First, unless someone can correct me, negative interest won’t affect the average savings account with a few thousand dollars or, at least this is the case anywhere negative rates have been tried, this is the case for the reasons that Sam cites. They don’t want the average person emptying their account. Corporations like Apple that hold billions in cash will be the target and will be most affected. Now could the Fed charge negative rates to everyone, sure, the Fed can do whatever it wants, but I seriously doubt it. Of course the affect will also be felt by banks some of whom hold large cash reserves. It is banks that I suspect are the primary target.
Now having said that, I’m not suggesting that everyone will be free from the affects of negative interest. If it causes corporate losses it’s hard to imagine they won’t be passed on to consumers. It will just be hidden and frankly you will never know it, but I don’t see (hypothetically) Sam being charged $12.50 on his $5k savings balance (not to mention a good safe costs $500+ and at that rate you could just keep your $$$ in the banks and consider the $5-$20 a month in negative interest, assuming it hit everyone, as renting the banks vault ass it would take several years before you spend enough in rent to buy your own safe).
How many of you have said in the past that you can’t go lower than zero on interest rates?..hmmmmm
Negative interest rates are just QE on steroids. The question is why do this? Well the reason they are doing it is sourced in the fundamental misunderstanding of the fiat monetary system. Banks do not lend because they have reserves. They get reserves because they have lent! Loans create deposits and then reserves are added…Anyway…
The hope is that by charging banks for saving their money, rather than paying them, it will encourage them to increase their lending to individuals and businesses, boosting the economy. It also hopes that it might encourage them to divert the money into other assets, such as government bonds or even highly rated corporate bonds. This would bring down bond yields and act as an stimulant.
That is the theory, however, the reasoning is a little more complex than this though. The interest rate being adjusted is a nominal rate (that is, how much money is changing hands) rather than a real rate (that is, what is the equivalent of the money changing hands in purchasing power terms). The real interest rate is the nominal rate minus the inflation rate.
In the end, banks will not lend if there are no credit-worthy customers lining up for loans. The logic surrounding the negative interest rate move is based on the erroneous belief that the banks need reserves before they can lend. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualization suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending.
But bank lending is not “reserve constrained”. Banks lend to any credit worthy customer they can find and then worry about their reserve positions afterwards (a banks true constraint is its capital position). If they are short of reserves (their reserve accounts have to be in positive balance each day and in some countries central banks require certain ratios to be maintained) then they borrow from each other in the interbank market or, ultimately, they will borrow from the central bank through the so-called discount window. They are reluctant to use the latter facility because it carries a penalty (higher interest cost).
The point is that building bank reserves or penalizing them for holding reserves will not increase the bank’s capacity to lend. Loans create deposits which generate reserves.
The reason that the commercial banks are currently not lending much is because they are not convinced there are credit worthy customers on their doorstep. In the current climate the assessment of what is credit worthy has become very strict compared to the lax days as the top of the boom approached.