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Germany in Uproar as Negative Rates Threaten Saving Obsession
- gmueckl 7y agoThis article picks up a discussion that is largely smoke and mirrors: courts have already ruled negative rates for private savings illegal under the current law. So any new law to that effect would be a politixal show only.
- neaden 7y ago"Negative rates, which mean deposits decline over time rather than increase, “would be bad for all savers,” said Juergen Dengel, a 40-year-old civil servant from Bonn. If negative rates were introduced at his bank, he would consider withdrawing his money and using it to build a home -- even if that meant going into debt." - This seems like the goal of negative interest rates.
- deleted 7y ago[deleted]
- nugget 7y agoHis statement reinforces the whole point of ZIRP: minimize the value of financial capital and maximize the value of human capital. Force investors to take on more risk. Entrepreneurs ironically may take on less risk since the value of labor relative to capital shifts in their favor.
- big_chungus 7y agoBut what people forget is it is not just "evil big corp" that has cash on hand which will be devalued in such a way. Individuals do too. Pension plans do. All those will also lose out. Why is there some bureaucrat in an office deciding how much my money gains or loses today? Maybe it would be better to go back to the gold standard.
- toomuchtodo 7y agoThere is a penalty for assuming the future will always have value you’ll be able to extract. Perhaps everyone will consider working less when your excess fiat has so little value.
- mikeash 7y agoNothing is stopping you from storing your savings in gold right now. You don’t need the gold standard for that.
- cbanek 7y agoOther than needing to safely store your gold somewhere. I'm guessing there's probably also some insurance you could get to protect against loss? With a bank these are generally "free" with laws that protect deposits.
- mikeash 7y agoIf you trust others to keep it for you, there are companies that let you buy gold online that they will store for you, and there are even gold ETFs. If you have a brokerage account, buy some shares of GLD and you’re done.
- rightbyte 7y agoIf you don't trust the financial system surely you don't trust gold certificates either. Dig it down ... atleast I would.
- mikeash 7y agoThe original comment mentioned the gold standard, which is just gold certificates used as everyday currency. If you don’t trust that sort of stuff then the gold standard is totally irrelevant anyway.
- deleted 7y ago[deleted]
- hogFeast 7y agoDo you know about the behaviour of German savers? It is fundamentally different to America, the UK, most other countries in Europe. The only similar nation anywhere is Japan...and even then, still significant differences. The ECB is making a huge push, without any kind of democratic consent, towards a finance-based, American/UK-style financial system. This won't work because German savers have virtually no experience of such a system. All that will happen is: banks go bust (more bust, most German banks are insolvent), and savers lose all their money. Either they hold their money in banks or they take it out and lose it all doing stuff they know nothing about (if we don't have an immediate recession, you will see French investment banks swarm Germany...French bankers have some kind of innate ability to produce bullshit derivatives aimed at savers with a conservative bank-led culture of saving). It is kind of insane that we have got to the point where policymakers actively ignore markets. All that matters are the textbooks. But this doesn't work. You can't just transplant economic policies from another context and expect them to work the same. That said, it will be nice to see Germany return to the early 2000s. Objectively, Germany has one of the most vulnerable and poorly functioning economies in the G10. Combine this with utterly insufferable, self-important policymakers and you have quite a nice example of natural justice.
- krilly 7y agoCould you elaborate on how the behaviour of German savers differs to those in other countries?
- JumpCrisscross 7y ago> Could you elaborate on how the behaviour of German savers differs to those in other countries? European finance is bank based. Banks make most of the loans. Bank managers decide which projects get financed and which don’t. Investors put money in banks and let the banks make decisions. American finance is market based. Bond buyers make most of the loans. Bond (and stock) investors decide which projects get financed and which don’t. Investors themselves make decisions. Broadly speaking, the European bank-based model is moribund. It concentrates risks and is too conservative. The ECB is trying to change this, but it involves changing a social contract around how investors behave. This has happened without a broader debate, because Europe, and now we’re seeing a backlash in Germany.
- baddox 7y agoGuess it just sucks for people who make a modest living and want to save a modest portion of their income over many years.
- javert 7y agoFor that, you need honest, sound money.
