Paying the bank interest?

While the U.S. economy has performed strongly over the past year growing at its fastest rate since 2003, the rest of the world continues to lag behind. Weakness in the global economy is so bad that it has sparked off a currency war where many nations are purposely printing money and pumping cash into their systems in order to devalue their currencies.  

You might ask why any country would want to devalue its currency. Primarily, it is in response to the threat of deflation, or dangerously low inflation that is forcing central banks to act in this manner. However, such actions may be having some unforeseen consequences. In particular, instead of being paid interest on their deposits, some account holders in certain countries are now paying their banks interest!  

For example, FIH Erhvervsbank, a small bank in Denmark, is planning to charge its customers 0.5 percent interest on their deposits. That means for every $100, account holders will have to pay the bank 50 cents. The bank says it is being forced to do so because "it is being similarly charged by the central bank, which has cut official interest rates deep into negative territory. The latest move by the Danish National Bank earlier this month took rates to a record low of minus 0.75 [percent].” Denmark is not alone in doing this, either, as Sweden became the latest country to introduce negative rates, cutting its benchmark rate to minus 0.1 percent. 

It is difficult to say how long this will go on, but “[s]even of the world's 10 biggest economies are in easy money mode. The U.S. and U.K. are in neutral. Only Brazil is currently raising rates.” This has led some to comment, “If everyone attempts to tackle deflation by depressing the value of their currencies, nobody wins. And this could hurt the U.S., which is the only major economy expected to start raising interest rates this year.” 

If this devaluing of currencies continues, paying a bank could just be one of the many issues that can result. The value of stocks and real estate could also become artificially inflated and susceptible to a correction. Many market watchers here in the U.S. “agree that the market rally has been fueled, for the most part by the artificial Fed stimulus.” If and when the Fed decides to raise rates, the stock market, which has performed admirably for the past couple of years, will drop. How much it will drop exactly is anyone’s guess. For now, these monetary policies remain something for everyone to watch.