6 ms·

With 0% interest rates in Europe, do you think this will encourage large savers to get their money invested? I think the idea of negative interest rates is absu

With 0% interest rates in Europe, do you think this will encourage large savers to get their money invested? I think the idea of negative interest rates is absurd however it might encourage Europeans to invest more money versus stashing in savings accounts

martin_bech 7y ago
My coworker just did this, moved from savings to passive investments, because of 0% interest rates, and the warning of potential negative rates for "consumer" accounts. Bussiness accounts are already at negative interest rates at some banks.
StarDucks 7y ago
This is really going to end up biting everyone in the ass though. What happens when we have another market crash and everyone is broke because they put money they would have saved into investments instead and now they have no safety net?
- BurningFrog 7y ago
  I don't understand negative interest rates at all, but surely something is deeply broken behind this, and it will crash in one spectacular way or another.
  - pas 7y ago
    It's a cost of having money, but not spending it. The central bank pays a negative interest on excess deposits. So banks are motivated to lend it out. (Eg. take on more risk.) https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749... One problem that becomes a bit hard is that in the retail sector if interest rates go below zero people are willing to simply withdraw the money, which would hurt banks' ability to lend. (Eg. the central bank would have to add funding via some mechanism, such as lowering the fractional ratio, or QE . [Or paying interest on reserves. But that would go against the negative interest on excess reserves.]) The paper concludes that the negative interest rates resulted in more loans.
    - BurningFrog 7y ago
      Yeah, but I'm worried about the underlying causes. How did holding money become so worthless in the first place? Can this really be natural, or is there massive central bank shenaningans behind it? Clearly savers lose, but who benefits?
      - pas 7y ago
        Money is just a piece of the underlying monetary system, which is constantly priced based on what the economy using that money does. If that economy expands without corresponding increase in the money supply, then prices go down (because there are more stuff, but the same amount of money, so the same amount of money now represent more stuff). But this represents a deflation, which would auto-magically counteract the expansion, because it would incentivize people to wait and spend just at the last minute. (Time value of money and all would revert, wages would fall, fixed amount mortgages would start to spiral out, and all the regular deflation doomsday scenarios.) So the central banks make sure that even in an expanding economy the money supply "stays ahead" of the expansion of the economy. Targeting 2%. (And usually falling short, so inflation is somewhere between 1-2%.) So holding money did not became worthless, quite the opposite, holding cash is now better than holding it in a bank. But the central bank has only a few policy tools available, and one of them is the interest rate manipulation. The central banks want to encourage people to make some investments, to take on some risk, or at least spend. Sure, one way is to simply fund the government, as that usually seems the least risky. And it's not like there's nothing to spend on - the Green New Deal and co, but governments are quite reluctant to do so.
  - tomp 7y ago
    No, what's actually broken is positive investment rates. Why would the central bank pay you (i.e. print new money and give it to you) just because you have some money lying on the central bank's account? And by "you" of course I mean big 1% banks, not the 99% population who don't have access to this feature. Commercial banks should be making money by taking consumers' deposits and loaning them out to businesses, taking a cut of the earned interest. If they can't do that, do they actually have a reason to exist?
    - BurningFrog 7y ago
      > Commercial banks should be making money by taking consumers' deposits and loaning them out to businesses, taking a cut of the earned interest That was all I was talking about. Why isn't that happening anymore?
- lotsofpulp 7y ago
  Government props up equity values again, especially since everyone is invested in them. People with savings in cash lose via loss of value of currency, just like last time.
MR4D 7y ago
With the dollar getting so strong and since we are now post brexit, I expect capital flight. The people running the show have zero understanding of how banking works. And no, I’m not being arrogant - negative rates destroy capital, which is not what you want in a bank. If you look at the largest European banks, they are all very weak (due to many factors, not just this one). However, negative rates is making them weaker. Further, the aging demographics of Europe are going to continue to drive lower and lower growth. In sum, I believe that all of this will cause smart money to leave Europe. At least in part as a hedge if nothing else.
- pas 7y ago
  What would be the solution for this? Which actors/groups ought to do what? Could you explain this a bit? Thanks!
  - logicchains 7y ago
    The central bank could start raising rates. There are very good arguments for temporarily lowering rates to stimulate the economy, but the arguments for keeping it this way for 5-10 years are weaker. Especially if it discourages savings, as in the long term economic growth requires savings (in the economic sense, wherein there is a choice to "save" or "consume" our output, and only the "saved" output can be invested to increase future productivity). There is also little empirical evidence that such low rates help (or no evidence, because negative rates were never tried before). Japan's had low rates for a while and they didn't seem to help, but the argument could be made that without those low rates the situation would be even worse (you could find economists who'd argue both sides). Personally I think it's better to err on the side of favouring whatever the "market rate" of interest would be (the rate if the central bank was taking no action to alter the supply of money or loans), and I'm very doubtful that would be negative.
    - pas 7y ago
      They would if they could. https://www.ft.com/content/478fe908-5168-11ea-8841-482eed0038b1 https://www.ft.com/content/478fe908-5168-11ea-8841-482eed003... Sweden raised rates recently, but only back to zero. Swedish banks - for some reason - simply waited for the NIRP to pass and moaned. [from the link]: Johan Torgeby, chief executive of one of Sweden’s largest banks SEB, says lenders involved in fixed income “struggled for years” and calls the end of sub-zero rates “good news”. He adds: “We have never really understood what effect negative yields have on [boosting] consumption.” https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage https://www.theguardian.com/money/2019/aug/13/danish-bank-la... It certainly helps expanding the money supply. That should help increase savings, that then can be loaned out. (And simply increasing savings doesn't automatically lead to more investment: https://en.wikipedia.org/wiki/Saving_identity https://en.wikipedia.org/wiki/Saving_identity - I know wikipedia is not a proper source, sorry, anyway: "This identity only holds true because investment here is defined as including inventory accumulation, both deliberate and unintended. As such, this does not imply that an increase in saving must lead directly to an increase in investment. Indeed, businesses may respond to increased inventories by decreasing both output and intended investment.") https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749... "Given this finding and its robustness when tested using a variety of standard robustness checks, we conclude that NIRP has acted as an empowerment to the ECB’s asset purchase programme (APP). Banks most reliant on retail deposits have the strongest incentive to convert their EL (excess liquidity), created by the APP, into loans - and our results document that they did so." > Personally I think it's better to err on the side of favouring whatever the "market rate" of interest would be (the rate if the central bank was taking no action to alter the supply of money or loans), and I'm very doubtful that would be negative. Isn't the problem that the market rate would lead us to deflation?

