Author Topic: what happens with negative interest rates?  (Read 1527 times)

kenmoremmm

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what happens with negative interest rates?
« on: July 31, 2019, 10:47:10 AM »
let's say fed reserve rate eventually gets <0% (like some other countries now). do people just pull their money from their banks and hold in cash? does that cause a systemic failure of banks or some other black swan events?

seattlecyclone

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Re: what happens with negative interest rates?
« Reply #1 on: July 31, 2019, 11:33:36 AM »
Holding physical cash isn't free. You need a secure safe for storage, which costs money. If you still use a bank account for any electronic transactions you will need to physically travel to the bank to deposit or withdraw cash as needed. Not only will this travel itself cost money in most cases, but the cash you're transporting is at risk of theft during these trips. Large cash transactions require extra paperwork and are subject to scrutiny due to money laundering laws.

If you're running a business that has a big account balance, you'll probably need to make your own cash vault and hire guards to monitor it if you choose to leave the banking system.

While all this expense will probably prove worthwhile if interest rates go too negative, it's not worth it if we have something like -0.25% interest.

trevmillion

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Re: what happens with negative interest rates?
« Reply #2 on: July 31, 2019, 12:46:41 PM »
let's say fed reserve rate eventually gets <0% (like some other countries now). do people just pull their money from their banks and hold in cash? does that cause a systemic failure of banks or some other black swan events?

If central banks plan to cut to "deep negative rates" (see international monetary fund paper on this) - they will try to eliminate cash in favor of an all-digital currency. They have already done this in some countries (India)

just read the paper, they tell you what the plan is. https://www.imf.org/en/Publications/WP/Issues/2019/04/29/Enabling-Deep-Negative-Rates-A-Guide-46598

efree

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Re: what happens with negative interest rates?
« Reply #3 on: July 31, 2019, 01:07:17 PM »
seattlecyclone is right in that holding physical money isn't free, but that mostly doesn't apply to individual people (as opposed to businesses). If you had a few hundreds or a few thousands in an account and the bank started charging you a fee for keeping the money there, you would simply pull it out and keep cash. That's why no European banks are doing this even though the interbank lending rates have been negative since 2015. They would simply lose too many clients.

habaneroNorway

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Re: what happens with negative interest rates?
« Reply #4 on: July 31, 2019, 03:33:10 PM »
Well, you can ask the swiss, the swedes or the folks in the EUR-zone who all have years of experience on the matter. For retail clients the deposit rate at the bank is 0.00%. So a negative central bank rate is in effect a tax on the banking system as the banks have to deposit their reserves at the central bank at a negative rate.

Keep in mind that retail deposits are valuable for a bank as the deposits are counted as stable long-term funding under banking regulations.

But very negative rates are uncharted territory. Currently the most negative is the swiss at -0.75%, Sweden bottomed out at -0.50% (for now) and for EUR it's currently -0.40% but priced to be cut further.

For fixed rate bonds the coupon is never negative, but they are sold above par so the yield becomes negative. But investors never have to pay interest to the lender in the bond markets.

« Last Edit: July 31, 2019, 03:40:11 PM by habaneroNorway »

MustacheAndaHalf

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Re: what happens with negative interest rates?
« Reply #5 on: July 31, 2019, 04:27:45 PM »
... - they will try to eliminate cash in favor of an all-digital currency. They have already done this in some countries (India)
India uses paper money according to this entry, and several news articles.  They replaced some paper currency with new paper currency.

"On 8 November 2016, the Government of India announced the demonetisation of all ₹500 and ₹1,000 banknotes of the Mahatma Gandhi Series. It also announced the issuance of new ₹500 and ₹2,000 banknotes in exchange for the demonetised banknotes"
https://en.wikipedia.org/wiki/2016_Indian_banknote_demonetisation

Seadog

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Re: what happens with negative interest rates?
« Reply #6 on: August 02, 2019, 09:36:47 AM »
seattlecyclone is right in that holding physical money isn't free, but that mostly doesn't apply to individual people (as opposed to businesses). If you had a few hundreds or a few thousands in an account and the bank started charging you a fee for keeping the money there, you would simply pull it out and keep cash. That's why no European banks are doing this even though the interbank lending rates have been negative since 2015. They would simply lose too many clients.

