5 ms·

Zero is an arbitrary limit - It may have a psychological signal, but there is no reason it should be more shocking that the rates drop under zero than when they

by troels 12y ago

Zero is an arbitrary limit - It may have a psychological signal, but there is no reason it should be more shocking that the rates drop under zero than when they dropped under 0.1% or any other number.

IkmoIkmo 12y ago
True. One could argue it's the difference between making money (positive interest), being equal (0) or losing money (negative). But considering that inflation is generally 1-3%, the sub 1% interest rates are already losing money effectively in real terms (the only terms that actually matter). Inflation of course is extremely low these days in most OECD countries. But still, real losses on loans don't start at sub 0% interest rates, they can start at positive interest rates, too. I guess it does mark something peculiar, which is sort of new on this scale. Insane levels of QE that don't lead to any significant inflation, making negative interest rates a somewhat sensible approach. In the past we've seen very low interest rates, too, but usually there was at least some fear of inflation, and at times inflation skyrocketed.
deleted 12y ago
[deleted]
ojbyrne 12y ago
Time value of money - meaning that its better to have a $1 today rather than a $1 tomorrow - isn't really an arbitrary thing. If its not true, then we have deflation.
- thaumasiotes 12y ago
  There are two concepts here: 1. $1 today might buy you less stuff than $1 tomorrow would. For example, maybe today $1 will buy you three today-apples, but tomorrow $1 will buy you five tomorrow-apples. This is arbitrary. The example shows deflation in apples, but there's no reason, a priori, that today should be better or worse than tomorrow, whether measured in apples or any other dimension. Maybe tomorrow $1 will get you two tomorrow-apples. 2. Under the assumption that the buying power of $1 is fixed and eternal, $1 today is necessarily better than $1 tomorrow because you have more options. Among other things, you might die later today. This phenomenon can't reverse, it can only make earlier money (or anything else) more valuable than later money. But it's not the same idea as #1. Deflation is an idea related to concept #1. $1 today being better than $1 tomorrow is concept #2.
  - fennecfoxen 12y ago
    The traditional point made for #2 isn't about the fact you could die but more that $1 today could be invested in some profit-making enterprise (directly or through a bank account paying interest). For a concrete non-financial-system example, $1000 today could let you re-insulate your home, saving you $250 over the course of the next winter. Every year you put off that $1000 then costs you around $250 (modulo any depreciation and the variability of heating costs). The thing that's a little different with the banking system is that you're not just getting paid for the time value of your deposited money and the returns it could get in the economy writ large, you're losing a little bit for the sake of safety (deposit insurance) and liquidity (you can withdraw money from a bank account any time, unlike if you had issued a mortgage loan directly yourself).
mauricemir 12y ago
Some short term Gilts/Bonds now have negative rates ie you pay to buy them (Switzerland is one example)

by troels 12y ago

IkmoIkmo 12y ago

True. One could argue it's the difference between making money (positive interest), being equal (0) or losing money (negative). But considering that inflation is generally 1-3%, the sub 1% interest rates are already losing money effectively in real terms (the only terms that actually matter). Inflation of course is extremely low these days in most OECD countries. But still, real losses on loans don't start at sub 0% interest rates, they can start at positive interest rates, too. I guess it does mark something peculiar, which is sort of new on this scale. Insane levels of QE that don't lead to any significant inflation, making negative interest rates a somewhat sensible approach. In the past we've seen very low interest rates, too, but usually there was at least some fear of inflation, and at times inflation skyrocketed.

deleted 12y ago

[deleted]

ojbyrne 12y ago

Time value of money - meaning that its better to have a $1 today rather than a $1 tomorrow - isn't really an arbitrary thing. If its not true, then we have deflation.

thaumasiotes 12y ago
There are two concepts here: 1. $1 today might buy you less stuff than $1 tomorrow would. For example, maybe today $1 will buy you three today-apples, but tomorrow $1 will buy you five tomorrow-apples. This is arbitrary. The example shows deflation in apples, but there's no reason, a priori, that today should be better or worse than tomorrow, whether measured in apples or any other dimension. Maybe tomorrow $1 will get you two tomorrow-apples. 2. Under the assumption that the buying power of $1 is fixed and eternal, $1 today is necessarily better than $1 tomorrow because you have more options. Among other things, you might die later today. This phenomenon can't reverse, it can only make earlier money (or anything else) more valuable than later money. But it's not the same idea as #1. Deflation is an idea related to concept #1. $1 today being better than $1 tomorrow is concept #2.
- fennecfoxen 12y ago
  The traditional point made for #2 isn't about the fact you could die but more that $1 today could be invested in some profit-making enterprise (directly or through a bank account paying interest). For a concrete non-financial-system example, $1000 today could let you re-insulate your home, saving you $250 over the course of the next winter. Every year you put off that $1000 then costs you around $250 (modulo any depreciation and the variability of heating costs). The thing that's a little different with the banking system is that you're not just getting paid for the time value of your deposited money and the returns it could get in the economy writ large, you're losing a little bit for the sake of safety (deposit insurance) and liquidity (you can withdraw money from a bank account any time, unlike if you had issued a mortgage loan directly yourself).

mauricemir 12y ago

Some short term Gilts/Bonds now have negative rates ie you pay to buy them (Switzerland is one example)