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How Low Can Central Banks Go? JPMorgan Reckons Way Lower

80 points by randomname2 11y ago

irln 11y ago
I thought the only reason that banks had excess reserves was due to the fed paying 50 basis points of interest. This was the fed's way of preventing +/-$2.28 Trillion [1] from being loaned out thus adding $2.28 trillion x (fractional reserve rate...10 if mandatory reserves were 10%) to the money supply through lending. With negative interest rates excess reserves again become an expense, therefore removing banks disincentive to lend. [1] https://research.stlouisfed.org/fred2/series/EXCSRESNS https://research.stlouisfed.org/fred2/series/EXCSRESNS [2] https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking
Taek 11y ago
With negative interest rates, you would make money by taking out a loan. Banks literally have profit margins just from borrowing money and doing nothing with it. What would happen if we gave the same advantage to the general public? Something seems very wrong.
- nissimk 11y ago
  Oh no, people aren't buying enough stuff. Let's penalize them for saving money to encourage them to buy more stuff. What's the impact on the environment?
  - a_humean 11y ago
    Excessive saving can be a problem, which the Fed is trying to address. It can be problem that can depress demand and drive down inflation to deflationary levels, which can further depress demand as people put off payments. On the issue of penalising savers: passive savers can't expect a good risk-less return on their investment when there isn't the economic growth to support it. Savers are basically asking for a free lunch while everyone else is suffering from depressed incomes and profits when they complain about the Fed's base rate decisions penalising savers.
    - ra1n85 11y ago
      >Excessive saving can be a problem, which the Fed is trying to address Is this really what is being addressed here? It seems more likely that the fed is just pushing harder on the same string.
      - a_humean 11y ago
        I didn't say they would be successful, but merely 'trying'. If you want to address demand issues or excessive savings you typically look to fiscal policy, but that is basically a non-starter for political reasons. The Fed and many other central banks such as the ECB and BOE are operating basically as the first and last defence with regards to all macro issues.
    - AnimalMuppet 11y ago
      > Excessive saving can be a problem, which the Fed is trying to address. And maybe trying to address in exactly the wrong way. Let's say I'm trying to save for retirement. If, during retirement, I'm going to be able to earn 4% return, I need some amount. If I'm going to earn 0.1%, I need a lot more, so I'd better save a lot more now. And if interest rates go negative, then I have to save even more... So this approach may not actually lead to decreased saving.
      - a_humean 11y ago
        That makes some intuitive sense, but I would raise two problems for that thought experiment. Firstly, I very much doubt you will see negative rates within consumer or retail products, or even attached to the rates seen by pension funds who usually don't sit on cash held in cash saving accounts held with the Fed. Secondly, I would think that if I were pension fund manager or an individual saving for retirement and I somehow encountered negative rates that persisted for cash savings, I would look for other types of investments that offer higher returns, or in the case of individuals, just spend the money as going to the cinema has greater utility than getting 0% returns on your investment. You would have to pessimistically assume that there are no viable investment opportunities with returns above 0% for your thought experiment to carry some water, which seems very unlikely.
- lintiness 11y ago
  negative rates won't happen in the retail market. it's fed to banks to enforce lending (and "economic activity").
  - roddux 11y ago
    Negative rates, maybe not. 0% rates, perhaps.
    - lintiness 11y ago
      as best i can logic (my abilities here are extremely limited), i'd say only a public entity would ever consider lending at 0% or lower. they receive a payoff indirectly through generated activity and tax revenue so could stand the real upfront loss. no non-crooked private party would entertain lending with no interest (i certainly wouldn't).
      - jsprogrammer 11y ago
        BofA offered 0% loans about 5-7 years ago.
        smaddox 11y ago
        Fixed APR? I didn't think so.
        jsprogrammer 11y ago
        Yes. They were short-term however; 18 months or less, if I recall.
      - caf 11y ago
        If you had $800 million in cash, and you could either deposit it with the central bank and be paid -0.5% interest, or invest it in say, a 12-month Apple corporate bond at 0%, what would you do? Note that attempting to hold onto the cash in a vault has real costs as well.
- adrianN 11y ago
  Take a loan, convert to cash, heat your house with the cash. Rinse. Repeat.
- sjm-lbm 11y ago
  I'm no economist, but with 0% interest rates and nonzero government bond rates banks have been able to do essentially this for years - get money for free, loan it to the government, call that a good day's work.
  - lintiness 11y ago
    dodd frank and various international banking rules have limited the amount of govt bonds a bank can hold on their balance sheet.
- obblekk 11y ago
  If you borrowed $100 but kept it in a bank account, then you'd be losing to the negative interest rate on that sum too (and friction of having to make regular payments). The only way to benefit is to borrow and invest that money, which is exactly what the fed wants (with the expectation that productive investments will boost economic growth). I think the real issue is that if you're paying -5% for a loan. It's rational to invest that into something that returns -1% (and profit by 4%). This means people are incentivized to invest in unproductive resources... Which might be a bad thing in the long run.
  - jaycroft 11y ago
    Or borrow and keep a stack of $100 bills under your mattress to be used to pay back a smaller sum at the end of the term?
    - 15155 11y ago
      That's why cash must be (gradually) banned, among other reasons. See Germany, Norway.
      - dav-ycombinator 11y ago
        No need to ban cash for arbitrarily negative rates to work. Simply introduce an exchange rate between physical currency and deposits. Simply introduce an exchange rate between the dollar and it's physical representation. Barriers are largely people's lack of understanding of how this works and how huge the benefits would be for society.