- arcticbull 7y agoThere's nothing honest or dishonest, sound or unsound about this. It's a question of what the role of money is in a given civil society. The US tends to view money as a tool for voting on which projects, companies, etc are most efficient. Saving doesn't always mean saving money but rather saving value. If you own your house and land outright, would you not consider that "savings"? What about government bonds? Corporate bonds? Fixed-incomes? Dividend bearing stocks? Growth stocks? All of that is savings. Cash in a mattress is an unproductive asset, it's a waste of potential. An account at a bank that lends and kicks some back to you may be the most productive allocation in some circumstances but overwhelmingly it isn't. Money is only valuable when it moves.
- fauigerzigerk 7y ago>An account at a bank that lends and kicks some back to you may be the most productive allocation in some circumstances but overwhelmingly it isn't. At least it's better than putting money in an index ETF, because bankers making loans do actually contribute to the capital allocation process in a meaningful way.
- arcticbull 7y agoI believe thats a decision everyone has to make individually, and that's the point :)
- fauigerzigerk 7y ago
- Proven 7y agoYou have absolutely no clue what you're talking about.
- samsonradu 7y agoWhat purpose would that home serve? Is there demand for it or it will just suppress housing prices by increasing supply? I guess the message here is that rent-seeking investments (positive yielding investments, deposits) will no longer work. Value needs to be added.
- JumpCrisscross 7y ago> will just suppress housing prices by increasing supply? That’s an odd way to phrase keeping housing affordable.
- umeshunni 7y agoIt's a phrasing that's extremely popular in the US, for obvious reasons.
- samsonradu 7y agoTrue, too much watching Bloomberg lately :)
- deleted 7y ago[deleted]
- samsonradu 7y agoJust tried to be technical, since 'affordable' is debatable. What I'm asking is how would building houses for no reason help in the current circumstances. Wouldn't the house also erode in value?
- JumpCrisscross 7y ago> how would building houses for no reason Stable housing prices are good for an economy. Next to negative rates, that’s a win. That’s the point.
- samsonradu 7y ago
- mruts 7y agoThen buy the US risk free rate instead? Or get some nice equity premiums if you want. I seriously have a hard time understanding logic like this. Who is actually saving money in a savings account? There’s literally only one reason why you would keep money in a savings account: For FDIC (or equivalent) protection. But if that was the sticking point, then US T-notes are even better and they don’t have a 250k limit. Maybe this guy doesn’t know anything about finance and doesn’t understand? I’m confused. Moreover, this is exactly what rate cuts are for: to stimulate the velocity of money and encourage investment. Europeans in general are so risk adverse that they make irrational financial decisions. As EMH posites, you get a return commensurate to your risk: without bearing risk, there cannot be any return.
- tonyedgecombe 7y agoIt’s a common attitude, investing is seen as little more than gambling.
- zmk_ 7y agoEMH says that prices reflect information, if anything it's a statement about the mean/expected return. What you are probably referring to is CAPM which has this baked in as an assumption on people's preferences.
- mruts 7y agoEMH directly implies that it’s impossible to beat the market on a risk-adjusted basis. Therefore, all above market return is just compensation for bearing additional risk. Therefore EMH is fundamentally about there only being one Sharpe ratio, the market Sharpe. Though you could also say it’s about the market incorporating all known information because that and there only being one Sharpe ratio mean pretty much the exact same thing. Moreover the implications of CAPM and EMH are pretty much the same.
- kgwgk 7y agoJuergen from Bonn is not interested in buying US Treasuries for the same reason that Joe from Baltimore is not interested in buying Mexican government bonds even though they yield 7% rather than 1.5%.
- joezydeco 7y agoNice goal, but how do you do that without triggering a bank run? Because when everyone starts withdrawing their money, you get a bank run.
- JumpCrisscross 7y ago> how do you do that without triggering a bank run? Deposit insurance. The EU’s lack of a currency-wide deposit guarantee is a separate problem. One uniquely spawned by the Germans.
- joezydeco 7y agoDeposit insurance? You're going to ask the public to subsidize their own negative interest?
- c3534l 7y agoNot if the government is giving out money. Besides, the second the bank can't actually provide the money is the second they increase rates.
