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Are Negative Interest Rates Good for an Economy?

August 24, 2012 – 5:06 pm

The problem is that the central bank of Denmark wants to put that money into circulation, trying to grow their economy as the rest of Europe struggles in recession but the Denmark banks cannot charge a negative rate to depositors. They can only go down to zero interest on the money they hold while the Central Bank charges a negative interest to them. The result is that banks lose money on every dollar they hold.

In effect this hurts the economy. The banks have to make up for those losses so they must lend. That in turn drives down loan rates, producing less profit.

This is a big new experiment where no one has been able to predict the consequences. Will this spark growth or will it retard it? Other non-Euro countries dealing with the same problem are very interested. England comes to mind.

We may not want real live experiments when it comes to economics but we have one.

Good Trading
Steve Peasley

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