        CyberDildonics 11y ago
        > how huge the benefits would be for society Maybe if you think government and society are the same thing.
        dav-ycombinator 11y ago
        > Maybe if you think government and society are the same thing. No, I just think that neutral monetary policy which leads to full employment (defined as natural employment under given tax/regulatory regime) is good for society. Also good for govt's ability to manage budget, but that's secondary.
- lmm 11y ago
  It's a deposit rate, no? i.e. you can pay the ECB x euros now and they'll pay you 0.993x euros in a year's time.
- arca_vorago 11y ago
  The Fed is insolvent and is playing ponzi scheme games to kick the can down the road. When it all comes collapsing back down expect a complete overturn of the currency and of the petrodollar system.
nissimk 11y ago
This negative rates thing is fascinating and scary. Apparently economists have been talking about it for years. I remember reading about the magnetic stripe on the dollar bills suggestion in the WSJ some time around 2000. The idea is that over time the dollar bill becomes worth less, and this is tracked by the magnetic stripe. Just found this interesting paper from the IMF: https://goo.gl/65CuKF https://goo.gl/65CuKF (scribd) What will happen if they try to do something like this?
- toyg 11y ago
  It will happen that the rich will get richer, since they are literally paid by central banks to take their money and use it for non-cash assets, which is where their wealth is; and the poor will get poorer, since their economy is cash-based and will not benefit from any interest rate. You'll have artificial inflation of asset values, likely not followed by salary inflation (because the whole point of negative rates is that the economy sucks), so the poor will get priced out even more. Negative rates are really, really bad for everyone except the rich. We shouldn't try make them work, we should find new ways to avoid them.
  - lintiness 11y ago
    the reason for negative interest rates is deflation. any poor person earning a wage of any sort is getting a raise just for working.
    - toyg 11y ago
      That compensates itself by shrinking employment numbers, which is what you expect during deflation / crisis (and indeed one of the causes of low rates in general).
- jpollock 11y ago
  They don't have to do mess around with face value. Individuals and companies with billions of dollars in cash can't really stick it in a mattress and ignore it. They have to find storage, pay rent, heating/cooling/humidity control, security, etc. That costs money. Negative interest rates reflect that cost. Security guards alone would cost round_up(24*7/40) = 5 security guards assuming you only need a single guard (and they never get sick or take vacation), which at a loaded labor cost of at least $150k (low end) is $750k, which is 4% interest on $18.75m. So, under $20m and you're happy to pay the central bank the money to guard your cash.
chollida1 11y ago
I remember Reid Hoffman talking about some of the mistakes he's made as an entrepreneur (http://ecorner.stanford.edu/podcasts http://ecorner.stanford.edu/podcasts) He said one of the big ones he made was in times of frothy capital markets when all your competitors are well capitalized, its was a mistake to be frugal and not take as much investors money as they could. We are currently in a time of very frothy capital markets. Money is just being given away. This is going to lead to, if it hasn't already, a big jump in the gap between the rich and the poor. These lower interest rates are allowing hedge funds to make money via currency carry trades (http://www.investopedia.com/terms/c/currencycarrytrade.asp http://www.investopedia.com/terms/c/currencycarrytrade.asp) while the average person is unlikely to be able to take advantage of this situation, if anything it make sit harder for the average person to save for retirement due to the paltry interest rates that are being paid on the products available to them. I don't know what the solution to this is. I guess if there is any good news in this, its that every single government who matters has already forced their bansk to go through some pretty strenuous stress tests wrt negative interest rates and there hasn't really been alot of bad news to come out of Europe, Canada or the US.....yet
- thewarrior 11y ago
  Pardon my ignorance , but why is it that normal people can't borrow like hedge funds ? ZIRP as it's done today is basically a massive wealth transfer.
  - maxerickson 11y ago
    Normal people aren't structurally important parts of the economy. Not that I think it's clear that hedge funds and big banks are structurally necessary, but they've managed to create a system where they are considered important by all the people that matter.
    - jakub_h 11y ago
      > Normal people aren't structurally important parts of the economy. I suggest we try to remove them to see what happens! :)
atomic77 11y ago
Somehow this gives me the image of a "high functioning" meth addict discovering the rush delivered by this wonderful drug called heroin. Surely he'll keep things under control.
- kolbe 11y ago
  And much like the heroin addict, the highs these days just aren't that high anymore, and it will never even glimpse the power of that first time.
- CyberDildonics 11y ago
  A government aggressively trying to borrow less money gives you that image?
  - kolbe 11y ago
    "borrow less" is the new "pay back what you owe"
    - CyberDildonics 11y ago
      Not paying back what you owe is default, and the countries in that position aren't the countries being talked about.
      - kolbe 11y ago
        That is an incorrect definition of "owe." Owing begins at the inception of incurring a liability, not at the moment of being legally required to pay the obligation. And even if you had used the correct definition, retorts like yours are pointlessly pedantic, petty and add no value to a discussion.
        CyberDildonics 11y ago
        Countries are paying back what they owe. How does your original reply add anything or even make sense? If you are this worried about it you should probably at least understand what you are talking about.
roymurdock 11y ago
