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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 intere

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
- cylinder 11y ago
  What are all these capital expenditures that are not viable at 0.25% but are viable at -0.5%? It's all just currency manipulation.
- dav-ycombinator 11y ago
  Nope. Every currency can have low interest rates at the same time. It's not rates relative to each other that matters that impacts nominal activity, it's the absolute rate of each. All currencies could have -10% rate at the same time (if they all introduced an exchange rate between cash and digital deposits). Hard to claim that credit is the problem because we know for a fact that monetary policy is too tight right now (as indicated by where the nominal aggregates are). In any case the govt should largely not attempt to influence credit. Until monetary policy is back to neutral, all other problems most economic ills are likely to be a consequence of bad money policy.
  - pas 11y ago
    What do you mean too tight? The FOMC shouldn't have raised interest rates? Should be doing more QE? What would constitute neutral monetary policy?
    - dav-ycombinator 11y ago
      The stance of monetary policy can't be assessed by looking at the level of interest rate (or the amount QE) -- otherwise you'd conclude that inflationary basket case Argentina has much tighter monetary policy than deflationary basket case Eurozone. I'm not inventing this, this is from Milton Friedman. You judge monetary policy by its result: where are the variables you are targeting vs your targets? The Fed's target is "low inflation and full employment". Since over the past decade we've had very little inflation and high unemployment, we can conclude that Fed monetary policy was tight. You might blame the less-than-specific target that the policy makers have chosen for this and you'd be right, it's way too vague and not that useful. A much better target would be the level of average nominal wage per capita, or highly related but simpler: level of nominal GDP. Based on these targets, monetary policy has been very tight over the past few years, particularly in the Eurozone. Monetary policy is neutral if nominal GDP remains on a 5%/year growth path. Big drops in NGDP is basically equivalent to the central bank punching the economy in the stomach.
toyg 11y ago
I agree: since we're giving away free money, we might as well try to get something in return. But that's the beauty of our current system: one side gets money without having to give anything back. Companies would be suckers for agreeing to do anything in exchange for government money, today. Why do anything, when they can sit on their free non-inflating money and even get paid for it when rates go negative? Which is why any real recovery from the current state of play can only be led by industrial and economic policy led by the State itself. The State will have to mass-hire and build something, anything, to kickstart new economic activity, because the private sector is just not going to do anything.
- smaddox 11y ago
  You're mistakingly conflating negative interest rates and negative inflation (aka deflation). They are quite different; in fact, their correlation is quite strongly negative, i.e. increasing the interest rate tends to decrease the inflation rate. On the topic of rescussitating the economy, funding public works projects would certainly have better long-term success than the current QE policy (i.e. the FED buying securities that never should have been legally issued in the first place). Even better would be a modern debt jubilee, a la Steve Keen's suggestion, in which all citizens are given a cash infusion that automatically pays down any outstanding debt, if present, or becomes a liquid asset if the citizen is debt free. This would reset the monetary system back to a state in which further investment can be financed within the system. The amount would of course need to be controlled so as to not induce immediate inflation, and restrictions on banks (e.g. Glass-Steagall) would need to be reinstated and enforced so as to delay the inevitable return to record high private debt levels.
  - toyg 11y ago
    > increasing the interest rate tends to decrease the inflation rate. But the problem is exactly that this correlation doesn't seem to apply in the opposite direction today: decreasing interest rates are not generating inflation across the board, quite the opposite. You can debate why that is the case, but that's what we see: central banks keep cutting rates expecting economic activity to get hot and generate inflation, but this is not happening. The Japanese experience would seem to indicate this is "the new normal", where monetary policy is simply a brake and not an engine; which means we have to find alternative engines.
atomic77 11y ago
Negative rates are scary if they go low enough, where an inverse of the problems with high inflation come about. Rather than try to collect payments as fast as possible due to the eroding value of money, there will be an incentive to delay receipt of payment as long as possible. Taxes will be overpaid to be reclaimed in the following year. How would your local telco handle being treated as an implicit temporary checking account? I don't claim to understand all the implications, but it's an odd experiment we would probably be better off not trying. What's worse, how do we ever get back to some range between [-2,2] once we've gone that far negative?
- roymurdock 11y ago
  Right, hyper [inflation, deflation] is bad and usually ends in the governing body losing all power over the economy as people switch over to another country's currency (Zimbabwe) or a new government's currency (Germany). That's a discussion we should have when we get to -2.0% interest on long-term assets.
  - atomic77 11y ago
    Fair enough, luckily we're not there yet, but what's concerning is that the title of the article uses the words "way, way lower"!
- gozur88 11y ago
  It's also going to push people into equities, which I believe to be the real motivator for these kinds of articles. With negative interest rates why wouldn't you buy, say, gold ETFs instead of losing a bit of money every month (even before inflation) to the bank?

