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You have to look at real rates, not nominal rates. The only markets that have negative nominal rates are battling deflation (which the US is not) or have seriou

You have to look at real rates, not nominal rates. The only markets that have negative nominal rates are battling deflation (which the US is not) or have serious liquidity concerns at the moment. The Fed is unlikely to go negative as they face a very different beast. Here's a quick example. Let's say you're in a deflationary environment: in 1 year, your money actually buys you more than it did last year, let's say for instance, 2% more. Under this weird environment, you would actually be willing to pay someone to hold your money for a year, because you know in a years time, it will buy you 2% more (effectively a 2% return). So, since you don't want to store that money under your mattress, how much will you pay someone? Let's say you pay your bank 0.5% for holding your money (i.e. negative rate). So in a years time, you get 99.5% of your money back from the bank, but it buys you 2% more "stuff" so really, compared to today, you're getting 101.5% (roughly) of your money back, which is the same as a 1.5% interest rate. This is called the "real" interest rate, and it's the only one that matters.

HorizonXP 7y ago
Upvoted for a wonderful and illustrative explanation. I'm commenting to see if others can corroborate, since I'm ignorant about this topic.
mindslight 7y ago
> in 1 year, your money actually buys you more than it did last year, let's say for instance, 2% more. Under this weird environment It's worth pointing out that this is not "weird", but rather the natural state of things! The effect is so strong in computing that we still see it, but technological progress means everything in general gets easier to produce. This policy that "prices must always go up" is itself the aberration, instituted to keep the plebs working "full time" and to undermine their ability to save.
- wsetchell 7y ago
  I don't think deflation is the natural state of things. Even before fiat currency the money supply grew (e.g. gold mines) and we had inflation. Productivity growth is normal-ish, but the amount you prices have been all over the place throughout history.
  - dnautics 7y ago
    Gold mines were not the major cause of inflation during the pre-fiat era. It was almost always deducting the precious metal content of the accepted currency, often to fund things like war. Deflation should be the natural order of things; for example the unit real cost of food had gone down massively since the first half of the 20th century, which is a huge part of why people don't starve to death during recessions anymore.
    - fauigerzigerk 7y ago
      >Deflation should be the natural order of things Yes, and it is, for existing unchanging things. But as productivity grows we invent and buy new and improved things.
- munificent 7y ago
  I think your natural argument rests on the idea that money is somehow a time-independent measure of "effort" but I don't know if that really makes sense.
  - mindslight 7y ago
    I agree that is part of my argument. People certainly treat money as if it should be a time-independent measure of effort. Is there another objective metric that you can imagine money representing? I do not think it makes sense to insist that money can only ever be subjective based on the possibility that transients can occur - eg a factory burning down does cause natural price inflation, but this is an exception rather than the rule.
    - munificent 7y ago
      I don't think have the luxury of imagining a metric that we wish money to represent any more than we can say that "the number of rats in New York" means anything in any abstract sense. The value of money is an emergent property of what people do with it and if its numeric measure fails to track our selected "objective metric", it's the fault of our metric, not money itself.
      - mindslight 7y ago
        Objective measures are necessary to independently judge the actions of the people in charge of the money supply. To write off objective standards is to hand them an enormous amount of unchecked power, power which will invariably be abused for their gain.
    - Supermancho 7y ago
      That is both how it is viewed by the 90% and how it is treated by the entire system. This is the source of "Time is money".
- AlexandrB 7y ago
  > It's worth pointing out that this is not "weird", but rather the natural state of things! Except in health care, education, and real-estate - all three of which are needs more fundamental than personal computing or electronics.
  - eloff 7y ago
