6 ms·

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

• 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.
        • jaycroft 11y ago
          If rates or yields remain positive for retail products, what's to stop hedge funds / companies with lots of cash / banks, from investing in those same products? Yields may be positive on paper, but I would suppose that fees will hide the fact that actual returns will be negative. Set up maximum account balance limits and you restrict investment by the non-retail crowd. Then again if these products are actually making profits for the small guy, what's the seller's incentive to keep providing them?
          • a_humean 11y ago
            Because you can't buy $1 billion in individual cash saving accounts; there isn't a supply of them and a bank won't sell them to you. When you have very large sums your options of what you can buy and kind of the returns you can expect change. A small investor with $10k can experience greater volatility in their returns (good and poor), and can just go ahead and buy Apple shares without the FT writing an article about it. Also, the base rate is only really encountered directly by Banks that have accounts with central, in the case of the US, or regional central banks. A normal company and even very large non-bank firms don't typically have accounts with the central bank. For consumers and most businesses the interest rate set by the fed is more of a benchmark that ends up being used to help calculate the returns of other products.
• 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.