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I am in finance and literally struggled to wrap my mind around this last year, until a proper fixed income trader explained this to me and I'll explain it the s

I am in finance and literally struggled to wrap my mind around this last year, until a proper fixed income trader explained this to me and I'll explain it the same way. Last year, oil futures prices turned negative. Which means "wait, I can take delivery of oil AND get cash for it too." So why didn't people do this? Because there's a cost of cary to oil - I need to pick it up in a train car at a specific place in the US and I need to store it somewhere, which is expensive. So while they were "paying you to take the oil" you couldn't really just jump on it and do it. This is an analogous situation to what's going on with a negative interest rate. You're right, you're literally better off taking the money out into a pile of cash. And if you only have a few thousand bucks you could just do that (but then you need to drive to the bank, figure out how to store it, drive back when the rate goes back up, etc.) But if you have a few hundred thousand bucks - what are you gonna do? Cash it out in hundreds and keep it in your garage? At some point the logistics and theft risk of that adds up too. Meaning, similarly to the oil example, while the raw numbers indicate one strategy, the practicality of carrying the asset on your own tends to outweigh the benefit. So yeah, someone may chose to incur negative interest if their only other option is to pile up cash in the house where they have to worry about it being stolen, burning in a fire, etc.

razius 5y ago
I highly recommend giving this a read: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Breaking-Through-the-Zero-Lower-Bound-43358 https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Bre...
nostrademons 5y ago
Note that this is an inverse of Gresham's Law and is behind the large increases in value of alternative stores of value (art, real estate, cryptocurrency, stocks). Gresham's Law is that "bad money drives out good" - when you have two forms of currency circulating within the economy and one is inflating at a faster rate than the other, people will tend to spend the inflating currency and hoard the appreciating one. The inverse of that is that they will tend to hoard the appreciating currency and spend the inflating one, i.e. as a store of value, nobody with long time preferences is going to hold cash. Instead they pile into any asset with zero cost of carry and a liquid market, which was stocks from about 1980-2010 and now also includes art, cryptocurrency, real estate, NFTs, other securities, etc. It occurs to me that this could play tricks on how we measure interest rates. Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash. But nobody serious about future returns wants to lend cash! They've exited the cash market entirely, and only touch it when they need to convert long-term holdings to short-term holdings. Instead, they trade amongst themselves in asset markets, which have appreciated far quicker than 3% CPIs and 2% nominal interest rates would suggest. It could be that the divorce between stock market returns (10-15% in recent years) vs. interest rates (2-3% in recent years) might indicate that all of the firms with high time preferences have exited the cash market, leaving behind only those firms who need cash now.
- imtringued 5y ago
  > Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash. Nitpick: It's the equilibrium between people who want to have savings and those who want to have debt. When you have deflation no such mechanism exists which is why the central bank has to set the interest rate manually.

razius 5y ago

I highly recommend giving this a read: https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Breaking-Through-the-Zero-Lower-Bound-43358 https://www.imf.org/en/Publications/WP/Issues/2016/12/31/Bre...

nostrademons 5y ago

Note that this is an inverse of Gresham's Law and is behind the large increases in value of alternative stores of value (art, real estate, cryptocurrency, stocks). Gresham's Law is that "bad money drives out good" - when you have two forms of currency circulating within the economy and one is inflating at a faster rate than the other, people will tend to spend the inflating currency and hoard the appreciating one. The inverse of that is that they will tend to hoard the appreciating currency and spend the inflating one, i.e. as a store of value, nobody with long time preferences is going to hold cash. Instead they pile into any asset with zero cost of carry and a liquid market, which was stocks from about 1980-2010 and now also includes art, cryptocurrency, real estate, NFTs, other securities, etc. It occurs to me that this could play tricks on how we measure interest rates. Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash. But nobody serious about future returns wants to lend cash! They've exited the cash market entirely, and only touch it when they need to convert long-term holdings to short-term holdings. Instead, they trade amongst themselves in asset markets, which have appreciated far quicker than 3% CPIs and 2% nominal interest rates would suggest. It could be that the divorce between stock market returns (10-15% in recent years) vs. interest rates (2-3% in recent years) might indicate that all of the firms with high time preferences have exited the cash market, leaving behind only those firms who need cash now.

imtringued 5y ago
> Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash. Nitpick: It's the equilibrium between people who want to have savings and those who want to have debt. When you have deflation no such mechanism exists which is why the central bank has to set the interest rate manually.