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The Era Of Negative Interest Rate and Wise Financial Decision making - Alldamoney

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The Era Of Negative Interest Rate and Wise Financial Decision making

The Hutchins Center on Fiscal and Monetary Policy at Brookings examined the recent experience with negative interest rates, particularly in Europe, and their possible use in the U.S. 
Bernanke the former fed chair initiated the ‘ZIRP,’ which means “zero interest rate policy.” He is has started suggesting the ‘NIRP,’ “negative interest rate policy.” Recently he said “Since the current low-interest-rate environment may persist, there are good reasons for the Fed and other central bankers to consider changes in their policy frameworks,” he added. “The option of raising the inflation target should be part of that discussion. But … it is premature to rule out alternative or potentially complementary approaches, including the possibility of using negative interest rates.”


A deeper look into this statement will show that most central bankers are totally confused. And this confusion has eroded  confidence in the global financial system. Such that about $13 trillion in government bonds are now yielding below zero, which means that the buyers have to pay  interest instead of receiving it.

Sept 12  Bernanke takes on critics who says his suggestions would cause hyperinflation and asset bubbles
In Switzerland for example, the Negative rates and currency intervention have been the cornerstone of the SNB's strategy to weaken demand for the Swiss franc since it scrapped its cap against the euro in January 2015.and it  has caused unease by acting as a charge on banks, while insurers and pension funds have been wrestling with low bond yields.
So what is a 'Negative Interest Rate Policy (NIRP) and how it would impact on you:
The NIRP (negative interest rate policy) is an unconventional monetary policy tool where the theoretical lower bound of zero percentage nominal target interest rates are set with a negative value.


BREAKING it DOWN
Naturally, People and businesses hoard money instead of spending and investing during deflationary periods because prices are expected to fall. This will result in a collapse in aggregate demand that will further lead to prices falling even further resulting to a slow down or halt in real production and output, then to an increase in unemployment.
To deal with such economic stagnation a loose or expansionary monetary policy is usually employed but if deflationary forces are too strong simply cutting the central bank's interest rate to zero may not be sufficient to stimulate borrowing and lending thus the negative interest rate is used in such a chronic case.
In the negative interest rate scenario the central bank and private banks will charge negative interest: what this means is that instead of receiving interest on deposits, depositors will pay to keep their money with the bank.
This will make banks lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.
Finally, targeting interest rates below zero will theoretically reduce the costs to borrow for companies and households, driving demand for loans and increasing investment and consumer spending.

In most countries currently using this policy, retail banks mostly bear the costs of the negative interest rates by paying them rather than passing it to depositors as paying to deposit might encourage people to hoard cash.


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