Currently there is a lot of talk about negative interest rate and possibly US would be adopting that. Denmark was the first country in the world which has "successfully" applied negative interest rate. How do Danish banks make their money there?

A lot of people in finance in US say that negative interest rate would not work in US and would cause a collapse of the banking sector. Given that we are currently in one of the biggest bond bubble in history, is an alternative other than negative interest rate possible because any rise in interest rate would cause a massive debt sell off. The last time FED tried to raise the interest rate by .25% the markets dropped by 20%. So i am trying to understand if we are in trouble, because if the interest rate is increased, we are looking at a deep recession but if the interest rates go negative we are looking at stagflation. Have I understood this right?

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    $\begingroup$ This sounds more like an economics question than a personal finance question. Did you have some personal-finance related question to ask about this? If you're really interested in the bigger economics picture you might be better off asking on economics.SE or somewhere else. $\endgroup$ – dwizum Jan 28 at 15:23
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    $\begingroup$ I don't understand the question. You are looking for an alternative to to negative rates to achieve what goal exactly? $\endgroup$ – BKay Jan 29 at 18:36

Negative interest rates means that if you take a 1.000 loan, you will pay 900 to the lender. At the same time, if you deposit this same 1.000 in a savings accounts, you will withdraw 900. This is an expansionary monetary policy. In other words, low or negative interest rates estimulates the consumption and destimulates the savings.

It also weaken a country’s currency, which boost the exports and pushing up import costs. Like Japan and USA, Denmark is a big exporter. One of Trump strategies - along with direct taxations into imported goods - is to decrease interest rates to gain advantage against China.

The stimulus for comsumption is to boost the economy and increase the aggregate demand. An investor would prefer to invest in a company or enterprise rather than government bonds, and a family would rather buy a new house today than save for 5 years.

Other monetary policies could be the reduction of the reserve ratio or quantitative easing, but all expansionary policies can lead to bad consequences in the future, like high inflation rates.

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  • $\begingroup$ Nitpick: I would say "if you take out a 1.000 loan." "Making a loan" sounds like what the lender does. $\endgroup$ – user253751 Jan 29 at 16:51
  • $\begingroup$ Thank you for the suggestion! $\endgroup$ – Croves Jan 29 at 17:03
  • $\begingroup$ If there is negative interest rate banks would not make money because essentially banks would lose the money in a negative rate environment making loans. However if the interest rates were to be increased bond prices would drop leading to sell offs in the bond market which would mean defaults since bonds are debts. Increasing interest rate seem unlikely but reducing interest rate would mean, i dont want to use the word "collapse" but essentially you are asking banks to lose money. What i was wondering is "there a depression coming"? Can the government do anything at this point? $\endgroup$ – Slartibartfast Jan 30 at 12:40
  • $\begingroup$ It's really dificult, at least for me, say if there's a recession coming or not. There's a documentary called Overdose The Next Financial Crisis and I strongly suggest you to watch, because the main topic of it it's the low interest rates around the world. In essence, low or negative rates are to stimulate spending, and when people spend it's good for the economy in general... but at which point? This threshold is very debatable depending on what economic school do you follow. $\endgroup$ – Croves Jan 30 at 13:50
  • $\begingroup$ And just to clarify: under a negative rate policy, banks need to pay interest for saving excess reserves with the central bank - that is, any surplus cash beyond the reserve requirement. This doesn't necessarialy means that a loan will have negative rates. The average lending interest rate in Japan for 2018 was 1% (tradingeconomics.com/japan/…) $\endgroup$ – Croves Jan 30 at 13:56

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