martin_bech 7y ago

My coworker just did this, moved from savings to passive investments, because of 0% interest rates, and the warning of potential negative rates for "consumer" accounts. Bussiness accounts are already at negative interest rates at some banks.

StarDucks 7y ago

This is really going to end up biting everyone in the ass though. What happens when we have another market crash and everyone is broke because they put money they would have saved into investments instead and now they have no safety net?

BurningFrog 7y ago
I don't understand negative interest rates at all, but surely something is deeply broken behind this, and it will crash in one spectacular way or another.
- pas 7y ago
  It's a cost of having money, but not spending it. The central bank pays a negative interest on excess deposits. So banks are motivated to lend it out. (Eg. take on more risk.) https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749... One problem that becomes a bit hard is that in the retail sector if interest rates go below zero people are willing to simply withdraw the money, which would hurt banks' ability to lend. (Eg. the central bank would have to add funding via some mechanism, such as lowering the fractional ratio, or QE . [Or paying interest on reserves. But that would go against the negative interest on excess reserves.]) The paper concludes that the negative interest rates resulted in more loans.
  - BurningFrog 7y ago
    Yeah, but I'm worried about the underlying causes. How did holding money become so worthless in the first place? Can this really be natural, or is there massive central bank shenaningans behind it? Clearly savers lose, but who benefits?
    - pas 7y ago
      Money is just a piece of the underlying monetary system, which is constantly priced based on what the economy using that money does. If that economy expands without corresponding increase in the money supply, then prices go down (because there are more stuff, but the same amount of money, so the same amount of money now represent more stuff). But this represents a deflation, which would auto-magically counteract the expansion, because it would incentivize people to wait and spend just at the last minute. (Time value of money and all would revert, wages would fall, fixed amount mortgages would start to spiral out, and all the regular deflation doomsday scenarios.) So the central banks make sure that even in an expanding economy the money supply "stays ahead" of the expansion of the economy. Targeting 2%. (And usually falling short, so inflation is somewhere between 1-2%.) So holding money did not became worthless, quite the opposite, holding cash is now better than holding it in a bank. But the central bank has only a few policy tools available, and one of them is the interest rate manipulation. The central banks want to encourage people to make some investments, to take on some risk, or at least spend. Sure, one way is to simply fund the government, as that usually seems the least risky. And it's not like there's nothing to spend on - the Green New Deal and co, but governments are quite reluctant to do so.
- tomp 7y ago
  No, what's actually broken is positive investment rates. Why would the central bank pay you (i.e. print new money and give it to you) just because you have some money lying on the central bank's account? And by "you" of course I mean big 1% banks, not the 99% population who don't have access to this feature. Commercial banks should be making money by taking consumers' deposits and loaning them out to businesses, taking a cut of the earned interest. If they can't do that, do they actually have a reason to exist?
  - BurningFrog 7y ago
    > Commercial banks should be making money by taking consumers' deposits and loaning them out to businesses, taking a cut of the earned interest That was all I was talking about. Why isn't that happening anymore?
lotsofpulp 7y ago
Government props up equity values again, especially since everyone is invested in them. People with savings in cash lose via loss of value of currency, just like last time.

