Sunday, April 17, 2016

Negative interest rate - get paid from borrowing and get charged from saving

If you think that you can earn some interest by depositing your money in bank, and you will be charged with interest for borrowing money from bank, you have to reverse your mind-set in certain places that are having negative interest rate policy now.

I'm not kidding. The European Central Banks (ECB), Switzerland, Denmark, Sweden are already having negative interest rate for quite some times. Lately, Japan has joint the league too!

(Chart produced by Toronto Star)

The ECB started this game by charging banks that hold their cash overnight and at the same time offering a premium to banks that borrow in order to extend more loans.

During economic uncertainty time, people tend to be conservative with spending and/or investing and more keen to hoard money in their bank accounts. They are willing to do so even with zero interest rate. This brings the danger of deflation, and as an extreme measure to counter this situation, the banks started to "punish" people that keep money in their bank accounts by charging interest instead of giving interest, and to encourage people to take up loan for business and investment activities by giving interest instead of charging interest.

When this negative interest situation occurs, the traditionally safe havens to put your money, namely bank deposit and bond market, will become the places that most likely cause you to lose money. Yes, fixed deposit is dangerous, bond market is dangerous, because your money will go down the drain if you put it there, in the era of negative interest rate.

However, this measure doesn't seem to be effective to stimulate the economy, as people there are still very cautious and tend to hoard with their money. With the negative interest rate, they are forced to take out their money from bank deposit account, and then they are keeping the money in their drawer or safe instead of spending it. (Reuters: Negative ECB rates fuel demand for safe deposit boxes, German banks say)

The impose of negative interest rate in Eurozone and Japan has shown unfavourable sign of worldwide economy. What will be next after quantitative easing and negative interest rate? If there is no more option ahead, we can foresee a huge economic catastrophe forming and will hit all of us at anytime.

Are you prepared for it? And the question is: how to get prepared for it?


Beza said... Reply To This Comment

You worry too much. They will invest or put it in markets such as Malaysia that can give them interest rate or dividend.

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