Negative interest rates really aren't scary, they're just unusual in an era (since early 1980's) where inflation targeting (which is closely coupled with interest rates) of ~2% is the norm for the world's most important central banks. Here's a good overview from Bernanke (pre chairman of Fed years). [1] In the short run, nothing will change from a day-to-day consumer perspective. Your 0.05% interest-rate saving account might drop to a 0.01% interest-rate account. If you have a lot (tens of millions) of money that you'd like to put in a liquid savings account, you might be charged a slightly negative interest rate. Some banks are already doing this with institutional investors, but I doubt it will trickle down into commercial consumer banking. [2] Kocherlakota, an ex-fed economist whose views I respect, called for negative rates yesterday: "The FOMC needs to go negative - and that's a gigantic fiscal policy failure." I have to agree. As he points out, low real interest rates present "an incredible opportunity" for US gov to make huge, necessary infrastructure investments. Read more here: https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/2-9-16 https://sites.google.com/site/kocherlakota009/home/policy/th... The only scary implication of negative rates comes from the fact that central banks do not want to go negative, but may be forced to. So they continue to lose control over once-powerful monetary policy tools. This is only scary if you put a lot of stock into a central bank's altruism, benevolence, and ability to effectively guide an extremely complex and intertwined economic/financial system. [1] http://www.federalreserve.gov/Boarddocs/speeches/2003/20030325/default.htm http://www.federalreserve.gov/Boarddocs/speeches/2003/200303... [2] http://www.bloomberg.com/news/articles/2015-02-26/julius-baer-charges-institutional-clients-for-snb-negative-rate http://www.bloomberg.com/news/articles/2015-02-26/julius-bae...
- Shivetya 11y ago
  it just a race to the bottom. An attempt to force your currency lower until the other guy does it, one bank will lose. Eventually it will push the US to do similar if the currency exchange gets too out of whack. it really does nothing to spur growth, if anything its an acknowledgment that those in charge cannot see the problem which means the credit market will stay stagnate and growth won't occur. Sadly it can also lead to more government borrowing under the idea "its free!" if they want to spur economic growth they really need to look at the regulations which impact it and the tax laws the deter it. then top that off with forcing governments back to spending within their means so as not to take so much money out of the system
deleted 11y ago
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randomname2 11y ago
Summary: JPM estimates that if the ECB just focused on reserves equivalent to 2% of gross domestic product it could slice the rate it charges on bank deposits to -4.5%. Alternatively, if the ECB were to concentrate on 25% of reserves, it would be able to cut as low as -4.64%. That compares with minus 0.3% today and the minus 0.7% JPMorgan says it could reach by the middle of this year as reported yesterday. In Japan, JPM calculates that the BOJ could go as low as -3.45% while Sweden’s is likely -3.27%. Finally, if and when the Fed joins the monetary twilight race, it could cut to -1.3% and the Bank of England to -2.69%. What could prompt the Fed to go NIRP: a recession. "With IOER at 0.5% and the Fed maintaining concerns about US money markets, the US is not close to considering NIRP. However, if recession risks were realized, the need for substantial additional policy support would likely push the Fed towards NIRP."
acd 11y ago
What percentage of world debt is on negative interest rates?
- pjc50 11y ago
  Very little at the moment. Remember this is only negative short term deposit rates at a few central banks. There's quite a bit at zero or near-zero rate though. More governments should take the opportunity to borrow money at zero rates and invest in socially useful things.
  - ThrustVectoring 11y ago
    Borrowing money is simply the government doing socially useful things now in exchange for giving up the ability to do so later. Sure, low interest rates give you better terms on this, but it's not obviously clear that this is the correct thing to do. Roads and bridges need maintenance, and in the future there will be more old people that we want to take care of.
    - trophycase 11y ago
      Except if you don't invest in infrastructure and useful social things, there's no future of note anyway. I don't really think the economy will do too well if nobody can make it to work.
      - ThrustVectoring 11y ago
        Right, there's obviously transportation and infrastructure projects that are positive-value. We should do those. What we shouldn't do is invest in transportation and infrastructure projects without evaluating whether or not they're positive-value. Even if we have unprecedented ability to cheaply invest in infrastructure, that doesn't mean that all projects are worth doing.
pjc50 11y ago
Firstly, note that these are negative deposit rates. As a bank you have to keep your spare money somewhere, and that is usually in an account at the local central bank which also serves as part of the interbank clearing system. Central banks are now proposing charging for keeping excessive reserves in this account. The bigger picture is that wealth accumulation cannot outstrip economic growth long-term or even medium-term without causing serious strain somewhere. Pushing the rate of return on capital negative is the gentlest possible way to do this. But the real problem is real estate and its endless appreciation in value.
btilly 11y ago
Crony capitalism at its best. JP Morgan makes bets on central bankers moving lower, then publishes a study saying that they could. If they can shift opinion, then their bets just paid off. Better yet if cronies of theirs in central banks buy the reasoning, the banks are likely to actually move lower, making for an even larger transfer of real wealth to the financial sector. Thereby paying off JP Morgan's bets even more AND giving it a shot at more free money from central bankers trying to "improve the economy". The result is a very large wealth transfer to the financial sector. Who will then say that they, "deserve it for being so smart." And then try to figure out how to top what they did the last time.
- rayiner 11y ago
  How is that "crony capitalism?" Companies try to shift opinion in their favor all the time.
  - btilly 11y ago