- cylinder 7y agoI'll never understand why people expect a rate of return above inflation simply for holding in cash savings accounts. It's a fundamental concept of a market economy -- you need to take a risk in order to earn a risk premium!
- Despegar 7y agoThere's nothing I enjoy more than the plight of the German Saver, who's obsession with "fiscal responsibility" has led to shitty austerity politics all across the EU (to be fair some other northern European countries like Netherlands also share the same view) and depressed growth for the poorer southern European countries. Germany has benefited most of all from the unfinished project of the EU. Without becoming a federal union like the US, but having a common currency, Germany's exports have been artificially cheaper and thus more competitive for over 20 years. This is the natural outcome from the obsession with running fiscal surpluses. Now Germany is on the brink of recession and they're finally starting to make some noises about fiscal spending, but the politics will likely limit it to modest deficits than anything transformational. Enjoy the negative rates.
- Dylan16807 7y agoFirst paragraph I can agree with pretty well. But you don't need to share a currency to have artificially cheap exports, do you? Selling things at a discount is usually very easy to accomplish.
- gumby 7y agoCalifornians can buy cheap rocket parts from Alabama without worrying about exchange rate risk just as Germans can buy cheap olive oil from Greece. However fiscal transfers between the two states (I.e. taxes -> welfare payments, labor standards etc) mean that the cheaper goods are more likely to be up to standards and that Alabamans can buy California almonds and Roku boxes. (This is one way cutting welfare hurts capitalism). The EU has no such fiscal mechanism thus the process drifts out of a crisis. Germany’s Länderausgleich is actually more extensive than the US’s, which has made its economy so strong for so long, yet the country is loath to extend its benefits (much of which would flow back to Germany!) to the rest of the EU.
- benj111 7y ago"labor standards" These exist EU wide you know. Additionally money is allocated to poorer regions to develop industries, not welfare payments but still wealth redistribution.
- Gys 7y agoWhat a world we live in: spending all you money and maximizing your debts is the new credo. Pay back? Will never happen. I think 'the Germans' were never a big supporter of keeping the economy running at all costs. Like the way the ECB operated in the last few years. Sooner or later there will be a crash. But somehow everyone thinks that will never ever happen. EDIT: typo
- Ididntdothis 7y agoThis time it’s different :)
- danmaz74 7y agoIt's the first time I hear about this new credo. Source?
- benj111 7y agoBut we're 10 years into this low interest rates/ low inflation environment, which came about after the last crash. I don't doubt a crash/recession will come eventually, it doesn't seem obvious to me that that will take it back to how it was before.
- marcrosoft 7y agoSimply go where savings are better (like US treasuries). The yields will self correct.
- haasted 7y agoThat would introduce an exchange risk for the savers. Euro and USD can fluctuate quite a bit between them.
- skybrian 7y agoI'm wondering why some German banks don't do something like that? Currency risk, maybe?
- gumby 7y agoBanking regulation tightly manages the level of risk permitted to deposit-taking institutions.
- gumby 7y agoThe whole point of keeping all that cash in the bank is to avoid risk. Few people can deal with exchange rate risk. In fact the EU fiscal crisis came from people basically doing what you said: putting their euros in Greek and Spanish banks that paid higher interest than German banks were. They assumed they’d have no exchange rate risk (they didn’t, except at a macro level) but also assumed they’d have the same bank regulation and guarantees they had at home. Oops!
- mikeash 7y agoI like getting interest on my savings as much as anyone, but it is kind of weird how we just expect the price of storing money to be negative. No other storage service works this way. I can’t put a bunch of furniture in a warehouse and not only pay nothing, but receive a percentage of the value each month. I understand why it often works this way for money, but I don’t see why this must be the natural order of things. The price of storing money in a bank will be the underlying cost of doing so, minus the proceeds the bank can make from your money, plus some profit margin. Nothing says this sum must be a positive number.
- Zhenya 7y agoThis is because banks lend against their deposit value (in many multiples). So if you give them $1, the bank can now lend $5 (without actually having it) and then make many times that $5 in interest. So sure, they will pay you a little, so they can make a lot. At least that's how it works today.