Between banking fees that many people (hopefully not here...) pay, and inflation, and the fact that what little interest you do get is taxed at your high marginal rate, effectively there is already a bit of a negative rate of return holding either cash, or at the bank. It's tricky being Mustachian. It's like the gov't is saying that if you don't spend all your money like a good little consumerist, then we're just going to take it. Use it or lose it.

effigy98

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Re: what happens with negative interest rates?
« Reply #7 on: August 09, 2019, 08:33:56 AM »
Nobody really knows since this is a really new condition with limited data. Gold, Long term treasuries, bitcoin, and land will probably do well. Long term treasuries maybe not if we have a real war with china.

Erma

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Re: what happens with negative interest rates?
« Reply #8 on: August 09, 2019, 09:35:45 AM »
You just try to keep the fees as low as possible as it seems almost impossible to live without a bank account.

effigy98

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Re: what happens with negative interest rates?
« Reply #9 on: August 09, 2019, 10:57:23 AM »
I just read somewhere about mortgages PAYING you to have them. Ok maybe I would get into some serious debt in that case and get some Timber land and build an income.

Villanelle

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Re: what happens with negative interest rates?
« Reply #10 on: August 09, 2019, 12:03:32 PM »
I just read somewhere about mortgages PAYING you to have them. Ok maybe I would get into some serious debt in that case and get some Timber land and build an income.

This makes my brain hurt.  What does that look like?  I borrow $100k (surely they wouldn't offer this as a fixed rate, right?  So I ASSume it would be an ARM). And instead of a principle plus interest payment, I'd pay principle, less a small amount which is what they'd be paying me to have the mortgage, and it would all go towards the balance?  So a 30 year mortgage on $100k at 0% would have a payment of $278, but I'd pay only $260 (for example), and yet $278 would be deducted from the balance?  So over the 30 years, assuming the rate didn't adjust (which it of course would), I'd have paid maybe $95,000 on my $100,000 loan?  Is that even what a negative interest rate mortgage would look like?

habaneroNorway

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Re: what happens with negative interest rates?
« Reply #11 on: August 09, 2019, 12:18:18 PM »
No, its 10y fixed at -0.50% issued by a Danish bank did the news today. However, it is not quite as it seems:

There is a credit margin of 1.00% for LTV 60-80% and various start-up fees etc. As per the example on the bank's webside, if you borrow 250.000 for 10y you pay a total of 277.392 back over the 10y so all in all the interest rate is still positive in reality.

I don't think you'll ever see actual negative borrowing rates for retail clients as long as the deposits are floored at 0%.
« Last Edit: August 09, 2019, 12:31:55 PM by habaneroNorway »

Indexer

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Re: what happens with negative interest rates?
« Reply #12 on: August 10, 2019, 05:53:38 AM »
I just read somewhere about mortgages PAYING you to have them. Ok maybe I would get into some serious debt in that case and get some Timber land and build an income.


I remember reading a few years back about some Swiss variable mortgages that were originally priced when rates were high so the terms were rates+0.5% or +0, and when rates went negative those homeowners suddenly had negative rate mortgages. I don't think banks are doing this as a new thing on purpose. It was just a fluke because rates fell negative many years after the original variable terms were decided at much higher rates, and at that time the bank didn't think long periods of super low, especially negative, rates were possible.

Zyphial

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Re: what happens with negative interest rates?
« Reply #13 on: August 14, 2019, 12:28:18 PM »
The IMF is not subtle about what will happen. Here's their take: https://www.imf.org/en/Publications/WP/Issues/2019/04/29/Enabling-Deep-Negative-Rates-A-Guide-46598 though, to be fair this is a proposal and not necessarily policy. Yet.

As for long term consequences... well, I doubt negative rates will last long. There is absolutely no reason whatsoever to hold currency or currency demoninated assets with negative rates. They will almost certainly ban gold/PM ownership and cryptos, but it doesn't matter. Literal cow shit has more value as a store of wealth than a currency/currency denominated asset with negative rates, and I'd rather buy 100lbs of fertilizer and sell it later than pay a bank to hold my money, and there's plenty I can buy and store that isn't so large and stinky.

Now imagine the effect of everyone realizing that fiat currency is less valuable than literal cow dung. Hyperinflation much?