    Crony capitalism describes any situation where success in business depends on close relationships between business people and government officials. Over the last decade, top financial firms have succeeded due to central bank policies that the firms themselves have been part of shaping. For example estimates are that "too big to fail" banks make an extra $34 billion per year off of the implicit guarantee from the federal government. Moving on, McKinsey studied the effects of the US government policy of quantitative easing. See http://www.mckinsey.com/insights/economic_studies/qe_and_ultra_low_interest_rates_distributional_effects_and_risks http://www.mckinsey.com/insights/economic_studies/qe_and_ult... for the full study. The bottom line is that it is estimated to have directly enriched private companies to the tune of $460 billion dollars (about a third of which went to banks), and cost American households $360 billion. That's a pretty large and direct transfer of wealth! This study examines how much room Europe has to pursue similar policies. JP Morgan is effectively telling the central banks, "Here is how much money we think you could afford to give us." But doing so in a sufficiently opaque way that it isn't obvious that that is what they said.
    - 11y ago
deleted 11y ago
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rrggrr 11y ago
This is a disaster in the making: About 80% of small business loan applications in the US are denied. The cost of underwriting and servicing the loans and Federal regulations make these loans almost unprofitable for big banks. Negative interest rates won't help. Negative interest rates will instead force big business to seek safe returns wherever they can - and that will not be by investing in small business. That money may well be deployed in competition against small business. Consider this... the US Small Business Administration's loan portfolio is barely a rounding error compared to the cost of quantitative easing and national security expenditures these past years. Double or triple SBA loans and USGOV balance sheet will not feel it, but the impact on job creation, salaries and investment could well exceed any benefit in the US from negative interest rates.
- USAnum1 11y ago
  >"About 80% of small business loan applications in the US are denied." Wow, I thought 80% was an overstatement. You are very much correct with regards to the "big" banks. See: "big banks – that is, banks with $10 billion or more in assets – approved of 21.3 percent of small business loan applications in January 2015, up from 21.1 percent the month prior" [0] Not the world's greatest source, but informative none the less: [0]: http://www.pymnts.com/news/b2b-payments/2015/big-bank-backed-small-business-loan-approval-rate-up/ http://www.pymnts.com/news/b2b-payments/2015/big-bank-backed...
  - cm2012 11y ago
    Also, that's 80% of official applications. Countless others were given soft nos - "don't bother applying as a start-up/fico under 680/time in business under 3 years" etc.
    - icelancer 11y ago
      Yup. Couldn't even get a LOC for $15k when we had cash reserves of $35k and 2 years in business making $250k/year because we wouldn't become personal guarantors on the loan and we were a risky startup.... that was cash finances, no debt.... Okay. I don't pretend to understand. (We wanted the line to service hard goods / inventory instead of cash servicing inventory, which is a standard retail tactic. Oh well.)
anon4this1 11y ago
The world economy has seen plenty of downturns but the whole developed world turning to negative interest rates is a new thing. Is this a sign that the economic dogma underlying central bank decision making is not really based on anything solid but rather just follows keynesian trends of the day combined with the race to the bottom of "europe is doing it so we need to as well!" Fortunately I hold a large bitcoin position which I believe hedges me pretty well in this situation.
- sageikosa 11y ago
  They'll come for your bitcoin just like they once came for gold (if they so desire).
  - TheOtherHobbes 11y ago
    If it gets to that point, you might as well stock up on alcohol and chocolate for barter. In a post-bank economy they're going to be a lot more valuable than bitcoins or PMs.
cameron111 11y ago
Central banks will be forced to do whatever they can to drive a constant rate of growth, which includes infinite QE and NIRP. They will do this until the music inevitably stops. Monetary policy can only paper over the real issues. Central banks have been screaming for the past decade that governments need to reform fiscal policy to drive meaningful economic growth. Wishing something does not make it so. Representative democracy, as is universal within the American Empire, is susceptible to populism and thus is systemically inclined towards ever-increasing budgets. People are generally resistant to change, and they want free things, so they'll vote for whoever will deliver that. Moreover, companies benefit from slanting the system in their favor without long-term consideration of the wider effects, e.g. the military-industrial complex. This isn't a libertarian/liberalist tirade; I'm just making the observation that our system of government is fundamentally unable to deliver meaningful fiscal reform. In other words, to achieve fiscal reform we would have to reform government -- which ain't gonna happen without economic failure anyway. There's another obvious way to drive growth however -- it's the way we've gotten here since 1900 -- but for whatever reason, we continue to ignore it. Ultimately, economic growth is stalling (and will continue to stall) because our economically-productive populations are shrinking. We're experiencing diminishing returns on productivity via technology, and we're deluding ourselves that Europeans can simply be replaced with Arabs or Africans (putting aside the genocidal nature of such belief, it's wrong and the data show that). To their credit, East Asians don't fall for such ridiculousness, but their birth rates have collapsed all the same. At least they'll still have a society when the economy fails. The solution is clear: we need to devote monumental effort to social engineering to get Europeans and East Asians to have more children. Bring the birth rate back up to 4 or 5 per woman, and we'll resume a stable rate of economic growth. With another 100 years of runway, we can eliminate scarcity in food, shelter and transport, and from there we have more flexibility. The alternative is systemic collapse. I don't know why this isn't being recognized, least of all by the transnational elite who have the most to lose.
- collyw 11y ago
  The planet is already well on its way to being fucked. We really don't need more people just to save the economic system. Time for a new paradigm.

