Negative Interest rates

I had mentioned about some ideas I had to combat deflation and one of the ideas is negative interest rates. The zero interest rate seems to be the floor in interest rates in everybody's mind. Why can't we go lower than that? If we think people aren't spending on goods & services now because they believe that the prices of those goods & services will go down in the future, then a negative interest rate may spur spending now. If the reduction in exchange of goods & services is not due to people's expectation of lower price tomorrow but in general a lower appetite to exchange, then negative interest rates won't help and neither an increased money infusion by the Fed would help. In that case, you need to be thinking of supply destruction to stave off deflation - I will discuss this idea in my later blogs. Negative interest rates may be thrown aside as an impractical one but would the declaration of negative interest rates at the banks spur spending now?

If a consumer is faced with a choice of negative interest rate on his deposits in a bank, he could withdraw all the cash and keep it in a safe besides his bed, he could spend it on goods & services with the thinking it is better to spend than lose value of his savings, he could invest the money in the stock or bond market. Thru this, we may create a business around Cash Safes around the country - where businesses would keep your cash in a safe for a nominal fee/year - this nominal fee/year will be akin to a negative interest rate though but maybe smaller than what the banks would charge. would there be a bank run across the nation because of this? Instead of the retail banks charging negative interest rates, the Feds could charge negative interest rates on excess reserves kept by the banks at the Fed. This is more of a signal by the Fed that it could go negative on interest rates and would the signal itself fuel spending by consumers. kind of opposite to Inflation - in inflation, people buy things now as they expect prices to rise tomorrow and this expectation feeds more inflation. would the expectation of negative interest rates create some psychological behaviour from consumers to buy things now. With negative interest rates at the Fed, the banks then won't keep those excess reserves at the Fed and may feel pressure to lend them out. The mortgage rates may drop further and create some additional refinancing, home buying.

This negative interest rate is just an idea I am throwing out there and I will try to explore it further in my future blogs when I get a chance. I haven't seen this idea being talked about or discussed about in the financial media as one tool to fight deflation. Everybody says that Feds can't go lower than zero on interest rates - is that really true. We may never have had to experiment with going negative on interest rates before but now it is worth talking about and seeing what behaviour it will create in the economy and if it can be another tool for the Fed?