Why Negative Interest Rates Spell Doom for Capitalism

• If I can make money simply by borrowing money from the bank (ie. NIRP), why then bother to invest in business? Why even get out of bed and go to work? The more money I borrow, the more interests the bank pays me when interest rates go negative. Would a bank pay you money to lend you money? They will go bust. Will a central bank pay commercial banks interests to lend them money? They will go bust. NIRP is nonsensical. What will happen is: the economy will grind to a halt as loans contract. Confidence in central banks and commercial banks will collapse since they will not be profitable. Confidence in the monetary and financial system will crash. The final end is: global economic, financial and currency collapse.
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• In a deflationary environment: asset prices collapse. Business will avoid investment since buyers will hold back on purchase on expectations of even cheaper prices. It means excess capacity will build up and worker retrenchments will follow. It becomes a vicious cycle as more deflation leads to even worst economic conditions and even lesser demand resulting in more worker retrenchments, resulting in even less economic demand …
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• Why Negative Interest Rates Spell Doom for Capitalism
  by Robert Romano, http://netrightdaily.com/ 
  Interest rates in Switzerland, Denmark, Sweden, the European Central Bank and now the Bank Japan have now plunged into negative territory, starting a new phase in the era of central banking that is very much uncharted.
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  Time will tell if it leaves the global economy lost at sea.
  So far, banks are primarily being charged for keeping excess reserves on account at these central banks, a policy designed to jumpstart lending by making it more expensive for banks to sit on reserves. In some cases, like Sweden, the deposit rates have gone negative, too.
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  Whether it will all work out or not remains to be seen — initiating inflation and economic growth.  Maybe it will, but so far it’s not really looking good. So what if it doesn’t work? The longer term implication is that central banks will then feel compelled to move their discount rates and other rates negative, too. Once that Pandora’s Box is open, it will mean that when financial institutions borrow money from the central bank, they will earn interest instead of owing it.
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  You read that right. When, not if, central banks go completely negative, they will wind up paying banks to borrow money from them. That’s quantitative easing by another name.
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  Say, the interest rate is -1 percent. For every $1 trillion that is lent, the central bank in theory would owe an additional $10 billion in interest to the borrowing banks. Fast forward 10 or 20 years into the future. Can you imagine a world where commercial banks pay their customers to borrow money?
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  Sure, scoff now. But mark my words. Central banks are so desperate to kick start the economy and credit creation, they will do almost anything. So, if they have to bribe you to borrow money to start acquiring more things, then that’s exactly what they’ll do.
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  A few problems immediately emerge. If it ends up costing money for banks to lend money, how will they make any profits? The answer might be that the profits will be the difference between the interest earned from that bank borrowing the money from the central bank less the interest owed to the borrowing customer.
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  So, say the bank borrowed from the central bank at -5 percent and then issued a loan with that money at -1 percent. The customer still earns 1 percentage point of negative interest, and the bank still gets to pocket the remaining 4 percentage points of negative interest from the central bank.
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  But what about savers? Would they be charged just to put money into the bank? If so, why would they keep it there? Since banks depend on deposits to make up their capital requirements, they would have a powerful disincentive against charging customers to keep deposits, lest it provoke a run on the banks.
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  Which brings us to the issue of deflation. By going negative, are not central banks basically forecasting that deflation — that is, outright asset price depreciation whether in stock prices or home values — is at hand? Perhaps banks can get by in such an environment since they apparently plan on getting paid to borrow money. But what about everyone else?
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  For, what negative interest rates are really projecting are low-to-no growth and zero-profit environments for the entire global economy sometime in the future, where businesses simply cannot make money. Not now, but perhaps soon.
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  In the Great Depression, when it came to such price volatilities for, say, farmers, the government instituted a series of agricultural subsidies to keep the farms profitable so they could pay their mortgages.
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  The implication of no growth and deflation today are that all businesses will come to the government seeking subsidies. We already see it in agriculture. Education. Health care. Housing. Whether it is loan programs for customers or outright grants. There will be more.
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  This is why capitalism cannot survive no growth. Economies would naturally revert to some form of subsistence, where the need to trade is reduced greatly. But investors demand return on investment. Remember, it’s a world without profits. In a no-growth, deflationary environment, those who over-produce are the ones who get punished by markets. So businesses will demand subsidies for their surplus stock, or for not producing at all, as in the Depression.
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  read more.

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