    This is a correct and fair observation. How we measure inflation is complex and widely speculated to be gamed by governments worldwide.
- dropit_sphere 7y ago
  You can have inflation as a market result though. A lot of economic activity is adversarial and negative-sum. In the best case it's negative-sum but a multiplier of over 1, like police work. In the worst case it's value-destroying Uber vs Lyft wars, where companies spend on guns to fight each other with, which effort is forever lost for butter. Digital marketers are the soldiers in these battles, along with lawyers and security people. In other words, just because everyone's rich doesn't mean there won't be someone willing to pay a lot of money to get more of the pie. Which leads to good scarcity (both from a smaller overall pie and the public having less access to it) and more money flying around, and boom, inflation. We are in this situation today.
- qeternity 7y ago
  I think you’re missing the meat of the argument: relatively speaking these things get cheaper over time. Bread has never been cheaper for most people. The average person can buy 2000 kcal for a few percent of their daily wages. However, in absolute terms, a few bucks today is many multiples of what it would have cost a century ago. The difference is that the increase in wages outpaced the increase in the cost of bread. And that is precisely what drives inflation. And that’s why talking in inflation adjusted terms (“real” terms) is so important. So even though bread costs 10x more than it did a century ago because people are earning 20x more so it’s actually cheaper. Compute works the same. Technological progress makes things cheaper in real terms and this is how quality of life improves.
6keZbCECT2uB 7y ago
When was the last time that the United States had a deflationary period during good market conditions? This might be a pretty new condition for some people.
- rayuela 7y ago
  What do you mean by "good market conditions?" Also, we're definitely not in deflationary conditions - this implies a decrease in prices of goods. The shock to supply chains is actually going to make things more expensive. What we're really looking at is the possibility of stagflation - inflation + fall in demand.
  - Der_Einzige 7y ago
    Check currency trading platforms - we are deflationary as of this moment.
    - rayuela 7y ago
      ??? That's not how you measure deflation.... edit: for those wondering you wanna look at a Consumer Price Index (CPI) to dertemine inflation/deflation
rayuela 7y ago
Thank you for commenting. Too many arm chair economist talking out their bums in these threads. I'm always reluctant to even look at these discussions now a days due to the poor quality of the comments, but your comment gives me hope.
abstractbarista 7y ago
I'd just put it in a safe, and work from home with guns by my side. Saves the extra 0.5%. Rest of my money is in equities anyways, so I really only need the "emergency savings" in cash. (Obviously big businesses can't do this.)
- Someone 7y ago
  With $100k emergency savings, 0.5% is $500 a year. Wouldn’t be worth it for me to stay home and alert 24/7.
  - triangleman 7y ago
    Your average gun costs like $500 too.
- krallja 7y ago
  you’re gonna shoot the fire out? shoot away the flood? or tornado?
  - joshu 7y ago
    what about the 30-50 feral hogs that run into my yard within 3-5 mins while my small kids play?
thorwasdfasdf 7y ago
but we're not having deflation. With fewer and fewer people working, there's less and less supply with even larger demand, now that they're printing money like never before. As a result, we're going to get really really serious inflation of over 2%, 3%, maybe even more than 3%. It doesn't sound like much because we've become innured to it. But, it's really bad. Just think, you earned 100K in 1 year and 1 year later it's only worth 97K. That's a tax of 3K just for holding on to your money, on top of all the taxes that already exist (Govt spending is 40% of GDP ~ and that's just nationwide.) After just 20 years of 3% inflation, your money is worth half of what it was when you earned it. What's the point of government if they can't even provide a stable currency? Is the expectation that everyone must now buy equities and real estate? Are we to go back to bartering?
- Der_Einzige 7y ago
  At the moment, foreign demand for the dollar is so high that we are experiencing deflation (liquidity is still too low which is entirely why the fed is moving towards negative interest rates), in spite of the money printer going "brrrrr"
  - toomuchtodo 7y ago
    > the money printer going "brrrrr" For those who have yet to have the enjoyment of the experience: https://brrr.money/ https://brrr.money/
    - Rury 7y ago