- mikeash 7y agoYou’re the second reply who seems to think that I have no idea how banks actually work or why they can often pay interest. Did you just skip my second paragraph, or what’s the deal?
- Zhenya 7y agoI read your second paragraph. There is almost a zero-cost to storing the money and as the account size grows the cost to transact on this account per dollar of storage also approaches zero. Meanwhile the lending power of the bank multiples by large whole numbers. They aren't storing your bills or gold coins.
- mikeash 7y agoYes, costs are low, but so is the potential revenue from loans right now. I never said anything about storing bills or coins.
- mlamat 7y agoThe negative rates are limited by the cost of bank vaults, where people can stuff cash. The ECB stopped production of the 500 Euro note in April to make the stuffing of cash more costly.
- dboreham 7y agoEspecially bad for the Restaurant at The End of the Universe.
- IloveHN84 7y agoAre actually Germans big savers? Living here for almost 10 years, I've NEVER found anyone saving money..the majority burn their salary month per month or burn their short 'savings' in more-than-they-could-afford vacations, like entire months in US or Australia.
- macspoofing 7y agoFrom the article: "The country’s savings rate was around 10% in 2017, almost twice the euro-area average ... On average, Germans held more than 40% of their financial assets in the form of bank deposits in 2018." It's usually perilous to extrapolate anecdotes to the population.
- pjmlp 7y agoActually compared with southern Europe culture, everyone here (NRW) seems crazy about collecting all sorts of coupons and waiting until most stores offer like double discounts. While back home most people would resort to black market or bazaar.
- gumby 7y agoGermans are huge penny pinchers (and why not?). When Walmart tried to take on Germany and offered free bags as they do in the US, German shoppers were convinced that Walmart’s prices must be higher to support such an extravagance. It should be no surprise that Aldi and Lidl are German companies.
- radicalbyte 7y agoI assume from your username that you're in your mid-30s. If that's so, then it's a largely generational thing. The generations in Western Europe who are 45-50+ have considerable wealth and thus have been able to save. For the generations below it's not really possible, on a macro level, to save money. They need all their money for housing and what's left to try to keep up the pretense that they're as successful as their elders.
- jaclaz 7y agoIt depends how you make calculations, but yes, globally savings in Germany are "high" see here: https://en.wikipedia.org/wiki/List_of_countries_by_gross_national_savings https://en.wikipedia.org/wiki/List_of_countries_by_gross_nat... Germany: 27.4 % GDP As a comparison: USA 16.9 % GDP UK 15.8 % GDP
- tempsy 7y agoFor your average retail bank customer you’d be lucky to get anything on your savings as is for the last 10 years. I’m speaking from the US bank perspective, but I imagine it has been the same or worse in Germany. The saving grace in the US is the somewhat recent trend of online banks offering around 2%. I don’t know if other developed countries in the Eurozone have similar offerings.
- Havoc 7y agoUnhappy Germans is not, historically speaking, a recipe for world happiness.
- qaq 7y agoThere are developing nation in need of investment and developed countries with negative interest rates hmmm ...
- TeMPOraL 7y agoA lot of comments here are saying that this is good, and/or one is not entitled to a non-negative return rate on a bank account. Ok, so as an individual, how am I supposed to store money? Under mattress? Or should I embrace the new way of spending everything I earn immediately, possibly by turning my life into a portfolio of subscriptions, and paper over all unexpected spendings (illness, car breaking down, family issues) with insurance? How are low-to-middle-class people supposed to improve their financial situation in this reality?
- defertoreptar 7y agoEither by tolerating some risk and investing locally or by buying some US Treasury bonds.
- TeMPOraL 7y agoAren't US treasury bonds about to become negative too? I vaguely recall something from recent negative interest rates discussion.
- toomuchtodo 7y agoWe’re on that path, it’s not a sure thing yet. I’d be surprised if all developed countries didn’t have their bonds go negative eventually. Too much capital and not enough productive investments available.
- fileeditview 7y agoOh and since this is about Germany: in Germany "Bundesanleihen" have already negative interest. It will become really impossible to save some money securely for "bad times". And if people want to tell me I should rather spend some money to push the economy... seriously? I don't need a new tv/phone/car/whatever every few years.. They tell you in the news to save the environment by doing "xyz" daily but just restrain on buying shit you don't need?? No that's too easy..
