This article at least has the benefit of an honest admission by Jamie Dimon, JPMorgan’s CEO. Dimon says that negative interest rates have “adverse consequences, which we do not full understand.” That’s true.

The U.S. has never experimented with negative interest rates (although they have been tried in the eurozone, Switzerland, Sweden and Japan). Dimon may be in the dark about the impact, but central banks are even more confused.

Let’s try to sort this out. There are two reasons to use negative interest rates.

The first reason is they make your currency unattractive and lower the exchange rate. Global investors looking for higher yields will steer away from currencies with low or negative rates. This is effective in producing a weaker currency. This method was used by Switzerland in the late 1970s at a time when investors were fleeing the dollar (because of high inflation) and looking for safe havens such as Switzerland. The Swiss franc was becoming the strongest currency in the world.

But Switzerland is dependent on exports and tourism for its economy, and a strong currency hurts both. So the Swiss National Bank used negative rates to discourage capital flows and weaken the currency. It was somewhat effective and at least kept the Swiss franc from getting much stronger than it already was.

The second reason for using negative rates is more theoretical and academic. The idea is that negative rates will force savers to spend money faster, before it disappears under the weight of negative rates (really a kind of tax on savings). This is intended to increase money velocity, increase inflation and act as monetary ease. In fact (and this is the part the eggheads and Dimon don’t realize), the opposite occurs.

People have lifetime goals for savings including retirement, health care and children’s tuitions. When you impose negative rates, people don’t save less; they save more because they still have to meet their goals. This actually reduces velocity, increases deflation and causes deferred spending.

Negative rates signal that the central bank expects deflation. Savers act accordingly by hoarding cash. The academics and central bankers won’t figure this out until the damage is done. Let’s hope we never cut rates below zero so we don’t have to see the disastrous consequences of negative rates in the U.S.

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