interest-ratesAn answer to a different question states “interest rates are already at zero, and we can’t make them negative” and then goes on to say “But increasing inflation will essentially make interest rates negative”.
Would it be possible to offer a negative interest rate with some conditions attached (eg a max of $x per individual, no corporations allowed - I’m not saying this is a good idea mind you!) and gain some sort of beneficial result? Or is it simply impossible?
When talking about “lowering interest rates” as a policy measure, as the original poster was, it generally means lowering the interest rates central banks like the Federal Reserve offer to commercial banks (not to the businesses and consumers ultimately wanting to borrow the money). When the interest rate the central bank charges is positive, lowering it makes it cheaper for banks to obtain cash reserves when needed which means they can afford to loan out money to their customers at lower rates. They still want to make a profit on loaning out money though, which means charging a positive interest rate to end borrowers.
Commercial banks will happily borrow as much money as the Fed is willing to lend them at negative interest rates, but they’re never going to pass that on in the form of paying businesses and consumers to borrow from them. Without changing rules to compel banks to lend, commercial lenders’ interest rates will never go below zero.
You could change the rules to allow the public and companies that aren’t banks to borrow money from the central bank within certain limits, and offer them a negative interest rate, meaning anyone that doesn’t borrow the full amount is an idiot. So here’s a thought experiment along those lines
Assuming the central bank / government want their money back (otherwise it’s a subsidy not a loan), they’ll need to ensure the interest rate on this consumer lending is variable - so it becomes positive in future - because no sane person would ever make repayments on a loan that gets smaller while they defer repaying. This means it’ll start making sense for recipients to repay the loan in future once interest payments becom positive (or more specifically higher than the rate of return people are able to get from investing the money). Obviously, wealthier people paying attention to their finances will be able to do this as soon as it makes sense for them and uncreditworthy poorer people who used the loan to finance their day-to-day spending habits won’t, because they’ll have spent it and need to wait for their next few paychecks to come in to repay.
Paying people to borrow money is essentially welfare, and non-bankrupt poorer people tending accumulate more of the repayments is essentially a highly regressive form of taxation. By giving people that didn’t need short term cash a debt-free temporary loan and people that needed it a longer-term loan with accumulating debt attached it would probably qualify as the worst form of welfare ever1.
What about the short term economic gains from the extra cash circulating? Well I’d guess, since it needs to be repaid, more people would look to invest their loan than consume it resulting in a sharp rise in investment far in excess of expected levels of future consumption. Which would mean a lot of cash chasing the same opportunities (a big asset bubble), and a big crash once interest rates on the government loan go up above zero and people try to cash out to pay it back.
1It might be less damaging for poor people who are using the cash to pay off existing debt at much higher interest rates. But it’s probably not the best way of helping them either.
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