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

cylinder 11y ago
What are all these capital expenditures that are not viable at 0.25% but are viable at -0.5%? It's all just currency manipulation.
dav-ycombinator 11y ago
Nope. Every currency can have low interest rates at the same time. It's not rates relative to each other that matters that impacts nominal activity, it's the absolute rate of each. All currencies could have -10% rate at the same time (if they all introduced an exchange rate between cash and digital deposits). Hard to claim that credit is the problem because we know for a fact that monetary policy is too tight right now (as indicated by where the nominal aggregates are). In any case the govt should largely not attempt to influence credit. Until monetary policy is back to neutral, all other problems most economic ills are likely to be a consequence of bad money policy.
- pas 11y ago
  What do you mean too tight? The FOMC shouldn't have raised interest rates? Should be doing more QE? What would constitute neutral monetary policy?
  - dav-ycombinator 11y ago
    The stance of monetary policy can't be assessed by looking at the level of interest rate (or the amount QE) -- otherwise you'd conclude that inflationary basket case Argentina has much tighter monetary policy than deflationary basket case Eurozone. I'm not inventing this, this is from Milton Friedman. You judge monetary policy by its result: where are the variables you are targeting vs your targets? The Fed's target is "low inflation and full employment". Since over the past decade we've had very little inflation and high unemployment, we can conclude that Fed monetary policy was tight. You might blame the less-than-specific target that the policy makers have chosen for this and you'd be right, it's way too vague and not that useful. A much better target would be the level of average nominal wage per capita, or highly related but simpler: level of nominal GDP. Based on these targets, monetary policy has been very tight over the past few years, particularly in the Eurozone. Monetary policy is neutral if nominal GDP remains on a 5%/year growth path. Big drops in NGDP is basically equivalent to the central bank punching the economy in the stomach.

toyg 11y ago

I agree: since we're giving away free money, we might as well try to get something in return. But that's the beauty of our current system: one side gets money without having to give anything back. Companies would be suckers for agreeing to do anything in exchange for government money, today. Why do anything, when they can sit on their free non-inflating money and even get paid for it when rates go negative? Which is why any real recovery from the current state of play can only be led by industrial and economic policy led by the State itself. The State will have to mass-hire and build something, anything, to kickstart new economic activity, because the private sector is just not going to do anything.

smaddox 11y ago
You're mistakingly conflating negative interest rates and negative inflation (aka deflation). They are quite different; in fact, their correlation is quite strongly negative, i.e. increasing the interest rate tends to decrease the inflation rate. On the topic of rescussitating the economy, funding public works projects would certainly have better long-term success than the current QE policy (i.e. the FED buying securities that never should have been legally issued in the first place). Even better would be a modern debt jubilee, a la Steve Keen's suggestion, in which all citizens are given a cash infusion that automatically pays down any outstanding debt, if present, or becomes a liquid asset if the citizen is debt free. This would reset the monetary system back to a state in which further investment can be financed within the system. The amount would of course need to be controlled so as to not induce immediate inflation, and restrictions on banks (e.g. Glass-Steagall) would need to be reinstated and enforced so as to delay the inevitable return to record high private debt levels.
- toyg 11y ago
  > increasing the interest rate tends to decrease the inflation rate. But the problem is exactly that this correlation doesn't seem to apply in the opposite direction today: decreasing interest rates are not generating inflation across the board, quite the opposite. You can debate why that is the case, but that's what we see: central banks keep cutting rates expecting economic activity to get hot and generate inflation, but this is not happening. The Japanese experience would seem to indicate this is "the new normal", where monetary policy is simply a brake and not an engine; which means we have to find alternative engines.

atomic77 11y ago

Negative rates are scary if they go low enough, where an inverse of the problems with high inflation come about. Rather than try to collect payments as fast as possible due to the eroding value of money, there will be an incentive to delay receipt of payment as long as possible. Taxes will be overpaid to be reclaimed in the following year. How would your local telco handle being treated as an implicit temporary checking account? I don't claim to understand all the implications, but it's an odd experiment we would probably be better off not trying. What's worse, how do we ever get back to some range between [-2,2] once we've gone that far negative?

roymurdock 11y ago
Right, hyper [inflation, deflation] is bad and usually ends in the governing body losing all power over the economy as people switch over to another country's currency (Zimbabwe) or a new government's currency (Germany). That's a discussion we should have when we get to -2.0% interest on long-term assets.
- atomic77 11y ago
  Fair enough, luckily we're not there yet, but what's concerning is that the title of the article uses the words "way, way lower"!
gozur88 11y ago
It's also going to push people into equities, which I believe to be the real motivator for these kinds of articles. With negative interest rates why wouldn't you buy, say, gold ETFs instead of losing a bit of money every month (even before inflation) to the bank?