      Can someone explain the 'going brrrrr' meme to me? I've seen it used in other contexts but can't quite fully grasp what is meant by it.
      - toomuchtodo 7y ago
        It's a tongue in cheek reference to the Federal Reserve "running the printing presses", generating as much fiat as necessary to support the US and global economy. With the US dollar not on the gold standard [1], or tied to something physical resource, the Federal Reserve can create money out of thin air without constraint. Ergo, the "money printer goes brrr". https://www.nytimes.com/2020/03/23/upshot/coronavirus-fed-extraordinary-response.html https://www.nytimes.com/2020/03/23/upshot/coronavirus-fed-ex... (The Fed’s Message: The Money-Printing Presses Are Fired Up and Ready to Go) [1] https://en.wikipedia.org/wiki/Gold_standard https://en.wikipedia.org/wiki/Gold_standard
MuffinFlavored 7y ago
> The Fed is unlikely to go negative as they face a very different beast. Does the United States risk doing damage to our currency and how other nations use it with the stimulus/money printing that is going on?
- pjc50 7y ago
  Like the old joke about only having to outrun the other guy but not the bear, the US is only at risk if it ends up less stable than somewhere else and doesn't manage to trip them up on the way down. It's still hard to see any more realistic alternative; the EU is struggling with the same crisis, and the Chinese government doesn't even want its currency externalised.
- qeternity 7y ago
  Unfortunately not. The US is the tallest midget for the time being, and that’s unlikely to change in the coming decades.
solaxun 7y ago
"So, since you don't want to store that money under your mattress"... I never understood/agreed with this argument. I'd much rather withdraw all my money and keep it in a safe than lock in a loss. I suppose for most people though the minor loss of principal outweighs that inconvenience, but for me, as a matter of principle, I refuse to be paid less than my principal (I didn't mean for that to come out as cheesy as it did).
- deleted 7y ago
  [deleted]
- bryanlarsen 7y ago
  That safe and ancillary services like armed guards or insurance could quite likely cost more than 0.5% per annum.
- fauigerzigerk 7y ago
  So you would rather buy a safe and take out insurance than pay a fee to someone who already has both (i.e a bank)?
- WJW 7y ago
  In order to make the calculation 'correctly', don't forget to price in the correct amount of risk. As an example, say there is a 0.2% chance in any given year of your house catching fire, either through your own fault or from a neighboring property on fire. If there is a 50% chance of you being able to rescue the money in such a situation, then that is an estimated 0.1% loss in any given year. There is also a similarly priceable risk for theft etc, which would probably increase with the amount stored. If it becomes known that there is 500k in cash stored in your house, there are probably plenty of people greedy or desperate enough to break in with heavy tooling when you're out and steal the whole safe.
  - solaxun 7y ago
    Well, while we're in the realm of discussing tail risks - what is the risk that if your assets exceed FDIC insurance limits, the bank you have them in defaults? Since we're discussing a negative rate environment, presumably this is a stressful time for the economy making this more likely than history would indicate. If you have your assets at multiple institutions to stay under the limits, what's the probability of one of those failing, and what's the probability the FDIC fails? Depending on how negative rates are, the math can quickly turn those probabilities you outlined above into risks I'm willing to take.
tomp 7y ago
Good explanation. Also wrong. Denmark has a negative interest rate [1] but has had a (positive) inflation for a while [2]. [1] https://en.wikipedia.org/wiki/List_of_countries_by_central_bank_interest_rates https://en.wikipedia.org/wiki/List_of_countries_by_central_b... [2] https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=DK https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?location...
- dnadler 7y ago
  This doesn't mean that the OP was wrong, but that the negative interest rate policy successfully prevented deflation.
  - chewz 7y ago
    Denmark does not use euro and their NIRP had more to do with keeping parity of krona to euro then fighting deflation.
    - qeternity 7y ago
      You say this like trade imbalances (driven by FX) have no bearing on inflation...it’s the same side of the coin.
- qeternity 7y ago
  I said battling deflation. I didn’t say undergoing. The reason you have negative rates are specifically to avoid deflation. It’s like you didn’t even read what I wrote. But thanks for the smug, and wrong, response.

