Desperate times do indeed call for desperate measures. That’s the case in the Land of the Rising Sun, where the Bank of Japan (BOJ) recently announced the implementation of negative interest rates.
Banks who leave their excess funds in the BOJ will now be charged a 0.1 percent levy. The move is intended to encourage these banks to more willingly lend to investors, and in the process prop up Japan’s sagging economy.
Since dipping back into recession in the fall, worries have abounded about the stability of Japan’s finances. Continually sluggish growth coupled with an aging population puts the nation at risk for continued downturns. This is impeding both borrowing and investment.
Hence the BOJ’s latest maneuver, an attempt to goose lending and consumption after decades of government spending failed to do so. Unfortunately it’s not likely to accomplish either of those. What it will do, however, is create a peculiar financial landscape where individuals are unintentionally encouraged to hoard cash, capital is misallocated, reckless borrowing is rewarded. and central banks attempt to eliminate physical currency.
This isn’t all hypothetical; Denmark, Sweden and Switzerland have all already used negative interest rates to stabilize their respective currencies, as has the European Central Bank, the Eurozone’s central bank.
In Denmark, where potential homeowners are paid to take on mortgages, negative interest rates have pushed property prices up 60 percent, causing an enormous housing bubble. Sweden, meanwhile, is on the verge of becoming the world’s first cashless society where negative interest rates are forcing citizens to spend what money they have to avoid bank fees. And in Switzerland, towns are actually asking citizens to delay paying their taxes in order to avoid paying interest on all the revenue.
These anecdotes paint the picture of a distorted economic world where up is down and down is up. Japan is following these other countries, risking financial instability and currency wars.
Another alarming feature of the negative interest crowd are structural problems associated with uncontrolled government spending, high taxes, national debt and aging populations.
A fifth of the world’s GDP in now resides in negative interest territory. Canada is openly contemplating joining the pack. It’s not inconceivable that America will do the same.
The problem with policies such as negative interest rates is that they assume public sector maneuvering creates a prosperous economy. Perhaps they should entertain the notion that the true driver of prosperity is the private sector. Would that not explain why all the massive “all in” government interventions of the last 8 years have had such little impact?
Rather than head into this risky territory, Japan, and any other nation contemplating negative interest rates, should stick to what’s worked in the past: letting the private sector create economic growth. That means government policies that get out of the way: free trade, balanced budgets, lower taxes and less regulation.
After years of dipping into recession Japan has run out of tools to stabilize its economy and fuel sustained growth. But the answer won’t be found in radical policies like negative interest rates, but rather in the tried and tested free market.
served as the 38th Director of the United States Mint from 2006-2011. Moy is the chief strategist for Fortress Gold Group, a provider of gold IRA rollovers and physical U.S. gold and silver bullion coins for direct delivery. Read more from Ed Moy — Click Here Now.
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