41–50 of 147 posts
Earlier quoted context omitted.
Also cash can be made illegal.
Technically but likely not functionally.
https://wolfstreet.com/2017/01/28/europe-limits-on-cash-tran...
The "natural" demand is there in the form of reserve requirements by European banks. This is limited by the amount of cash that banks can store at cost, but that practice can restricted or eliminated:
https://www.imf.org/~/media/Files/Publications/WP/2018/wp181...
I understand why you would want to set interest rates negative if your central bank is going to buy up all that debt, but as an individual or institutional investor why would you ever want to hold something with negative interest instead of cash? Why is there even a market for a bond with negative interest rates at all, since compared to a $X bond with negative interest, $X in currency seemingly carries less risk, mo…
When you deposit your money at the bank, the bank pays you an interest rate. Normally that rate is positive. They pay you that interest rate because they are investing your money somewhere (often in mortgages, which pay them an interest rate). However, sometimes they have more money than their investment prospects can handle. Normally under those circumstances, they would buy treasuries from the federal reserve, whic…
How does what you said mesh with the notion that keeping cash might be riskier / more cumbersome than investing in the "risk-free" treasury bonds?
Earlier quoted context omitted.
It makes no sense for an individual, since you can keep your money in an FDIC insured account and earn a positive interest rate. Institutions don't have that luxury - the government doesn't insure large amounts of cash. If they keep it in a bank and the bank goes under, they lose their money. So they keep their money in national governments, which are far safer than banks.
> Institutions don't have that luxury - the government doesn't insure large amounts of cash. If they keep it in a bank and the bank goes under, they lose their money. So they keep their money in national governments, which are far safer than banks. Due to the low interest rates German insurance companies are already considering to store cash in their own vaults instead of buying bonds: https://translate.google.com/tr…
Negative interest on wealth is the historic norm for people who have a lot of it. Think storage costs for gold, guards (and maintenance) for your palace, or your yacht - not to mention the crazy depreciation. For the ultra rich, 50 basis points of holding costs would arguably be a bargain. Even normally wealthy people don't hesitate to pay 200 basis points for their wealth to be managed in, for instance, mutual funds…
The debtor is free to do as they wish with your money in the meantime. The debtor is also "free" to default and not give you back anything. The interest rate is supposed to reflect that risk.
In the case of a government bond, you either have the risk of sovereign default, or the risk of currency devaluation to pay back otherwise unservicable debt.
The idea that already heavily indebted governments will be "storing your wealth" is completely naive. They'll be playing this game until suddenly they can't hide the massive inflation anymore, then they'll have to hike interest rates to double digits to get it back under control. This literally just happened in Turkey last year, but it also happened in the US in the seventies.
"average net monthly payroll gains have now slowed [and] aggregate hours worked for production and non-supervisory workers are now contracting..., something that usually doesn’t happen outside of a recession."
We could instead be entering a recession. They tend to happen about every 10 years, and we're a tad overdue for one now.
My understanding is that interest rates were cut originally in order to provide a "safe landing" instead of a "sharp drop" after the last economic crisis (and that they were left low since then). If interest rates are imposed externally by Central Banks instead of by a free market, how do we know what the natural rate would be? Do Central Banks attempt to adjust interest rates towards the natural rate or is it in som…
Central banks attempt to adjust interest rates to keep inflation at a target rate, which is a balancing act between maintaining a stable currency and stimulating (or resuscitating) an economy.
Negative interest on wealth is the historic norm for people who have a lot of it. Think storage costs for gold, guards (and maintenance) for your palace, or your yacht - not to mention the crazy depreciation. For the ultra rich, 50 basis points of holding costs would arguably be a bargain. Even normally wealthy people don't hesitate to pay 200 basis points for their wealth to be managed in, for instance, mutual funds…
Except when you're giving out a loan you're not asking the debtor to "store the wealth", you're asking them to pay you back the principal plus interest when the loan matures. The debtor is free to do as they wish with your money in the meantime. The debtor is also "free" to default and not give you back anything. The interest rate is supposed to reflect that risk. In the case of a government bond, you either have the…
No regular person is going to buy a bond with a negative interest rate. Just hold cash. But once you start to have large amounts of cash, different considerations enter the picture. How do you store it? Security guards. Guards to watch the security guards. Too much cash is hard to spend, so you want it in electronic form.
The market is now saying that for certain types of cash in electronic form, the risk adjusted fee for creating the electronic record and holding it for you is greater than the interest they will pay you for the money.
In that way, the net interest rate including all factors such as the risk of default, ends up negative.