HorizonXP 7y ago

Upvoted for a wonderful and illustrative explanation. I'm commenting to see if others can corroborate, since I'm ignorant about this topic.

mindslight 7y ago

> in 1 year, your money actually buys you more than it did last year, let's say for instance, 2% more. Under this weird environment It's worth pointing out that this is not "weird", but rather the natural state of things! The effect is so strong in computing that we still see it, but technological progress means everything in general gets easier to produce. This policy that "prices must always go up" is itself the aberration, instituted to keep the plebs working "full time" and to undermine their ability to save.

wsetchell 7y ago
I don't think deflation is the natural state of things. Even before fiat currency the money supply grew (e.g. gold mines) and we had inflation. Productivity growth is normal-ish, but the amount you prices have been all over the place throughout history.
- dnautics 7y ago
  Gold mines were not the major cause of inflation during the pre-fiat era. It was almost always deducting the precious metal content of the accepted currency, often to fund things like war. Deflation should be the natural order of things; for example the unit real cost of food had gone down massively since the first half of the 20th century, which is a huge part of why people don't starve to death during recessions anymore.
  - fauigerzigerk 7y ago
    >Deflation should be the natural order of things Yes, and it is, for existing unchanging things. But as productivity grows we invent and buy new and improved things.
munificent 7y ago
I think your natural argument rests on the idea that money is somehow a time-independent measure of "effort" but I don't know if that really makes sense.
- mindslight 7y ago
  I agree that is part of my argument. People certainly treat money as if it should be a time-independent measure of effort. Is there another objective metric that you can imagine money representing? I do not think it makes sense to insist that money can only ever be subjective based on the possibility that transients can occur - eg a factory burning down does cause natural price inflation, but this is an exception rather than the rule.
  - munificent 7y ago
    I don't think have the luxury of imagining a metric that we wish money to represent any more than we can say that "the number of rats in New York" means anything in any abstract sense. The value of money is an emergent property of what people do with it and if its numeric measure fails to track our selected "objective metric", it's the fault of our metric, not money itself.
    - mindslight 7y ago
      Objective measures are necessary to independently judge the actions of the people in charge of the money supply. To write off objective standards is to hand them an enormous amount of unchecked power, power which will invariably be abused for their gain.
  - Supermancho 7y ago
    That is both how it is viewed by the 90% and how it is treated by the entire system. This is the source of "Time is money".
AlexandrB 7y ago
> It's worth pointing out that this is not "weird", but rather the natural state of things! Except in health care, education, and real-estate - all three of which are needs more fundamental than personal computing or electronics.
- eloff 7y ago
  This is a correct and fair observation. How we measure inflation is complex and widely speculated to be gamed by governments worldwide.
dropit_sphere 7y ago
You can have inflation as a market result though. A lot of economic activity is adversarial and negative-sum. In the best case it's negative-sum but a multiplier of over 1, like police work. In the worst case it's value-destroying Uber vs Lyft wars, where companies spend on guns to fight each other with, which effort is forever lost for butter. Digital marketers are the soldiers in these battles, along with lawyers and security people. In other words, just because everyone's rich doesn't mean there won't be someone willing to pay a lot of money to get more of the pie. Which leads to good scarcity (both from a smaller overall pie and the public having less access to it) and more money flying around, and boom, inflation. We are in this situation today.
qeternity 7y ago
I think you’re missing the meat of the argument: relatively speaking these things get cheaper over time. Bread has never been cheaper for most people. The average person can buy 2000 kcal for a few percent of their daily wages. However, in absolute terms, a few bucks today is many multiples of what it would have cost a century ago. The difference is that the increase in wages outpaced the increase in the cost of bread. And that is precisely what drives inflation. And that’s why talking in inflation adjusted terms (“real” terms) is so important. So even though bread costs 10x more than it did a century ago because people are earning 20x more so it’s actually cheaper. Compute works the same. Technological progress makes things cheaper in real terms and this is how quality of life improves.

6keZbCECT2uB 7y ago

When was the last time that the United States had a deflationary period during good market conditions? This might be a pretty new condition for some people.

rayuela 7y ago
What do you mean by "good market conditions?" Also, we're definitely not in deflationary conditions - this implies a decrease in prices of goods. The shock to supply chains is actually going to make things more expensive. What we're really looking at is the possibility of stagflation - inflation + fall in demand.
- Der_Einzige 7y ago
  Check currency trading platforms - we are deflationary as of this moment.
  - rayuela 7y ago
    ??? That's not how you measure deflation.... edit: for those wondering you wanna look at a Consumer Price Index (CPI) to dertemine inflation/deflation

rayuela 7y ago

Thank you for commenting. Too many arm chair economist talking out their bums in these threads. I'm always reluctant to even look at these discussions now a days due to the poor quality of the comments, but your comment gives me hope.

abstractbarista 7y ago

I'd just put it in a safe, and work from home with guns by my side. Saves the extra 0.5%. Rest of my money is in equities anyways, so I really only need the "emergency savings" in cash. (Obviously big businesses can't do this.)

Someone 7y ago
With $100k emergency savings, 0.5% is $500 a year. Wouldn’t be worth it for me to stay home and alert 24/7.
- triangleman 7y ago
  Your average gun costs like $500 too.
krallja 7y ago
you’re gonna shoot the fire out? shoot away the flood? or tornado?
- joshu 7y ago
  what about the 30-50 feral hogs that run into my yard within 3-5 mins while my small kids play?

thorwasdfasdf 7y ago

but we're not having deflation. With fewer and fewer people working, there's less and less supply with even larger demand, now that they're printing money like never before. As a result, we're going to get really really serious inflation of over 2%, 3%, maybe even more than 3%. It doesn't sound like much because we've become innured to it. But, it's really bad. Just think, you earned 100K in 1 year and 1 year later it's only worth 97K. That's a tax of 3K just for holding on to your money, on top of all the taxes that already exist (Govt spending is 40% of GDP ~ and that's just nationwide.) After just 20 years of 3% inflation, your money is worth half of what it was when you earned it. What's the point of government if they can't even provide a stable currency? Is the expectation that everyone must now buy equities and real estate? Are we to go back to bartering?