MR4D 7y ago

With the dollar getting so strong and since we are now post brexit, I expect capital flight. The people running the show have zero understanding of how banking works. And no, I’m not being arrogant - negative rates destroy capital, which is not what you want in a bank. If you look at the largest European banks, they are all very weak (due to many factors, not just this one). However, negative rates is making them weaker. Further, the aging demographics of Europe are going to continue to drive lower and lower growth. In sum, I believe that all of this will cause smart money to leave Europe. At least in part as a hedge if nothing else.

pas 7y ago
What would be the solution for this? Which actors/groups ought to do what? Could you explain this a bit? Thanks!
- logicchains 7y ago
  The central bank could start raising rates. There are very good arguments for temporarily lowering rates to stimulate the economy, but the arguments for keeping it this way for 5-10 years are weaker. Especially if it discourages savings, as in the long term economic growth requires savings (in the economic sense, wherein there is a choice to "save" or "consume" our output, and only the "saved" output can be invested to increase future productivity). There is also little empirical evidence that such low rates help (or no evidence, because negative rates were never tried before). Japan's had low rates for a while and they didn't seem to help, but the argument could be made that without those low rates the situation would be even worse (you could find economists who'd argue both sides). Personally I think it's better to err on the side of favouring whatever the "market rate" of interest would be (the rate if the central bank was taking no action to alter the supply of money or loans), and I'm very doubtful that would be negative.
  - pas 7y ago
    They would if they could. https://www.ft.com/content/478fe908-5168-11ea-8841-482eed0038b1 https://www.ft.com/content/478fe908-5168-11ea-8841-482eed003... Sweden raised rates recently, but only back to zero. Swedish banks - for some reason - simply waited for the NIRP to pass and moaned. [from the link]: Johan Torgeby, chief executive of one of Sweden’s largest banks SEB, says lenders involved in fixed income “struggled for years” and calls the end of sub-zero rates “good news”. He adds: “We have never really understood what effect negative yields have on [boosting] consumption.” https://www.theguardian.com/money/2019/aug/13/danish-bank-launches-worlds-first-negative-interest-rate-mortgage https://www.theguardian.com/money/2019/aug/13/danish-bank-la... It certainly helps expanding the money supply. That should help increase savings, that then can be loaned out. (And simply increasing savings doesn't automatically lead to more investment: https://en.wikipedia.org/wiki/Saving_identity https://en.wikipedia.org/wiki/Saving_identity - I know wikipedia is not a proper source, sorry, anyway: "This identity only holds true because investment here is defined as including inventory accumulation, both deliberate and unintended. As such, this does not imply that an increase in saving must lead directly to an increase in investment. Indeed, businesses may respond to increased inventories by decreasing both output and intended investment.") https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc074964.en.pdf https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2283~2ccc0749... "Given this finding and its robustness when tested using a variety of standard robustness checks, we conclude that NIRP has acted as an empowerment to the ECB’s asset purchase programme (APP). Banks most reliant on retail deposits have the strongest incentive to convert their EL (excess liquidity), created by the APP, into loans - and our results document that they did so." > Personally I think it's better to err on the side of favouring whatever the "market rate" of interest would be (the rate if the central bank was taking no action to alter the supply of money or loans), and I'm very doubtful that would be negative. Isn't the problem that the market rate would lead us to deflation?