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negative interest rates explained

negative interest rates explained

Negative interest rates? What’s that? Who cares? Even if you don’t understand what Ms.Yellen is saying (and almost nobody does) it is important to you because it could mean you might lose you job next year or have to cut back on some of the things you want to acquire.

A negative-interest-rate policy (NIRP) is a monetary policy tool where nominal target interest rates are set with a negative value somewhere below zero. In short, the policy means banks and customers are essentially paying to park their money at financial institutions.

negative interest rates explained 2

negetive interest ratesNegative interest rates have become much more popular in 2016, and Money Morning experts say the ramifications are huge for global stock markets.

It really is very simple, but most of the media broadcasters don’t understand it because they are reading from a script written by someone else who doesn’t understand it either. Let me take a whack at explaining it in plain language.

There are two kinds of interest rates – short term and long term. The amount of interest paid has to do with the amount of time that is involved. We are talking about long term and short term bonds that pay dividends. If you lend me a thousand dollars with the agreement I will pay you back in one year you can easily understand that the risk is less than if I agree to pay you back in 20 years. The amount of risk is reflected in the rate of interest. Longer is higher and shorter is lower. Pretty simple.

Now we throw the monkey wrench into the machinery. Yellen arbitrarily sets interest rates rather than letting the market place determine them. The so-called Fed Funds rate is the short-term interest rate set by Greenspan that banks charge each other when one bank loans to another or from the Fed. The basic policy of banks is to borrow short and loan long. That means they borrow money at lower rates (5%) and loan out at higher long-term rates (6%). Unfortunately, we now have the monkey wrench that is ruining the machinery because the short-term rate is higher than the long-term rates.

This effectively cuts down on the amount of money banks have to loan and means the banks must cut back on loans for new business and loans for old business expansion. This is a very effective tool that our big money guru is using. Big G has said he wants to slow down the economy and he is doing it. He thinks a 2 ½% growth is fast enough; however, when you slow to 2 ½% from 6% that is 58%. Too much, too fast. What would happens if your company had 58% reduction in growth?

Money is the lifeblood of our economy. When you curtail the money flow it is like a person having congestive heart failure. Some people die and some businesses go bankrupt, but both must slow down drastically.

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