Each and every year, for the last four years, economists have predicted that this economic boom will end. In 2018 the “R” word was bandied about the airwaves all year long. The economy, however, continues to see growth in job creation, development, and investments. How can a 12-year boom continue to sustain itself when typically growth periods last 7-10 years? One new factor that is a part of this economy, which has not been seen very often, is that major economic powers like Sweden, Denmark, and Japan have negative interest rates.
What are Negative Interest Rates and why are they part of the economic growth in the global economy?
A negative interest rate environment is in effect when the nominal interest rate drops below zero percent for a specific economic zone, meaning banks and other financial firms would have to pay to keep their excess reserves stored at the central bank rather than receive positive interest income.
Right now, the Fed’s benchmark rate is in a range of 1.5% to 1.75%. In contrast the Denmark Interest rate is -.75%. Just for simplicity sake, if you were to buy a $100 bond from the United States’ government, you would be paid back $101.50. Not a great return on your investment, but fairly secure in that the U.S government would be able to repay with very little risk. In countries like Japan and Denmark, if you buy a bond for $100, you would expect to be paid back in a year $99.25.
Why would any investor buy this? The truth is they likely would not. This is a policy to address inflation, currency trading, and financial incentives for banks to borrow and lend money.
How does this affect us in the United States and locally? Borrowing money is much easier when interest rates are down. Everytime someone is asked in real estate how the market is doing and we say “things are good, interest rates are low, employment is high, and vacancy is at all time lows as well”, these are not people “whistling past the graveyard. ” The factors that cause good economic conditions for borrowing money to buy real estate are still there.
So are we never going to have a downturn because of low or negative interest rates? Unlikely. Employment, Development, Political Policy, and many other factors dictate how the economy does on a local and global scale. But the intuitive nature of interest rates climbing, as historical records show they almost always do, might not be at the same rate and same level as we have seen in the past. The best take-away is that this new economic policy may keep interest rates low and make it easier to borrow, for the foreseeable future.
Are there any downsides to this policy? Certainly. In moderation this can keep interest rates low but this causes deflation in a currency which slows the economy. If my dollar will be worth more tomorrow than it is today I will hold onto it because the buying power is increasing, not decreasing. Decreased spending is always bad for economic growth. It can also create currency wars leading to speculation and potential bubbles in trade.
The major takeaway from researching this policy affect on the global economy may be, don’t take historical information as a prediction for future events. When you hear interest rates are going up, ask why would they? What are other countries doing with their interest rates? Negative interest rates, automation, and cyber markets are all things not seen at this scale in human history and may have a much greater effect on the future than how things were done 25 years ago.
– Dave Garvey & Ethan Ash