- 7y ago
- persia_hodl 7y agoBitcoin fixes this.
- AdrianB1 7y agoIt does not. It just provides a high risk playground.
- segmondy 7y agoI have been mulling over this for quite a while. What to do if USA one day enters the negative rate territory. I'm not yet so sure. Go all into stocks, bonds? Buy real estate, lock up in long term CDs before it hits zero? I have thought about foreign savings, but without FDIC insurance, it doesn't even seem to be worth the risk. What are your plans? bitcoins? gold?
- deleted 7y ago[deleted]
- tunesmith 7y agoMy allocation model requires a certain percentage in cash. I send most of that cash towards my mortgage instead. Even a low interest rate mortgage of 3-4% beats current cash savings rates of 1-2%.
- faissaloo 7y agoPool your money with others, invest in real estate and share the profits.
- Zenst 7y agoOver the decades we have seen in many countries a trend from saving and responsible spending towards, credit and living on a have no, pay tomorrow. This of course is not solely down to interests lowering. But the opening up and diversification along with growth in marketing of financial products and that in itself has been driven by the increased marketing and fashion conscious mentality of certain consumer products. Is this a good thing or a bad thing. Hard to say, but certainly when your populus is more exposed on credit and less backed up with saving and secured assets, any blips in the market can and will explode into financial meltdown with more dominos in the stack to fall down in a greater knock-on effect. What we also need to know is that in the past when things got bad, governments would raise interest rates, that would have a negative knock-on effect. So the approach switched towards lowering those interest rates, more competition in financial markets and with that growth, we saw the rise in marketing and credit accessibility and the market competed with itself for your not only the money you have today, but more so towards the money you will have tomorrow. There is only so far you can cut interest rates, and had you asked anybody a few decades ago about the possibility of negative interest rates, they would of laughed so much that your ears would bleed. Today, such things are a reality. What I wonder is that Quantitative Easing ( fancy way of devaluing your currency and in effect currency manipulation that is accepted...these days) is the elephant in the room. If we never had such things, would we of ever seen negative interest rates? What's more, we are now even seeing Government bonds with negative interest rates. How far will they go and with all that. Will we see the bartering system becoming more fashionable? Finally, is saving now classed as an obsession! Really, are we seriously at that stage in in fiscal devolution that we all seem flummoxed in a few decades time when nobody bothered to have a pension plan? Finance is about balance, sure have fun, have credit, but equally, have some savings. This drive to now demonise savings, just seems irrisponsible. But do remember, savings can be in many forms, assets can be a form of savings, gold, art, shares in companies even. Some have larger risk, some more stable and with any financial blip/crisis - the same old things do better like gold. Which is also an indicator of financial crisis's, and it has been trending up recently, in a way indicative of a financial crash. Now with that in mind, and finance does have some smart people who not only see that and more, I wonder - are negative interest rates the new trick to staive of a financial market heading for a crash? Maybe, but it gets down to enough people buying into it. Now with government bonds, that may well happen as many pension pots have rules that force them to have a certain percentage of such bonds. As they have always been classed as stable. Times change, rules change and if those pension pots change there safe long term bets into another approach, things could become very interesting indeed. I do hope that this new trick in interest rates pans out, but it is hard not to be blown away by the complexities at play the further and deeper you look into it.
- apta 7y agoOnce again, the destructive effects of usury/interest on the economy are manifesting in front of us.
- rocqua 7y agoHow long until banks start investing in vaults and just store millions of euros in hard cash to avoid negative interest rates? Is their any regulatory reason against doing this (lets ignore the cost of securing such cash against physical risks).
- 345218435 7y agothey actually do store printed money in vaults. but that costs money as well. now, remember when everybody was wondering why they axed the 500€ bill?
- rocqua 7y agoThat was much more about money laundering than control over monetary policy. Both come down to the same thing though, move away from cash into instruments that are under the government auspices.
- acd 7y agoGold and diamonds or owning forest.
