Negative interest rates?

[minority_finance_mo]

http://www.bloomberg.com/news/articles/2015-04-23/negative-interest-rates-may-spark-existential-crisis-for-cash

It’s a new era of banks deigning to accept money only if customers are willing to pay for the privilege

Can someone smarter than me explain to me how this is advantageous for banks, o possible? And what does this mean for us?

[PeachFuzzInVA]

Without jumping into the inflation/deflation debate (that's where this thread is headed, I promise), because all that will result in is me wanting to bang my head against a wall, negative interest rates are an inflationary policy. They're trying to avoid what they think could turn into a deflationary cycle.

To make it simple:

The lower the interest rate, the cheaper it is to borrow money, the more inflationary the policy.
The higher the interest rate, the more expensive is it to borrow money, the more deflationary the policy.

[gimp]

It's basically a prod and a poke for banks not to sit on huge piles of cash, but go out and spend it and lend. It doesn't affect end customers like us in the sense that there are no savings accounts with negative interest rates (apart from, you know, service fees and annual fees and etc etc etc.)

[nereo]

It's basically a prod and a poke for banks not to sit on huge piles of cash, but go out and spend it and lend. It doesn't affect end customers like us in the sense that there are no savings accounts with negative interest rates (apart from, you know, service fees and annual fees and etc etc etc.)

... though (and this is only tangentially related to the OP)... banks have kept savings accounts at negative rates (real-adjusted) for years now, and there has never been more cash stored in savings account.  Seems us humans need a bigger stick or a sharper poke to get us to move...

[jmusic]

Without jumping into the inflation/deflation debate (that's where this thread is headed, I promise),

I don't see how this discussion could be anything else, because that's exactly what negative rates ARE (inflationary)!  The central banks are trying to spur more borrowing (inflation), because more and more people are retiring debts and causing deflation, which is EXACTLY what happens when everyone becomes frugal. 

... though (and this is only tangentially related to the OP)... banks have kept savings accounts at negative rates (real-adjusted) for years now, and there has never been more cash stored in savings account.  Seems us humans need a bigger stick or a sharper poke to get us to move...

The banks have not brought real negative rates to the consumer level yet, because they know that people will eventually start hoarding actual cash (which doesn't have a negative rate).  Supposedly there are plans by the evil bankers to actually eliminate cash from the monetary system so they won't have this problem any more (I'll believe this when I see it though). 

I think there's a lot of cash in the bank because people are concerned about the risk on other assets is getting too high relative to the potential reward. 

[forummm]

It costs the banks something to hold your cash and have the account open and be ready to send it to you whenever you want it. Usually they pay for that by lending it out at rates higher than what they pay you. But they can't lend it out for anything good right now. So they have to charge you to make a spread.

Probably also something regulatory related to get the big banks to slim down a bit.

[nereo]

The banks have not brought real negative rates to the consumer level yet, because they know that people will eventually start hoarding actual cash (which doesn't have a negative rate).  Supposedly there are plans by the evil bankers to actually eliminate cash from the monetary system so they won't have this problem any more (I'll believe this when I see it though). 

Ok, well maybe I'm misunderstanding something then, but what's a 0% (or 0.25% or 0.5%) savings rate if not a real negative rate?

[PeachFuzzInVA]

Without jumping into the inflation/deflation debate (that's where this thread is headed, I promise),

I don't see how this discussion could be anything else, because that's exactly what negative rates ARE (inflationary)!  The central banks are trying to spur more borrowing (inflation), because more and more people are retiring debts and causing deflation, which is EXACTLY what happens when everyone becomes frugal. 

... though (and this is only tangentially related to the OP)... banks have kept savings accounts at negative rates (real-adjusted) for years now, and there has never been more cash stored in savings account.  Seems us humans need a bigger stick or a sharper poke to get us to move...

The banks have not brought real negative rates to the consumer level yet, because they know that people will eventually start hoarding actual cash (which doesn't have a negative rate).  Supposedly there are plans by the evil bankers to actually eliminate cash from the monetary system so they won't have this problem any more (I'll believe this when I see it though). 

I think there's a lot of cash in the bank because people are concerned about the risk on other assets is getting too high relative to the potential reward.

Basically Just saying that I don't want to get into the pro-inflation/pro-deflation debate because the logic on the other side of the debate is simply non-existant.

I'm assuming by "real negative rates" that he's basically referring to the real rate of return (accounting for inflation) on your cash deposits. In which case, those have been negative for quite a while. We're playing in a whole different ball game, though, when John Doe off the street realizes that he's being actually being charged interest to store his money in a checking account.

