What are negative interest rates, and why should you care?
As more countries around the globe prepare to launch CBDCs (central bank digital currencies), this is a topic you want to understand.
There is an economic theory that an effective way to get a country out of a recession is to encourage people to spend money.
That's part of what stimulus checks were for during covid, to keep people spending money so that the economy looked healthy.
However, during a recession, when people are worried about the future, it's natural to save money for "just in case".
Fears around losing a job or higher costs for food / fuel naturally lead people to be conservative with their money.
However, central banks and monetary experts don't want people to save money in a struggling economy.
This brings us to the "paradox of thrift" which means it's both good and bad to save money in a recession.
A paradox is when two ideas that appear to be contradictions, or opposites, can BOTH be true.
In this case, it's both good for you as an individual to prepare for uncertain times, but bad for a society in recession when people decrease the flow of money through the economy.
The unfortunate reality of paradoxes is they often lead to divisive debates in the media and among friends, so heads up that this may become something people fight about.
What does this have to do with CBDCs?
CBDCs are digital currencies issued on a blockchain by a central bank, using smart contract technology.
Smart contracts are mini computer programs that can be programmed to dictate how and where the money can be spent.
For example, the central bank may want to boost the grocery sector, so they could program funds in your account to only be used for food, and NOT for airline or concert tickets.
This isn't a new concept, as food stamps and public assistance programs have parameters around how funds can be spent.
Negative interest rates can also be applied to a CBDC account.
The term can sound confusing, as we are used to the idea of "interest" being positive.
"Put your money in an account and earn interest as a reward."
What is a "negative interest rate"?
Instead of earning money on the account, you actually lose money.
Honestly, it's not that different than a monthly fee on a savings account that varies with the amount of money you have in the account.
But in reality, it's a way to encourage people to spend instead of save their money.
The sad parts of a policy negative interest rate policy are:
1. People become unable to prepare for unexpected expenses (a main reason people like to save money)
2. As a society, people are less invested in the future (they are literally not able to financially invest in their future).
This is a very bad indicator of the health of society.
Time preference is a measure of how people prioritize their resources.
If you have a low time preference, purchases are short term, focused on instant gratification and impulse buys.
A high time preference person uses restraint, discipline and sacrifice of short term pleasure for long term rewards.
High time preference qualities are present in a healthy, growing society that looks forward to the future.
If the recession continues to worsen, and countries implement negative interest rates to encourage spending,
Be mindful of how this will impact society's health and long term potential.
There are other ways to grow the economy that should be explored first.