Negative interest rates

Date posted: October 1, 2012

Some investors in Europe are actually earning negative interest rates on their investments. How can this happen? And what does it mean? N.C. State University economist Mike Walden explains.

“It’s very unusual … . Essentially what it’s saying is that instead of taking your money to a bank or financial institution and saying, ‘Hey, I’m going to hand over this money to you. You pay me an interest rate. You pay me some money to do that, because you’re going to use that money.’

“Instead what’s happening is you’re paying the institution to keep your money. It’s sort of like people putting their money in a mattress: You’re not going to earn any interest, and indeed you’re actually paying interest.

“I think what’s happening here is it’s really being driven by fear. We’ve had a lot of economic issues in Europe as people know. There’s a lot of concern with the financial systems in Europe. So I think people are very fearful that their savings may be depleted, may be lost. And … simply, right now, they’re not concerned about adding to their savings in terms of investments. They just want to preserve those savings. So they want a safe place to keep their money, and they’re actually willing to pay to do that.

“It’s going to be very interesting … . We’ve not had this situation in our country, but if we ever do, I think it is clearly a signal of bad economic times.”

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