Author Topic: Negative Interest Rates  (Read 6586 times)

dungoofed

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Negative Interest Rates
« on: March 10, 2015, 01:31:32 AM »
http://www.nytimes.com/2015/02/28/business/dealbook/in-europe-bond-yields-and-interest-rates-go-through-the-looking-glass.html?_r=0

“I think I was so happy I got the loan, I didn’t hear everything he said,” she recalled.

And then she was told again about her interest rate. It was -0.0172 percent — less than zero. While there would be fees to pay, the bank would also pay interest to her.

innerscorecard

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Re: Negative Interest Rates
« Reply #1 on: March 10, 2015, 02:57:18 AM »
I need to find out how I can borrow money in Europe. All the cool kids (Apple, Berkshire Hathaway) are doing it.

marty998

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Re: Negative Interest Rates
« Reply #2 on: March 10, 2015, 04:48:06 AM »
I'm curious. Would really like to see a European Bank's income statement.

Interest income: (negative number)
Interest expense: positive number

Net interest income: positive number (you'd hope)

Utterly ridiculous. As an accountant, I'm offended.

arebelspy

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Re: Negative Interest Rates
« Reply #3 on: March 12, 2015, 02:53:15 PM »
Hah.  What a world we live in.

Thanks for the link!  :)
We are two former teachers who accumulated a bunch of real estate, retired at 29, spent some time traveling the world full time and are now settled with three kids.
If you want to know more about us, or how we did that, or see lots of pictures, this Business Insider profile tells our story pretty well.
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CDP45

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Re: Negative Interest Rates
« Reply #4 on: March 12, 2015, 07:19:53 PM »

Bob W

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Re: Negative Interest Rates
« Reply #5 on: March 12, 2015, 10:35:28 PM »
Too weird.

ScroogeMcDutch

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Re: Negative Interest Rates
« Reply #6 on: March 13, 2015, 08:46:12 AM »
The Danes don't use the Euro, nor do the Swiss. It really is the strange stuff that's happening with the Euro that's causing all of this. Interest rates in the Euro zone are also dropping. Every quarter I get an email saying the savings rate was dropped again by .1 to .2%, currently resting a .9% for a major bank in the Netherlands.

On top of that, it seems the ECB has trouble buying the bonds they set out to buy.

TreeTired

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Re: Negative Interest Rates
« Reply #7 on: March 13, 2015, 09:38:46 AM »
So governments will soon be able to finance their spending with their deficit!    The bigger the deficit the greater the interest revenue.  This is awesome!   Taxes will be cut because governments will find get all the revenue they need by issuing bonds,  high levels of personal debt will become a good thing, not a bad thing.  Why do I think this will all end very very badly?

seattlecyclone

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Re: Negative Interest Rates
« Reply #8 on: March 13, 2015, 10:56:36 AM »
I don't get it. I understand why a government might lend out money at negative interest to stimulate growth, but why would private investors do it? Why not just put cash in a safe? Zero interest is better than negative interest.

Scandium

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Re: Negative Interest Rates
« Reply #9 on: March 13, 2015, 11:16:53 AM »
I don't get it. I understand why a government might lend out money at negative interest to stimulate growth, but why would private investors do it? Why not just put cash in a safe? Zero interest is better than negative interest.
The article explains it. If you have $500 million you need to park somewhere putting it in a large enough, and safe enough safe would be quite expensive. And some apparently also believe the price of the bonds will go up. Not that I know why they would, unless the rate goes more negative?

a1smith

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Re: Negative Interest Rates
« Reply #10 on: March 13, 2015, 04:48:16 PM »
And government bold yields are doing the same thing.

http://www.wsj.com/articles/government-bond-yields-turn-negative-1421257217

German, Finnish and Swiss debt went negative back in January.  US debt has done it as well in the past, notably 2008.

dungoofed

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Re: Negative Interest Rates
« Reply #11 on: March 13, 2015, 08:35:32 PM »
I don't get it. I understand why a government might lend out money at negative interest to stimulate growth, but why would private investors do it? Why not just put cash in a safe? Zero interest is better than negative interest.
The article explains it. If you have $500 million you need to park somewhere putting it in a large enough, and safe enough safe would be quite expensive. And some apparently also believe the price of the bonds will go up. Not that I know why they would, unless the rate goes more negative?

I think this is the point. Purchasers of bonds with negative interest are speculating or hedging against this exact scenario.

scottish

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Re: Negative Interest Rates
« Reply #12 on: March 14, 2015, 09:00:22 AM »
The ECB has announced that it will buy 60 billion Euros worth of bonds every month as part of euro currency devaluation quantitative easing.  Linky:
http://www.ecb.europa.eu/press/pr/date/2015/html/pr150122_1.en.html

forummm

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Re: Negative Interest Rates
« Reply #13 on: March 14, 2015, 09:05:27 AM »
I don't get it. I understand why a government might lend out money at negative interest to stimulate growth, but why would private investors do it? Why not just put cash in a safe? Zero interest is better than negative interest.

It would cost a lot of money to build a safe large enough to hold a half billion euros in cash and insurance on the cash itself (to not get stolen either in transit or in the safe). And if you wanted to make that cash liquid for a big purchase it would take possibly a couple days to deposit it somewhere.

YoungInvestor

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Re: Negative Interest Rates
« Reply #14 on: March 14, 2015, 09:52:30 AM »
I don't quite understand why anyone would purchase negative interest-rate debt (might as well keep your money in cash at that rate), but hey, it's a pretty sweet deal for borrowers.


