The Euribor, widely used in EU, has also been negative for about a year now:
Bank of Japan, in a Surprise, Adopts Negative Interest Rate
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Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate
#72Earlier quoted context omitted.
Wouldn't it be acceptable to just accept a shrinking economy and change policies in such a way to deal with it? i.e. shrink the police and armed forces, public services, cut needless spending, etc. Become more frugal as economy allows.
The key phrase here was 'aging population'. If the majority of Japan's population are retired then there will still be a huge deficit. Japan needs to bite the bullet and accept immigration as part of its economic strategy.
> Japan needs to bite the bullet and accept immigration.
Immigration isn't going to solve anything, immigration from where ? Japan isn't the US, they aren't talking English nor their society is build in a way it can accept huge immigration waves.
Japan needs to work on techs that will solve its problems, not resort to a massive immigration wave that will only kick the can down the road.
Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate
#73The backstory here is demographics. Japan has a shrinking, aging population and almost no immigration. With fewer people there are naturally less things bought, sold, and produced. Japanese authorities have been trying to pump the economy by deficit spending (central government borrows money and spends it), quantitative easing (central bank buys long term private debt, increasing the money supply for short term spend…
Question: if the government doesn't want people "parking their money" in government bonds at all ... then why not just stop issuing government bonds altogether, thus giving banks no choice but to invest in the market instead? Is that somehow impossible? Would it make the market illiquid? Are there laws concerning the required volatility caps for the securities backing savings accounts that would have to be relaxed?
This isn't about the rate on government bonds, it's the overnight rate on savings deposits.
Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate
#74The backstory here is demographics. Japan has a shrinking, aging population and almost no immigration. With fewer people there are naturally less things bought, sold, and produced. Japanese authorities have been trying to pump the economy by deficit spending (central government borrows money and spends it), quantitative easing (central bank buys long term private debt, increasing the money supply for short term spend…
Wouldn't it be acceptable to just accept a shrinking economy and change policies in such a way to deal with it? i.e. shrink the police and armed forces, public services, cut needless spending, etc. Become more frugal as economy allows.
Yes, if you believed in a free-market economy. But if you believed the only way to success was growth, and were willing to push that growth at any price, negative interest rates.
Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate
#75Can someone explain to me why both cheap oil and expensive oil seem to be bad for the economy? Back when oil was >$100 per barrel everybody seemed to blame the weak economy on expensive oil. Now somehow very cheap oil is also a bad thing.
Ignoring the obvious climate-change issues just for the moment to focus purely on the relation of oil prices and the economy...
From the global perspective, cheap oil is a very good thing. Cheap commodities in general are an unmitigated good thing. Cheap oil means that people spend less money to move vehicles around and heat homes, and can spend it elsewhere. Cheap oil means trade is cheaper, allowing goods to be produced in more-efficient places and then shipped instead. Cheap commodities mean that investors spend less money building oil rigs and mines, and can invest it elsewhere. Final goods and services where oil or other commodities are an input become less expensive, allowing other economic activity to be pursued.
The reasons cheap oil could be linked to bad stuff in the world economy are not because the oil itself is cheap, though. Cheap oil could be bad because it is a sign that no one wants to buy oil, which is a sign that people aren't shipping goods and other economic activity is depressed. (This is a cause of cheap oil, though, not an effect.) The other big reason it could be bad is that it is a sign that people have invested too much money drilling for oil and building oil-extracting machines and training people to be oilfield workers and the like. Too-cheap oil suggests that this investment was a bad idea and should not have been made, or at least not made yet, and now that effort has been at least partially wasted. But that's another cause of cheap oil, and not an effect.
The people who suffer from cheap oil are those who are involved in the production of oil: oil companies themselves, companies who provide services to oil companies, pipeline companies, railroad companies involved in shipping oil, workers out on the oil fields, companies involved in providing services in those regions (e.g. real estate firms in the right parts of the Dakotas)... and investors in any of those companies (including pension funds).
The US is involved in a lot more oil production than it used to be, so some of that suffering partially mitigates against the awesomeness of cheap oil to the rest of its economy. (Partially. Most of the US is not involved in producing oil.)
Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate
#76I remember, in 2009, spending the effort to go through the code to make sure we had a check to set the interest rate to zero if it went negative in the simulation. Because negative interest rates make no sense, right?
When the value of money falls very deep in a crisis and investors don't want to invest but keep their money liquid, then banks may charge you a fee for allowing you to park your money with them, instead of paying you for loaning it to them. So yes, negative interest can make sense. And maybe you coded a bug into your application instead o a feature, based on wrong assumptions...
Negative risk free rates were theoretically possible, but thought at the time to be stupid. See for example the development of the Cox Ingersoll Ross model, "The standard deviation factor, \sigma \sqrt{r_t}, avoids the possibility of negative interest rates for all positive values of a and b."
Many interest rate models had been in the past either criticised for theoeretically allowing negative rates, or specially developed to avoid them.
https://en.wikipedia.org/wiki/Cox%E2%80%93Ingersoll%E2%80%93...
Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate
#77Earlier quoted context omitted.
When the value of money falls very deep in a crisis and investors don't want to invest but keep their money liquid, then banks may charge you a fee for allowing you to park your money with them, instead of paying you for loaning it to them. So yes, negative interest can make sense. And maybe you coded a bug into your application instead o a feature, based on wrong assumptions...
Isn't it the case that a central bank primarily lends? In this case aren't they effectively paying banks to borrow? Given 0% interest rates haven't led to desired economic investment and stimulus the approach of the ECB and BOJ seems like wishful thinking that "more of the same" will somehow create different results. While it's clear the stock market benefits from the increased investment, it's not clear that this ad…
They are effectively paying banks to lend. The aim is to stimulate investment, and also to drive inflation by making money less valuable.
Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate
#78Negative Interest Rates happened in the US in late 2008:
http://blogs.wsj.com/marketbeat/2008/12/09/three-month-bill-...
Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate
#79I remember, in 2009, spending the effort to go through the code to make sure we had a check to set the interest rate to zero if it went negative in the simulation. Because negative interest rates make no sense, right?
Negative yields have been very common in the last 2-3 years, perhaps not when the bond is initially sold, but certainly after the bond starts trading - when the negative yield also takes into accounts expectations around currency risk. A currency that is expected to hold it's value (like the US Dollar) - is a very desirable place to park your money if you believe other currencies will drop. And, as you purchase those…
I should have specified I meant negative risk free rates, not negative market yields.
Re: Bank of Japan, in a Surprise, Adopts Negative Interest Rate
#80The backstory here is demographics. Japan has a shrinking, aging population and almost no immigration. With fewer people there are naturally less things bought, sold, and produced. Japanese authorities have been trying to pump the economy by deficit spending (central government borrows money and spends it), quantitative easing (central bank buys long term private debt, increasing the money supply for short term spend…
The irony of this approach is that the lower interest rates are, the more people need to save to reach their retirement goals. If this effect is stronger than the incentive to borrow and invest, low interest rates might actually curb consumption.
Saving for retirement using a savings account hasn't been a viable strategy in decades (at least in the US). People need to be encouraged to invest a significant portion of their money in other securities, and know that in the long term, they'll be much better off for it.