Of course, at these interest rates that we're already seeing, the ones who really suffer the most are savers and the elderly living on fixed incomes.

[marty998]

It's just maths. e.g if the US or any country does end up with deflation (say an inflation rate of -3%) and interest rates are -1% then you are getting 2% above inflation even if you are losing money in the process.

If it sounds ridiculous then thats because it is, and yes it is better to keep the cash under the mattress. But most people do not feel comfortable hiding all their live savings in the house (fire, burglary, kids running off with it etc) - so they will still use the banks.

[nereo]

It's just maths. e.g if the US or any country does end up with deflation (say an inflation rate of -3%) and interest rates are -1% then you are getting 2% above inflation even if you are losing money in the process.

If it sounds ridiculous then thats because it is, and yes it is better to keep the cash under the mattress. But most people do not feel comfortable hiding all their live savings in the house (fire, burglary, kids running off with it etc) - so they will still use the banks.

...and ignoring that, with a 3% deflation rate (e.g. -3% inflation) the economy is imploding.

yes, i was referring to the real-rate of return.  But as I interpret it, if you have a negative real rate of return, then you should ahve a negative real interest rate.  Someone correct me if I am mistaken

[jmusic]

The banks have not brought real negative rates to the consumer level yet, because they know that people will eventually start hoarding actual cash (which doesn't have a negative rate).  Supposedly there are plans by the evil bankers to actually eliminate cash from the monetary system so they won't have this problem any more (I'll believe this when I see it though). 

Ok, well maybe I'm misunderstanding something then, but what's a 0% (or 0.25% or 0.5%) savings rate if not a real negative rate?

My mistake for using the wrong word.  I agree that the real rates have been negative for quite some time.  I was referring to the printed, "face value" rate actually being negative.

[acroy]

AND!!
negative interest rates mean governments can continue to stay solvent (new debt and and refinance old debt)

it is quite a house of cards - unprecedented, I think, in history.

[Syonyk]

it is quite a house of cards - unprecedented, I think, in history.

Yup.  Never before in history have we managed such creativity in keeping utterly unsustainable fiscal discipline afloat for so long!

The more interesting part of this is that cash is slowly being banned for use in transactions above certain amounts, in certain classes of goods, etc.  That's not going to be fun...

[PeachFuzzInVA]

it is quite a house of cards - unprecedented, I think, in history.

Yup.  Never before in history have we managed such creativity in keeping utterly unsustainable fiscal discipline afloat for so long!

The more interesting part of this is that cash is slowly being banned for use in transactions above certain amounts, in certain classes of goods, etc.  That's not going to be fun...

This. Color me a conspiracy theorist, but I wonder why...

[money beard]

Anyone know of any foreign countries that have experienced these negative interest rates in the past?

Frankly if it spurs a couple more years of bull market in the USA, and gets our inflation to a healthy level, I'm cool with it, but it is a little odd.

[PathtoFIRE]

The lower the interest rate, the cheaper it is to borrow money, the more inflationary the policy.
The higher the interest rate, the more expensive is it to borrow money, the more deflationary the policy.

There are quite a few economists who would argue with this assertion (I find this article a good summary of that point).

It's basically a prod and a poke for banks not to sit on huge piles of cash, but go out and spend it and lend.

Banks never have and never will lend out deposits. (Another brief article that explains that for you).

[Syonyk]

This. Color me a conspiracy theorist, but I wonder why...

Cash prevents central banks from enforcing severely negative interest rates.  At some point it literally becomes cheaper to pay for a warehouse and guards of piles of cash than it does to keep money in the banks.

Also, the IRS and various other taxing agencies would utterly love to eliminate cash, because then they can eliminate a large part of the shadow economy that works in cash and doesn't pay enough taxes.  Being able to tax literally every single penny flowing between people is the goal.

[Syonyk]

Frankly if it spurs a couple more years of bull market in the USA, and gets our inflation to a healthy level, I'm cool with it, but it is a little odd.

Even if it makes the crash after those few years even worse?

[gimp]

It's basically a prod and a poke for banks not to sit on huge piles of cash, but go out and spend it and lend.

Banks never have and never will lend out deposits. (Another brief article that explains that for you).

Not sure how that's in any way relevant to what I said...

[acroy]

Low or negative rates are supposed (according to the financial gods) to encourage capital spending, thus growth, jobs, etc etc etc.

But industry will only build for demand. negative interest is  'pushing on a string' in that regard. Even if Capex is cheap, if demand is not there, business will not invest. I've seen this in my own workplace.

Artificially low / negative rates are driving massive capital mis-allocation into inflated bond and equity prices.