If interest rates go up, the markets will crash in a way that makes 2008 look like foreplay. The Fed gently tried to tighten up in late 2018 and it sent the market off a cliff. But the international credit system needs to perpetually add to the world’s ever-increasing levels of debt to fuel the asset price increases foundational to keeping the whole thing upright. The best way to spur debt creation is to lower interest rates. But rates are hovering just above zero now.
One potential way out of this trap is to lower interest rates below 0%. Depositors pay financial institutions to hold their money rather than those financial institutions paying depositors for the privilege of booking the deposits and then lending multiples of the deposits out other parties at higher rates than they pay the depositors.
Absent fractional reserve banking and a relatively steady increase in the money supply–that is, inflation–this is sensible. People pay to have their gold, jewelry, collectibles, and other highly valuable items stored. But because the supply of those things are limited, their real value tends to increase. They also require real physical space to store. That never happens with and is not applicable to fiat currencies. Like a car off the lot, as soon as a dollar comes off the proverbial presses it is losing value.
Big commercial institutions can handle marginally negative interest rates for convenience and scale. Individuals and small business on the other hand? It’s bad enough to let an institution hold money without a nominal return, let alone a real one. But nominally paying to do so? Better to literally store money under the mattress than let the bank hold onto it.
Is there a way to force the issue? Sure, by going cashless. If the only way to store money is in an institution approved by the regulatory state for the purpose, negative interest rates are viable.
If only the pesky proles would get with the program. Westerners are recalcitrant. The following graph shows net support (opposition) to becoming cashless, “meaning only electronic forms of money such as debit cards, credit cards and Apple or Google pay would be accepted”, by selected countries:
In India, the most corrupt country surveyed, support for going cashless is high. This isn’t surprising. If bribing a cop or a bureaucrat to avoid being harassed or to get basic administrative work done is a daily experience, creating a digital record of all monetary transactions no matter how modest the amount will be attractive. Captain Strong and the petty bureaucrat don’t want a permanent record of their crimes. Italian support is also relatively high, presumably the same reason–Italy fares considerably worse than the other European and diaspora countries when it comes to corruption.
Early in the coronavirus catastrophe, the idea of extracting cash from the system was floated–it’s a disease vector, the dirtiest thing in society, you know!–and there were severe coin shortages all over the country, but the powers that be didn’t go through with it. Not yet, anyway. They’ll try again.