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Negative Interest Means You Might Have to Start Paying Banks to Look After Your Money

Banks like Natwest may start charging people to keep their money there, and that's bad news for you, my penniless friend.

by Sam Wolfson
27 July 2016, 3:35pm

Incredible stock image which shows how Greenland could one day end up below New Zealand

The news normally reports when stuff happens: a bomb goes off or a celebrity dies or Rupert Murdoch gets a new wife, that kind of thing. But there is one news story that is reported week in week out about something staying exactly the same: interest rates.

In March 2009, the Bank of England lowered interest rates to 0.5 percent. Today, it is still 0.5 percent, having not budged in all that time. Yet in those intervening seven-and-a-bit years, that miniscule number has hardly been out of the news – including this week when there was astorysuggesting Natwest might start to charge businesses for keeping their money there, essentially offering negative interest. We'll get to that, but first: why is the continuation of half a percent rate such a big deal?

Basically, 0.5 percent is a disconcertingly low interest rate. It's the financial equivalent of the UK being in a constant state of emergency, with extraordinary measures like curfews and police checks, only continuing indefinitely.

A low interest rate means that saving your money is a bit of a waste of time, because it's likely to depreciate in value. If you're earning 0.5 percent from your bank account and the cost of living is rising by about 1.4 percent (which is the current Retail Price Index rate of inflation) then essentially you are losing money. So rather than keep your money in a bank account, it makes sense to spend and consume, buy stuff, buy a house, reinvest into your business, keep the economy moving.

In theory, it should also be a great time to borrow, because you don't have to pay back as much, and borrowing money means you can buy even more stuff.

But in the long term, you don't want everyone to just be constantly spending - it's good for people to have financial reserves and less debt. It's just not good right now, when the economy is still a mess like this.

So low interest rates are a special measure. But like a lot of special measures, once they're in place, people are terrified of withdrawal. It's like taking sleeping pills when you're anxious, but then continuing to take them when you're not. After a while you can't get to sleep without them - or maybe you could, but you're too scared to find out. And that's why the low interest rates remain news, because this extraordinary measure has become the new normal.

Now, if you're a millennial on minimum wage working at a regional branch of Whittards Tea while you try to get your psych-grime band up and running, then you probably aren't that bothered about low interest rates when you have lots of debt and no money. In a way, low interest rates are kind to people like you. But there's another way they have the potential to fuck you forever.

To see why, let's talk about negative interest rates, because after all these years of 0.5 percent interest and people wondering when rates are going to go back up, the Bank of England is instead about to cut interest rates again, perhaps to 0.25 percent, perhaps to 0 percent. They are preparing for a Brexit recession, and so believe in more of this low interest medicine.

That's why Natwest started to warn their customers about negative interest rate this week, essentially charging them to keep their money there. Which seems ridiculous: why would anyone give all their money to a bank if they were to be charged for the privilege?

Well, many central banks have already implemented negative interest rates, so big banks like Natwest are already experiencing negative interest. If Natwest stores £1 million with the European Central Bank, which sets interest rates for the Eurozone, a year later they'll get back £996,000. So far they have been sucking up those losses themselves, because negative interest rates sound really shit for customers, but they're now saying, initially to their business customers - shopkeepers, freelancers, small business owners - that they may soon have to start charging negative rates.

You might think that people would just take all their money out and put it under their mattresses, and that is the fear, but if you're a bank or a business you can't do that. It's impractical and unsafe. Banks need to leave their money with federal banks, and businesses need to leave their money with regular banks, and so people are sort of left with little choice.

So how is this going to affect you, my penniless friend? First, because low interest rates are going to make it harder for banks to turn a profit, and even if that makes you rub your little hands with glee, it's going to mean further economic downturns and job losses in the short term, especially as banks are likely to do more shady bubble-inflating dark money shit in order to make up the lost profit margins.

Second, because lowering interest rates to comedically negative levels shows government's absolute unwillingness to stimulate the economy in other ways, like investing wild amounts of borrowed cash in education, health and infrastructure leaving the economy not only stimulated but all of us with better public services (something we'll need when they've got no money). And third, because even if these new rates mean that banks offer you loans at a lower cost, you're still going to be in debt and being in debt so that you can have money is literally the shittest way of having money.

Negative interest rates seem like they might only affect the rich and that is probably true for now, but they also precipitate an uneasy new dawn in global finance – one in which debt is celebrated, the refusal of governments to seek alternatives to austerity is steadfast and there's no way of money holding on to its value.

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