80 points by randomname2 11y ago

irln 11y ago

I thought the only reason that banks had excess reserves was due to the fed paying 50 basis points of interest. This was the fed's way of preventing +/-$2.28 Trillion [1] from being loaned out thus adding $2.28 trillion x (fractional reserve rate...10 if mandatory reserves were 10%) to the money supply through lending. With negative interest rates excess reserves again become an expense, therefore removing banks disincentive to lend. [1] https://research.stlouisfed.org/fred2/series/EXCSRESNS https://research.stlouisfed.org/fred2/series/EXCSRESNS [2] https://en.wikipedia.org/wiki/Fractional-reserve_banking https://en.wikipedia.org/wiki/Fractional-reserve_banking

Taek 11y ago

With negative interest rates, you would make money by taking out a loan. Banks literally have profit margins just from borrowing money and doing nothing with it. What would happen if we gave the same advantage to the general public? Something seems very wrong.

nissimk 11y ago
Oh no, people aren't buying enough stuff. Let's penalize them for saving money to encourage them to buy more stuff. What's the impact on the environment?
- a_humean 11y ago
  Excessive saving can be a problem, which the Fed is trying to address. It can be problem that can depress demand and drive down inflation to deflationary levels, which can further depress demand as people put off payments. On the issue of penalising savers: passive savers can't expect a good risk-less return on their investment when there isn't the economic growth to support it. Savers are basically asking for a free lunch while everyone else is suffering from depressed incomes and profits when they complain about the Fed's base rate decisions penalising savers.
  - ra1n85 11y ago
    >Excessive saving can be a problem, which the Fed is trying to address Is this really what is being addressed here? It seems more likely that the fed is just pushing harder on the same string.
    - a_humean 11y ago
      I didn't say they would be successful, but merely 'trying'. If you want to address demand issues or excessive savings you typically look to fiscal policy, but that is basically a non-starter for political reasons. The Fed and many other central banks such as the ECB and BOE are operating basically as the first and last defence with regards to all macro issues.
  - AnimalMuppet 11y ago
    > Excessive saving can be a problem, which the Fed is trying to address. And maybe trying to address in exactly the wrong way. Let's say I'm trying to save for retirement. If, during retirement, I'm going to be able to earn 4% return, I need some amount. If I'm going to earn 0.1%, I need a lot more, so I'd better save a lot more now. And if interest rates go negative, then I have to save even more... So this approach may not actually lead to decreased saving.
    - a_humean 11y ago
      That makes some intuitive sense, but I would raise two problems for that thought experiment. Firstly, I very much doubt you will see negative rates within consumer or retail products, or even attached to the rates seen by pension funds who usually don't sit on cash held in cash saving accounts held with the Fed. Secondly, I would think that if I were pension fund manager or an individual saving for retirement and I somehow encountered negative rates that persisted for cash savings, I would look for other types of investments that offer higher returns, or in the case of individuals, just spend the money as going to the cinema has greater utility than getting 0% returns on your investment. You would have to pessimistically assume that there are no viable investment opportunities with returns above 0% for your thought experiment to carry some water, which seems very unlikely.
lintiness 11y ago
negative rates won't happen in the retail market. it's fed to banks to enforce lending (and "economic activity").
- roddux 11y ago
  Negative rates, maybe not. 0% rates, perhaps.
  - lintiness 11y ago
    as best i can logic (my abilities here are extremely limited), i'd say only a public entity would ever consider lending at 0% or lower. they receive a payoff indirectly through generated activity and tax revenue so could stand the real upfront loss. no non-crooked private party would entertain lending with no interest (i certainly wouldn't).
    - jsprogrammer 11y ago
      BofA offered 0% loans about 5-7 years ago.
      - smaddox 11y ago
        Fixed APR? I didn't think so.
        jsprogrammer 11y ago
        Yes. They were short-term however; 18 months or less, if I recall.
    - caf 11y ago
      If you had $800 million in cash, and you could either deposit it with the central bank and be paid -0.5% interest, or invest it in say, a 12-month Apple corporate bond at 0%, what would you do? Note that attempting to hold onto the cash in a vault has real costs as well.
adrianN 11y ago
Take a loan, convert to cash, heat your house with the cash. Rinse. Repeat.
sjm-lbm 11y ago
I'm no economist, but with 0% interest rates and nonzero government bond rates banks have been able to do essentially this for years - get money for free, loan it to the government, call that a good day's work.
- lintiness 11y ago
  dodd frank and various international banking rules have limited the amount of govt bonds a bank can hold on their balance sheet.
obblekk 11y ago
If you borrowed $100 but kept it in a bank account, then you'd be losing to the negative interest rate on that sum too (and friction of having to make regular payments). The only way to benefit is to borrow and invest that money, which is exactly what the fed wants (with the expectation that productive investments will boost economic growth). I think the real issue is that if you're paying -5% for a loan. It's rational to invest that into something that returns -1% (and profit by 4%). This means people are incentivized to invest in unproductive resources... Which might be a bad thing in the long run.
- jaycroft 11y ago
  Or borrow and keep a stack of $100 bills under your mattress to be used to pay back a smaller sum at the end of the term?
  - 15155 11y ago
    That's why cash must be (gradually) banned, among other reasons. See Germany, Norway.
    - dav-ycombinator 11y ago
      No need to ban cash for arbitrarily negative rates to work. Simply introduce an exchange rate between physical currency and deposits. Simply introduce an exchange rate between the dollar and it's physical representation. Barriers are largely people's lack of understanding of how this works and how huge the benefits would be for society.
      - CyberDildonics 11y ago
        > how huge the benefits would be for society Maybe if you think government and society are the same thing.
      - dav-ycombinator 11y ago
        > Maybe if you think government and society are the same thing. No, I just think that neutral monetary policy which leads to full employment (defined as natural employment under given tax/regulatory regime) is good for society. Also good for govt's ability to manage budget, but that's secondary.
lmm 11y ago
It's a deposit rate, no? i.e. you can pay the ECB x euros now and they'll pay you 0.993x euros in a year's time.
arca_vorago 11y ago
The Fed is insolvent and is playing ponzi scheme games to kick the can down the road. When it all comes collapsing back down expect a complete overturn of the currency and of the petrodollar system.