- rocqua 7y agoGold is too volatile to replace central bank deposits. Diamonds are worthless, despite what deBeers wants you to think, and forests are an investment. If a bank has continual deposits at the ECB, and is paying money for the privilege, they might just decide to hold those euros in a vault. Once the vault becomes cheaper than the ECB, it should become a matter of time.
- AdrianB1 7y agoWhy do that? When most money are just bits in some computers why bother printing it? Go digital, you don't need paper, you save on physical storage.
- rocqua 7y agoBecause the only way for a European bank to have money as 'bits in some computers' is with the ECB. And the ECB gives you back less money than you gave them (negative interest). Banks can also place money with other banks, but that is lending to other banks. Besides, this only shifts the problem to another bank, who now has cash on hand that'll be stored in the ECB if they don't do something else with it. Besides that, banks can invest cash. But in a low-yield market where all stable investments give very low, or even negative, interest, that becomes less attractive.
- 345218435 7y ago„germany in uproar“ made my day, thanks. as a german i can report that nobody is roaring. the herd is eating their cake calmly.
- lixtra 7y agoSo as a high earner, what would be a rational thing to do? German savings rate is about 10%, let’s assume it’s 20% for a high earner. If she decides to stop saving, she can reduce her workload to 80%. This is generally easier than it might look like[1]. Because of progressive taxes, she will still earn about 85% of her income, so she can still save 5%, but rather outside of Europe with its faltering economy. Especially when more high earners decide to work less and live more. Luckily few people act rationally. [1] https://www.globaladvocaten.com/blog/labour-law-parttime-work-in-germany https://www.globaladvocaten.com/blog/labour-law-parttime-wor...
- acd 7y agoQuality of life also increases if you work 80% as you now have 20% more free time.
- AdrianB1 7y agoThe biggest problem I find is financing the activities in the extra free time. Most of my saving capability comes from the fact I have no time to spend what I get, if I take more vacation and lower pay I am becoming bankrupt very soon, very fast. Not working and just staying at home because I cannot afford to go anywhere is not a positive use of my time, I can work and be productive.
- triceratops 7y ago> The biggest problem I find is financing the activities in the extra free time Find cheaper hobbies. Video games, library books, walks in parks (city, regional, national), exercising or playing cheap team sports like soccer or basketball, local volunteering, playing music - all have a very low cost per hour. Other hobbies such as woodworking/carpentry, painting or other arts and crafts, have higher costs but also the possibility of making some money. If you have more vacation time, you can also choose cheaper but slower modes of transport or book tickets and accommodation at non-peak times. E.g. you're not forced to travel around long weekends or Christmas holidays to get a decent-sized break.
- pascalxus 7y agoNegative rates doesn't change the reality that retirees need to save money. It just exacerbates the situation. Negative interest rates could cause even more aggressive saving as people need to hold on to every last little penny they own. When you know that you're bank account will have less and less in it in the future, saving even more in the present day becomes even more important. If I was a retiree in germany right now, I'd cut as much of my spending to almost nothing and wait for this ridiculousness (negative interest rates) to stop.
- deleted 7y ago[deleted]
- sdinsn 7y agoIsn't that the point? People are saving too much in the consumer economy, so negative rates encourage people/companies to spend or take on debt to stimulate the economy.
- umadon 7y agoI think this is the message the investor class is trying to send to ordinary people: "If we can't find a place to invest at a reasonable rate of return, we will find a way to loot your bank accounts."
- jakeogh 7y ago"Obsession" ay? The old guard newspapers make more sense if one notes their framing often tends towards increasing dependence on central power structures.
- crb002 7y agoThis is bad. Germany goes insolvent from malinvestment and we have a global deep recession on our hands. All their creditors will default because why not when there is a run on their banks?
- apexalpha 7y agoSame here in NL. An entire generation is growing up with the idea that saving doesn't earn you anything. Borrow borrow borrow is the credo. Our entire housing market is fucked thanks to the ECB, pension funds are cutting pensions because bonds literally don't give you a return anymore. All assets worldwide have been pumped into record heights. All this so governments in southern Europe don't drown in their own debt. If only the countries joining the Euro had agreed to keep deficits and debts below a certain level....