Der_Einzige 7y ago
At the moment, foreign demand for the dollar is so high that we are experiencing deflation (liquidity is still too low which is entirely why the fed is moving towards negative interest rates), in spite of the money printer going "brrrrr"
- toomuchtodo 7y ago
  > the money printer going "brrrrr" For those who have yet to have the enjoyment of the experience: https://brrr.money/ https://brrr.money/
  - Rury 7y ago
    Can someone explain the 'going brrrrr' meme to me? I've seen it used in other contexts but can't quite fully grasp what is meant by it.
    - toomuchtodo 7y ago
      It's a tongue in cheek reference to the Federal Reserve "running the printing presses", generating as much fiat as necessary to support the US and global economy. With the US dollar not on the gold standard [1], or tied to something physical resource, the Federal Reserve can create money out of thin air without constraint. Ergo, the "money printer goes brrr". https://www.nytimes.com/2020/03/23/upshot/coronavirus-fed-extraordinary-response.html https://www.nytimes.com/2020/03/23/upshot/coronavirus-fed-ex... (The Fed’s Message: The Money-Printing Presses Are Fired Up and Ready to Go) [1] https://en.wikipedia.org/wiki/Gold_standard https://en.wikipedia.org/wiki/Gold_standard

MuffinFlavored 7y ago

> The Fed is unlikely to go negative as they face a very different beast. Does the United States risk doing damage to our currency and how other nations use it with the stimulus/money printing that is going on?

pjc50 7y ago
Like the old joke about only having to outrun the other guy but not the bear, the US is only at risk if it ends up less stable than somewhere else and doesn't manage to trip them up on the way down. It's still hard to see any more realistic alternative; the EU is struggling with the same crisis, and the Chinese government doesn't even want its currency externalised.
qeternity 7y ago
Unfortunately not. The US is the tallest midget for the time being, and that’s unlikely to change in the coming decades.

solaxun 7y ago

"So, since you don't want to store that money under your mattress"... I never understood/agreed with this argument. I'd much rather withdraw all my money and keep it in a safe than lock in a loss. I suppose for most people though the minor loss of principal outweighs that inconvenience, but for me, as a matter of principle, I refuse to be paid less than my principal (I didn't mean for that to come out as cheesy as it did).

deleted 7y ago
[deleted]
bryanlarsen 7y ago
That safe and ancillary services like armed guards or insurance could quite likely cost more than 0.5% per annum.
fauigerzigerk 7y ago
So you would rather buy a safe and take out insurance than pay a fee to someone who already has both (i.e a bank)?
WJW 7y ago
In order to make the calculation 'correctly', don't forget to price in the correct amount of risk. As an example, say there is a 0.2% chance in any given year of your house catching fire, either through your own fault or from a neighboring property on fire. If there is a 50% chance of you being able to rescue the money in such a situation, then that is an estimated 0.1% loss in any given year. There is also a similarly priceable risk for theft etc, which would probably increase with the amount stored. If it becomes known that there is 500k in cash stored in your house, there are probably plenty of people greedy or desperate enough to break in with heavy tooling when you're out and steal the whole safe.
- solaxun 7y ago
  Well, while we're in the realm of discussing tail risks - what is the risk that if your assets exceed FDIC insurance limits, the bank you have them in defaults? Since we're discussing a negative rate environment, presumably this is a stressful time for the economy making this more likely than history would indicate. If you have your assets at multiple institutions to stay under the limits, what's the probability of one of those failing, and what's the probability the FDIC fails? Depending on how negative rates are, the math can quickly turn those probabilities you outlined above into risks I'm willing to take.

tomp 7y ago

Good explanation. Also wrong. Denmark has a negative interest rate [1] but has had a (positive) inflation for a while [2]. [1] https://en.wikipedia.org/wiki/List_of_countries_by_central_bank_interest_rates https://en.wikipedia.org/wiki/List_of_countries_by_central_b... [2] https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?locations=DK https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?location...

dnadler 7y ago
This doesn't mean that the OP was wrong, but that the negative interest rate policy successfully prevented deflation.
- chewz 7y ago
  Denmark does not use euro and their NIRP had more to do with keeping parity of krona to euro then fighting deflation.
  - qeternity 7y ago
    You say this like trade imbalances (driven by FX) have no bearing on inflation...it’s the same side of the coin.
qeternity 7y ago
I said battling deflation. I didn’t say undergoing. The reason you have negative rates are specifically to avoid deflation. It’s like you didn’t even read what I wrote. But thanks for the smug, and wrong, response.