Swedes are saving more than ever in their newly created (voluntary) cashless environment. That was not supposed to be how it works. They should be saving less and spending more because the banks are charging them interest. That is the goal of negative interest rates, to force people to spend more so that inflation will bump off zero.

But here is the flaw in that reasoning. The fees the banks charge retail customers are like a tax. They make the Swedes feel poorer in their accounts, not richer. So the Swedes do what I predicted. They save more to make up for the shortfall. They still don’t want to hide money under the mattress, risking the loss of all of it to theft!

The illogical reasoning that people will spend more when you take their money away from them must have been created by people who have plenty of spare money. No one else would entertain this absurd reasoning except for economists and bankers!

A tax is a tax, no matter if it comes from the government or if it is imposed by the banks. Bankers better be very afraid that people will simply not want to spend money when they are being taxed more. Savings have exploded in the USA, even while main street has suffered. You can see that by the chart:

Now, it is possible that once negative rates become large, like over 5 percent, that people will look for alternative means of storing value. They will seek out gold, or perhaps antiques, or art, or coins, or most likely bond funds. But knowing that the populace is getting steadily poorer will not, in my opinion, make for a stronger business climate. And if people sense a weak business climate they save money.

So, making the populace poorer will not make them spend. People spend less when they feel poorer, not more. I cannot understand how this is lost on New Keynesians like Krugman and Roubini and others. The slide toward negative interest rates is an untested and dangerous model.

But even JP Morgan is calling for a deep venture into negative rates well below zero. The economists at JP Morgan say that banks will not hoard cash, even if it makes economic sense to do so. Negative .5 percent is the real zero lower bound according to the bank of England. But JP Morgan says that the Fed could go as low as -1.3 percent here in the US, that Britain could drop down to -2.5 percent, and that the euro zone could drop as low as -4.5 percent with Japan dropping to -3.45 percent.