nissimk 11y ago

This negative rates thing is fascinating and scary. Apparently economists have been talking about it for years. I remember reading about the magnetic stripe on the dollar bills suggestion in the WSJ some time around 2000. The idea is that over time the dollar bill becomes worth less, and this is tracked by the magnetic stripe. Just found this interesting paper from the IMF: https://goo.gl/65CuKF https://goo.gl/65CuKF (scribd) What will happen if they try to do something like this?

toyg 11y ago
It will happen that the rich will get richer, since they are literally paid by central banks to take their money and use it for non-cash assets, which is where their wealth is; and the poor will get poorer, since their economy is cash-based and will not benefit from any interest rate. You'll have artificial inflation of asset values, likely not followed by salary inflation (because the whole point of negative rates is that the economy sucks), so the poor will get priced out even more. Negative rates are really, really bad for everyone except the rich. We shouldn't try make them work, we should find new ways to avoid them.
- lintiness 11y ago
  the reason for negative interest rates is deflation. any poor person earning a wage of any sort is getting a raise just for working.
  - toyg 11y ago
    That compensates itself by shrinking employment numbers, which is what you expect during deflation / crisis (and indeed one of the causes of low rates in general).
jpollock 11y ago
They don't have to do mess around with face value. Individuals and companies with billions of dollars in cash can't really stick it in a mattress and ignore it. They have to find storage, pay rent, heating/cooling/humidity control, security, etc. That costs money. Negative interest rates reflect that cost. Security guards alone would cost round_up(24*7/40) = 5 security guards assuming you only need a single guard (and they never get sick or take vacation), which at a loaded labor cost of at least $150k (low end) is $750k, which is 4% interest on $18.75m. So, under $20m and you're happy to pay the central bank the money to guard your cash.

chollida1 11y ago

I remember Reid Hoffman talking about some of the mistakes he's made as an entrepreneur (http://ecorner.stanford.edu/podcasts http://ecorner.stanford.edu/podcasts) He said one of the big ones he made was in times of frothy capital markets when all your competitors are well capitalized, its was a mistake to be frugal and not take as much investors money as they could. We are currently in a time of very frothy capital markets. Money is just being given away. This is going to lead to, if it hasn't already, a big jump in the gap between the rich and the poor. These lower interest rates are allowing hedge funds to make money via currency carry trades (http://www.investopedia.com/terms/c/currencycarrytrade.asp http://www.investopedia.com/terms/c/currencycarrytrade.asp) while the average person is unlikely to be able to take advantage of this situation, if anything it make sit harder for the average person to save for retirement due to the paltry interest rates that are being paid on the products available to them. I don't know what the solution to this is. I guess if there is any good news in this, its that every single government who matters has already forced their bansk to go through some pretty strenuous stress tests wrt negative interest rates and there hasn't really been alot of bad news to come out of Europe, Canada or the US.....yet

thewarrior 11y ago
Pardon my ignorance , but why is it that normal people can't borrow like hedge funds ? ZIRP as it's done today is basically a massive wealth transfer.
- maxerickson 11y ago
  Normal people aren't structurally important parts of the economy. Not that I think it's clear that hedge funds and big banks are structurally necessary, but they've managed to create a system where they are considered important by all the people that matter.
  - jakub_h 11y ago
    > Normal people aren't structurally important parts of the economy. I suggest we try to remove them to see what happens! :)

atomic77 11y ago

Somehow this gives me the image of a "high functioning" meth addict discovering the rush delivered by this wonderful drug called heroin. Surely he'll keep things under control.

kolbe 11y ago
And much like the heroin addict, the highs these days just aren't that high anymore, and it will never even glimpse the power of that first time.
CyberDildonics 11y ago
A government aggressively trying to borrow less money gives you that image?
- kolbe 11y ago
  "borrow less" is the new "pay back what you owe"
  - CyberDildonics 11y ago
    Not paying back what you owe is default, and the countries in that position aren't the countries being talked about.
    - kolbe 11y ago
      That is an incorrect definition of "owe." Owing begins at the inception of incurring a liability, not at the moment of being legally required to pay the obligation. And even if you had used the correct definition, retorts like yours are pointlessly pedantic, petty and add no value to a discussion.
      - CyberDildonics 11y ago
        Countries are paying back what they owe. How does your original reply add anything or even make sense? If you are this worried about it you should probably at least understand what you are talking about.

