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I remember, in 2009, spending the effort to go through the code to make sure we had a check to set the interest rate to zero if it went negative in the simulati

I remember, in 2009, spending the effort to go through the code to make sure we had a check to set the interest rate to zero if it went negative in the simulation. Because negative interest rates make no sense, right?

ifdefdebug 11y ago
When the value of money falls very deep in a crisis and investors don't want to invest but keep their money liquid, then banks may charge you a fee for allowing you to park your money with them, instead of paying you for loaning it to them. So yes, negative interest can make sense. And maybe you coded a bug into your application instead o a feature, based on wrong assumptions...
- nopassrecover 11y ago
  Isn't it the case that a central bank primarily lends? In this case aren't they effectively paying banks to borrow? Given 0% interest rates haven't led to desired economic investment and stimulus the approach of the ECB and BOJ seems like wishful thinking that "more of the same" will somehow create different results. While it's clear the stock market benefits from the increased investment, it's not clear that this addresses the lack of aggregate demand in the economy (which as mentioned seems highly influenced by demographics). Then again this is probably more about lowering currency value than stimulating domestic demand.
  - riskneural 11y ago
    They are effectively paying banks to lend. The aim is to stimulate investment, and also to drive inflation by making money less valuable.
- riskneural 11y ago
  Negative risk free rates were theoretically possible, but thought at the time to be stupid. See for example the development of the Cox Ingersoll Ross model, "The standard deviation factor, \sigma \sqrt{r_t}, avoids the possibility of negative interest rates for all positive values of a and b." Many interest rate models had been in the past either criticised for theoeretically allowing negative rates, or specially developed to avoid them. https://en.wikipedia.org/wiki/Cox%E2%80%93Ingersoll%E2%80%93Ross_model https://en.wikipedia.org/wiki/Cox%E2%80%93Ingersoll%E2%80%93...
ghshephard 11y ago
Negative yields have been very common in the last 2-3 years, perhaps not when the bond is initially sold, but certainly after the bond starts trading - when the negative yield also takes into accounts expectations around currency risk. A currency that is expected to hold it's value (like the US Dollar) - is a very desirable place to park your money if you believe other currencies will drop. And, as you purchase those bonds, and drive up the price, you drive down the yield. So, while negative yields on savings accounts are pretty new and strange thing, negative yields on bonds aren't entirely unexpected.
- riskneural 11y ago
  I should have specified I meant negative risk free rates, not negative market yields.
bachback 11y ago
Look at the balance sheets of all central-banks: they show hockey-stick growth and correlate with government debt. We're in the last stages of the self-destruction of a fiat money regime. Rates themselves don't reflect anything about the time-value of money, but much more about the banking system. Anyone who doubt this can ask himself what is going to happen when banks and governments need more trillion dollar bailouts.
- riskneural 11y ago
  No need to read up on von Mises to read speculation on what happens to an economy without a fiat currency. Greece has no control over its currency, thus essentially may as well be on a gold standard. It's a hard road.

ifdefdebug 11y ago

When the value of money falls very deep in a crisis and investors don't want to invest but keep their money liquid, then banks may charge you a fee for allowing you to park your money with them, instead of paying you for loaning it to them. So yes, negative interest can make sense. And maybe you coded a bug into your application instead o a feature, based on wrong assumptions...

nopassrecover 11y ago
Isn't it the case that a central bank primarily lends? In this case aren't they effectively paying banks to borrow? Given 0% interest rates haven't led to desired economic investment and stimulus the approach of the ECB and BOJ seems like wishful thinking that "more of the same" will somehow create different results. While it's clear the stock market benefits from the increased investment, it's not clear that this addresses the lack of aggregate demand in the economy (which as mentioned seems highly influenced by demographics). Then again this is probably more about lowering currency value than stimulating domestic demand.
- riskneural 11y ago
  They are effectively paying banks to lend. The aim is to stimulate investment, and also to drive inflation by making money less valuable.
riskneural 11y ago
Negative risk free rates were theoretically possible, but thought at the time to be stupid. See for example the development of the Cox Ingersoll Ross model, "The standard deviation factor, \sigma \sqrt{r_t}, avoids the possibility of negative interest rates for all positive values of a and b." Many interest rate models had been in the past either criticised for theoeretically allowing negative rates, or specially developed to avoid them. https://en.wikipedia.org/wiki/Cox%E2%80%93Ingersoll%E2%80%93Ross_model https://en.wikipedia.org/wiki/Cox%E2%80%93Ingersoll%E2%80%93...

ghshephard 11y ago

Negative yields have been very common in the last 2-3 years, perhaps not when the bond is initially sold, but certainly after the bond starts trading - when the negative yield also takes into accounts expectations around currency risk. A currency that is expected to hold it's value (like the US Dollar) - is a very desirable place to park your money if you believe other currencies will drop. And, as you purchase those bonds, and drive up the price, you drive down the yield. So, while negative yields on savings accounts are pretty new and strange thing, negative yields on bonds aren't entirely unexpected.

riskneural 11y ago
I should have specified I meant negative risk free rates, not negative market yields.

bachback 11y ago

Look at the balance sheets of all central-banks: they show hockey-stick growth and correlate with government debt. We're in the last stages of the self-destruction of a fiat money regime. Rates themselves don't reflect anything about the time-value of money, but much more about the banking system. Anyone who doubt this can ask himself what is going to happen when banks and governments need more trillion dollar bailouts.

riskneural 11y ago
No need to read up on von Mises to read speculation on what happens to an economy without a fiat currency. Greece has no control over its currency, thus essentially may as well be on a gold standard. It's a hard road.