Spork

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Re: Negative Interest Rates
« Reply #15 on: March 14, 2015, 09:57:28 AM »
And government bold yields are doing the same thing.

http://www.wsj.com/articles/government-bond-yields-turn-negative-1421257217

German, Finnish and Swiss debt went negative back in January.  US debt has done it as well in the past, notably 2008.

Yep.  I have some old I bonds that had a few negative months.  I was shocked when it happened (though it wasn't that much money or that many months.)  I re-read the terms and I'm pretty sure they were re-interpreting the rules "because they could."

johnny847

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Re: Negative Interest Rates
« Reply #16 on: March 14, 2015, 12:29:34 PM »
I don't quite understand why anyone would purchase negative interest-rate debt (might as well keep your money in cash at that rate), but hey, it's a pretty sweet deal for borrowers.

Well I recall that months before the bond rates went negative, the ECB (European version of the federal Reserve) set negative rates for banks deposits. Meaning banks, who normally keep most of their deposits at the ECB and not on site, were getting charged money to keep their deposits at the ECB. So long as they lend out money at a rate higher than the ECB rate they are making money (because they can only keep so much money on site and raising that amount would necessitate a larger vault at some point, costing a lot of money). Then competition would ensure that rates would descend to close to the ECB rate.

brooklynguy

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Re: Negative Interest Rates
« Reply #17 on: September 21, 2015, 08:24:50 AM »
Reviving this old thread to link to yesterday's thoughtful and superb (as usual) Philosophical Economics article on negative interest rates:

Philosophical Economics:  Thoughts on Negative Interest Rates

Here's one salient point the author makes that is especially germane to our community:

Quote from: Philosophical Economics
Even if the wealth [transferred to the government as a result of a negative interest rate policy] is reinjected into the system in the form of tax cuts or increased government spending elsewhere, we have to consider the behavioral effects on those that rely, at least in part, on returns on accumulated savings to fund their expenditures.  Those individuals–typically older people [though not, of course, in our community!]–represent a growing percentage of western society. Under conventional policy, they simply have to deal with low interest rates on their savings–tough, but manageable.  To require them to deal with negative interest rates–confiscation of a certain percentage of their savings as each year passes–would be a significant paradigm shift.  Their confidence in their ability to fund their futures–their future spending–would likely fall.  They would therefore spend less, not more, exacerbating the economic weakness.  Granted, the threat of punishment for holding risk-free assets might coax them into speculating  in the risky financial bubbles that will have formed–but then again, it might not.  If it does, they will suffer on the other end.

(Text in square brackets added by me.)

dungoofed

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Re: Negative Interest Rates
« Reply #18 on: September 21, 2015, 06:24:32 PM »
Seems like those two FOMC dots have caused all sorts of trouble. For starters, the fact that negative interest rates are now "officially" on the cards has caused investors to flock to 30 year treasuries that aren't even expected to outpace inflation.

Regarding the quote above, if we are already invested in shares then we would welcome these speculators, no?

Indexer

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Re: Negative Interest Rates
« Reply #19 on: September 21, 2015, 06:34:56 PM »
I don't quite understand why anyone would purchase negative interest-rate debt (might as well keep your money in cash at that rate), but hey, it's a pretty sweet deal for borrowers.

For private investors= Safety.

If you live in Greece and there is a X% chance your money will be worth 50% less, but if you use that money to buy German bonds there is a 100% chance your money will be worth 1% less... how high does X have to be for you to buy the German bond?

Or look at the USA in 2008. Stocks are crashing. People are talking about the banks going under. If your bank fails FDIC covers you to 250k, but it can take awhile for you to get your money. A short term treasury or a money market that invests in short term treasuries pays..... %&$^ who cares what it pays? You want safety!!!!  You buy it no matter what and find out your yield to maturity is negative, but by then you don't care. You have safety, and paying 1% in interest to get safety is worth it.

I would rather have stocks and bonds, but some people get scared and run to safety.... and most of them don't even realize over a 30 year period cash is probably the most likely to be worth less.

As noted banks have their own reasons that are out of their control.
« Last Edit: September 21, 2015, 06:36:41 PM by Indexer »

brooklynguy

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Re: Negative Interest Rates
« Reply #20 on: September 22, 2015, 10:07:52 AM »
Regarding the quote above, if we are already invested in shares then we would welcome these speculators, no?

No, or at least not if we plan to remain invested for the long term.  Asset bubbles are harmful to markets.  If you plan to hold the assets for the long-term (and not try to time the market by exiting at the top before the bubble bursts), you will be better off if the market grows in a healthy way instead of forming bubbles.  The author argues that imposing meaningfully negative interest rates would be detrimental to the economy as a whole and to virtually all participants in investment markets (including people who rely on accumulated investments to fund their expenditures).

Telecaster

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Re: Negative Interest Rates
« Reply #21 on: September 22, 2015, 12:18:08 PM »
Reviving this old thread to link to yesterday's thoughtful and superb (as usual) Philosophical Economics article on negative interest rates:

Philosophical Economics:  Thoughts on Negative Interest Rates



That is a very interesting site, thanks for posting. 

TheOldestYoungMan

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Re: Negative Interest Rates
« Reply #22 on: September 22, 2015, 12:26:36 PM »
This is weird for sure.