roymurdock 11y ago

Negative interest rates really aren't scary, they're just unusual in an era (since early 1980's) where inflation targeting (which is closely coupled with interest rates) of ~2% is the norm for the world's most important central banks. Here's a good overview from Bernanke (pre chairman of Fed years). [1] In the short run, nothing will change from a day-to-day consumer perspective. Your 0.05% interest-rate saving account might drop to a 0.01% interest-rate account. If you have a lot (tens of millions) of money that you'd like to put in a liquid savings account, you might be charged a slightly negative interest rate. Some banks are already doing this with institutional investors, but I doubt it will trickle down into commercial consumer banking. [2] Kocherlakota, an ex-fed economist whose views I respect, called for negative rates yesterday: "The FOMC needs to go negative - and that's a gigantic fiscal policy failure." I have to agree. As he points out, low real interest rates present "an incredible opportunity" for US gov to make huge, necessary infrastructure investments. Read more here: https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/2-9-16 https://sites.google.com/site/kocherlakota009/home/policy/th... The only scary implication of negative rates comes from the fact that central banks do not want to go negative, but may be forced to. So they continue to lose control over once-powerful monetary policy tools. This is only scary if you put a lot of stock into a central bank's altruism, benevolence, and ability to effectively guide an extremely complex and intertwined economic/financial system. [1] http://www.federalreserve.gov/Boarddocs/speeches/2003/20030325/default.htm http://www.federalreserve.gov/Boarddocs/speeches/2003/200303... [2] http://www.bloomberg.com/news/articles/2015-02-26/julius-baer-charges-institutional-clients-for-snb-negative-rate http://www.bloomberg.com/news/articles/2015-02-26/julius-bae...

Shivetya 11y ago
it just a race to the bottom. An attempt to force your currency lower until the other guy does it, one bank will lose. Eventually it will push the US to do similar if the currency exchange gets too out of whack. it really does nothing to spur growth, if anything its an acknowledgment that those in charge cannot see the problem which means the credit market will stay stagnate and growth won't occur. Sadly it can also lead to more government borrowing under the idea "its free!" if they want to spur economic growth they really need to look at the regulations which impact it and the tax laws the deter it. then top that off with forcing governments back to spending within their means so as not to take so much money out of the system

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randomname2 11y ago

Summary: JPM estimates that if the ECB just focused on reserves equivalent to 2% of gross domestic product it could slice the rate it charges on bank deposits to -4.5%. Alternatively, if the ECB were to concentrate on 25% of reserves, it would be able to cut as low as -4.64%. That compares with minus 0.3% today and the minus 0.7% JPMorgan says it could reach by the middle of this year as reported yesterday. In Japan, JPM calculates that the BOJ could go as low as -3.45% while Sweden’s is likely -3.27%. Finally, if and when the Fed joins the monetary twilight race, it could cut to -1.3% and the Bank of England to -2.69%. What could prompt the Fed to go NIRP: a recession. "With IOER at 0.5% and the Fed maintaining concerns about US money markets, the US is not close to considering NIRP. However, if recession risks were realized, the need for substantial additional policy support would likely push the Fed towards NIRP."

acd 11y ago

What percentage of world debt is on negative interest rates?

pjc50 11y ago
Very little at the moment. Remember this is only negative short term deposit rates at a few central banks. There's quite a bit at zero or near-zero rate though. More governments should take the opportunity to borrow money at zero rates and invest in socially useful things.
- ThrustVectoring 11y ago
  Borrowing money is simply the government doing socially useful things now in exchange for giving up the ability to do so later. Sure, low interest rates give you better terms on this, but it's not obviously clear that this is the correct thing to do. Roads and bridges need maintenance, and in the future there will be more old people that we want to take care of.
  - trophycase 11y ago
    Except if you don't invest in infrastructure and useful social things, there's no future of note anyway. I don't really think the economy will do too well if nobody can make it to work.
    - ThrustVectoring 11y ago
      Right, there's obviously transportation and infrastructure projects that are positive-value. We should do those. What we shouldn't do is invest in transportation and infrastructure projects without evaluating whether or not they're positive-value. Even if we have unprecedented ability to cheaply invest in infrastructure, that doesn't mean that all projects are worth doing.

pjc50 11y ago

Firstly, note that these are negative deposit rates. As a bank you have to keep your spare money somewhere, and that is usually in an account at the local central bank which also serves as part of the interbank clearing system. Central banks are now proposing charging for keeping excessive reserves in this account. The bigger picture is that wealth accumulation cannot outstrip economic growth long-term or even medium-term without causing serious strain somewhere. Pushing the rate of return on capital negative is the gentlest possible way to do this. But the real problem is real estate and its endless appreciation in value.

btilly 11y ago

Crony capitalism at its best. JP Morgan makes bets on central bankers moving lower, then publishes a study saying that they could. If they can shift opinion, then their bets just paid off. Better yet if cronies of theirs in central banks buy the reasoning, the banks are likely to actually move lower, making for an even larger transfer of real wealth to the financial sector. Thereby paying off JP Morgan's bets even more AND giving it a shot at more free money from central bankers trying to "improve the economy". The result is a very large wealth transfer to the financial sector. Who will then say that they, "deserve it for being so smart." And then try to figure out how to top what they did the last time.

