your car now. That’s the goal of negative interest rates, buying today instead of tomorrow.

While already in practice throughout much of Europe, the United States is exploring the option as well. Janet Yellen, Federal Reserve Chair, told Congress in February that the central bank in the United States was looking at the possibility of negative interest rates.

Most economists view this as a short-term solution riddled with risk. If interest rates go too far in the negative, consumer and businesses will take their money out of the bank, limiting that bank’s ability to lend, and the consumer would not spend it in a deflationary economy. Ironically, the policy that seeks to put an end to deflation could backfire on itself.

Crop prices (March 15)

Rio Creek Feed Mill – Algoma

Fox River Valley Ethanol – Green Bay

Basis: The difference between the local cash price for a commodity and the Chicago cash price (where the Board of Trade sets national futures price).

Gas Price Averages

United States: $1.93

United States one year ago: $2.43

Wisconsin: $1.97

Wisconsin one year ago: $2.35

Northern Door: $2.01

Sturgeon Bay: $1.96

Other Commodities

Gold: $1,257.10/troy ounce

Silver: $15.76/troy ounce

Oil: $37.37/barrel

Sources: aaa.com, agweb.com, gasbuddy.com, cnn.money, Reuters