rayiner 11y ago
How is that "crony capitalism?" Companies try to shift opinion in their favor all the time.
- btilly 11y ago
  Crony capitalism describes any situation where success in business depends on close relationships between business people and government officials. Over the last decade, top financial firms have succeeded due to central bank policies that the firms themselves have been part of shaping. For example estimates are that "too big to fail" banks make an extra $34 billion per year off of the implicit guarantee from the federal government. Moving on, McKinsey studied the effects of the US government policy of quantitative easing. See http://www.mckinsey.com/insights/economic_studies/qe_and_ultra_low_interest_rates_distributional_effects_and_risks http://www.mckinsey.com/insights/economic_studies/qe_and_ult... for the full study. The bottom line is that it is estimated to have directly enriched private companies to the tune of $460 billion dollars (about a third of which went to banks), and cost American households $360 billion. That's a pretty large and direct transfer of wealth! This study examines how much room Europe has to pursue similar policies. JP Morgan is effectively telling the central banks, "Here is how much money we think you could afford to give us." But doing so in a sufficiently opaque way that it isn't obvious that that is what they said.
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rrggrr 11y ago

This is a disaster in the making: About 80% of small business loan applications in the US are denied. The cost of underwriting and servicing the loans and Federal regulations make these loans almost unprofitable for big banks. Negative interest rates won't help. Negative interest rates will instead force big business to seek safe returns wherever they can - and that will not be by investing in small business. That money may well be deployed in competition against small business. Consider this... the US Small Business Administration's loan portfolio is barely a rounding error compared to the cost of quantitative easing and national security expenditures these past years. Double or triple SBA loans and USGOV balance sheet will not feel it, but the impact on job creation, salaries and investment could well exceed any benefit in the US from negative interest rates.

USAnum1 11y ago
>"About 80% of small business loan applications in the US are denied." Wow, I thought 80% was an overstatement. You are very much correct with regards to the "big" banks. See: "big banks – that is, banks with $10 billion or more in assets – approved of 21.3 percent of small business loan applications in January 2015, up from 21.1 percent the month prior" [0] Not the world's greatest source, but informative none the less: [0]: http://www.pymnts.com/news/b2b-payments/2015/big-bank-backed-small-business-loan-approval-rate-up/ http://www.pymnts.com/news/b2b-payments/2015/big-bank-backed...
- cm2012 11y ago
  Also, that's 80% of official applications. Countless others were given soft nos - "don't bother applying as a start-up/fico under 680/time in business under 3 years" etc.
  - icelancer 11y ago
    Yup. Couldn't even get a LOC for $15k when we had cash reserves of $35k and 2 years in business making $250k/year because we wouldn't become personal guarantors on the loan and we were a risky startup.... that was cash finances, no debt.... Okay. I don't pretend to understand. (We wanted the line to service hard goods / inventory instead of cash servicing inventory, which is a standard retail tactic. Oh well.)

anon4this1 11y ago

The world economy has seen plenty of downturns but the whole developed world turning to negative interest rates is a new thing. Is this a sign that the economic dogma underlying central bank decision making is not really based on anything solid but rather just follows keynesian trends of the day combined with the race to the bottom of "europe is doing it so we need to as well!" Fortunately I hold a large bitcoin position which I believe hedges me pretty well in this situation.

sageikosa 11y ago
They'll come for your bitcoin just like they once came for gold (if they so desire).
- TheOtherHobbes 11y ago
  If it gets to that point, you might as well stock up on alcohol and chocolate for barter. In a post-bank economy they're going to be a lot more valuable than bitcoins or PMs.

cameron111 11y ago

Central banks will be forced to do whatever they can to drive a constant rate of growth, which includes infinite QE and NIRP. They will do this until the music inevitably stops. Monetary policy can only paper over the real issues. Central banks have been screaming for the past decade that governments need to reform fiscal policy to drive meaningful economic growth. Wishing something does not make it so. Representative democracy, as is universal within the American Empire, is susceptible to populism and thus is systemically inclined towards ever-increasing budgets. People are generally resistant to change, and they want free things, so they'll vote for whoever will deliver that. Moreover, companies benefit from slanting the system in their favor without long-term consideration of the wider effects, e.g. the military-industrial complex. This isn't a libertarian/liberalist tirade; I'm just making the observation that our system of government is fundamentally unable to deliver meaningful fiscal reform. In other words, to achieve fiscal reform we would have to reform government -- which ain't gonna happen without economic failure anyway. There's another obvious way to drive growth however -- it's the way we've gotten here since 1900 -- but for whatever reason, we continue to ignore it. Ultimately, economic growth is stalling (and will continue to stall) because our economically-productive populations are shrinking. We're experiencing diminishing returns on productivity via technology, and we're deluding ourselves that Europeans can simply be replaced with Arabs or Africans (putting aside the genocidal nature of such belief, it's wrong and the data show that). To their credit, East Asians don't fall for such ridiculousness, but their birth rates have collapsed all the same. At least they'll still have a society when the economy fails. The solution is clear: we need to devote monumental effort to social engineering to get Europeans and East Asians to have more children. Bring the birth rate back up to 4 or 5 per woman, and we'll resume a stable rate of economic growth. With another 100 years of runway, we can eliminate scarcity in food, shelter and transport, and from there we have more flexibility. The alternative is systemic collapse. I don't know why this isn't being recognized, least of all by the transnational elite who have the most to lose.

collyw 11y ago
The planet is already well on its way to being fucked. We really don't need more people just to save the economic system. Time for a new paradigm.