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Interest Rates: Naturally Negative?

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Re: Interest Rates: Naturally Negative?

#71

Post by freddie_mercury »

ZainRiz wrote: post #48

The article presented and dismissed a valid alternative in the same breath: "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.

> They tend to happen about every 10 years, and we're a tad overdue for one now.

Though it is oft-repeated, it is not just wrong but meaningless to claim that recessions "tend to happen about every 10 years".

If we look about the NBER data on recessions[1] there is not a single way of measuring that has a 120 month cycle. Not if you measure trough to peak. Not if you measure trough to trough. Not if you measure all recessions, 1854-present. Not if you just limit yourself to post-World War 2, 1945-present.

The average length of a post-WW2 expansion is 58.4 months, or under 5 years.

But, as should be clear from the data in the link, averages are pretty meaningless. Even if we pretend recessions are normally distributed (and there's no reason to believe that), the standard deviation is 33 months, nearly 3 years. Meaning there is a tremendous amount of variance, such that we can't say things like "we're a tad overdue".

But, especially on HN where any scientific study has immediate replies about small sample size, we should all know that something that only has 11 observations (post-WW2) or 33 observations (1854-present) is far too few to draw any actual conclusions from.

What's more, any claims about "the average time between recessions" can't just look at the US, unless we are claiming there is something so unique about US economic activity that we don't need to account for out-of-sample data around the world.

Australia, famously, has gone 27 years without a recession. So much for "they happen every 10 years". Japan had no recession from 1961-1993 (32 years). The Netherlands had no recession from 1981-2008 (27 years).

And on the other side, there's Greece, which has had 3 recessions just since 2010. Or Argentina which has had 5 or 6 recessions in the past 20 years.

If you look at this chart of economies around the world and their incidence of recessions[2], it should be pretty clear there is no such thing as a 10-year cycle.

It is just a made up story. The same old made up story of humans seeing patterns in data that aren't actually there.

[1]: https://www.nber.org/cycles.html [2]: https://amp.businessinsider.com/images/59de54466d80ad23008b5...

Re: Interest Rates: Naturally Negative?

#72

Post by darawk »

scott00 wrote: post #68
darawk wrote: post #31

Earlier quoted context omitted.

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…

> Now, if the risk-free rate is negative, you might reasonably ask: Why doesn't the bank just keep cash? And the answer to that is that they're legally prevented from doing so. Some cursory research suggests this is not the case. The Federal Reserve website states: "Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks." [0] [0] https://www.federalreserve.gov/mone…

Sorry, what I meant was that they cannot simply keep cash digitally without physically storing something.

Re: Interest Rates: Naturally Negative?

#73

Post by darawk »

JumpCrisscross wrote: post #67
darawk wrote: post #31

Earlier quoted context omitted.

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…

> they're legally prevented from doing so No, they’re not. They must hold certain quantities of reserves with the Fed. But banks are free to hold the rest as cash in their vaults. This is why many countries with negative rates still have zero deposit rates.

Sorry, what I meant was that banks cannot simply keep cash digitally, without physically storing cash and thereby incurring costs associated with doing that.

Re: Interest Rates: Naturally Negative?

#74

Post by hndamien »

xchaotic wrote: post #12

Obviously this article shows up when the negative rates are already here, with the benefit of hindsight. What I am more interested in at this point is what is a good, safe alternative for a small time investor who’s already overweight on equities and housing. Bonds used to be the sensible pillar that worked at times when stock market crashed and now it doesn’t really make sense to use them for a small guy.

Bitcoin.

Re: Interest Rates: Naturally Negative?

#75

Post by aalleavitch »

The reason that there's a naturally negative interest rate isn't because "people are getting better at saving". The reason there's a naturally negative interest rate is because over half of the American population owns less than nothing; they have more debts than assets. Investors simply own too much wealth, and the general public owns too little. The economy is so lopsided that investment is yielding a negative rate of return, because the wealthy invest the majority of their money while the poor have to spend it just to survive, and a lesser and lesser proportion of wealth belongs to the poor.

Re: Interest Rates: Naturally Negative?

#76

Post by caseysoftware »

AnimalMuppet wrote: post #39
DennisP wrote: post #20

Earlier quoted context omitted.

Because if interest rates drop even lower, you can get capital gains on your bonds, especially if there's a lot of time left before they mature. https://portfoliocharts.com/2019/05/27/high-profits-at-low-r...

If. I have a hard time seeing interest rates continuing to drop, however. (On the other hand, I never thought I'd see them this low. But they can't keep going lower forever... can they?)

It depends on how badly you want to drive "growth".

If you have $1000 today and can either spend it now or put it in the bank and withdraw $999 a year from now, what would you do? I suspect some would spend it now.

But what if that number goes down to $990 or $975? More and more people will be willing to spend it now instead of savings therefore "growing" the economy now.

Re: Interest Rates: Naturally Negative?

#77

Post by allana »

aalleavitch wrote: post #75

The reason that there's a naturally negative interest rate isn't because "people are getting better at saving". The reason there's a naturally negative interest rate is because over half of the American population owns less than nothing; they have more debts than assets. Investors simply own too much wealth, and the general public owns too little. The economy is so lopsided that investment is yielding a negative rate…

Money doesn't have high velocity in the upper echelons of society compared to in the bottom half. One dollar will pass through many hands if paid to a person in the lower half of our economy, while in the top 10% this same dollar barely makes it into one other person's hands, let alone multiple.

The economically disadvantaged chunk of society has grown as middle wage jobs have disappeared, while their wages have effectively dropped. This is terrible for economic growth IMO.

Re: Interest Rates: Naturally Negative?

#78

Post by gnopgnip »

xchaotic wrote: post #12

Obviously this article shows up when the negative rates are already here, with the benefit of hindsight. What I am more interested in at this point is what is a good, safe alternative for a small time investor who’s already overweight on equities and housing. Bonds used to be the sensible pillar that worked at times when stock market crashed and now it doesn’t really make sense to use them for a small guy.

If you expect interest rates to decline, bonds still make sense as their value increases. US fiscal policy is unlikely to have negative rates in the foreseeable future.

Re: Interest Rates: Naturally Negative?

#79

Post by SmooL »

programmertote wrote: post #65
kitten_smuggler wrote: post #37

Earlier quoted context omitted.

Bitcoin and gold imo, in addition to a balanced portfolio of stocks, bonds and real estate.

Aside from buying physical gold at a refinery, is there a place to buy gold from the equities market? Sorry if this question sounds naive/ridiculous. If it's in my country, people would go to gold/jewelry shops and buy gold. In the US, I'm not sure if it's the case. Thank you.

Check out gold ETF's. They hold the physical gold so you don't have to, you just buy a stake in the physical assets. The ETF prices will vary depending on the specific ETF, but you can find ones that track very closely.

Re: Interest Rates: Naturally Negative?

#80

Post by caseysoftware »

caseysoftware wrote: post #76
AnimalMuppet wrote: post #39

Earlier quoted context omitted.

If. I have a hard time seeing interest rates continuing to drop, however. (On the other hand, I never thought I'd see them this low. But they can't keep going lower forever... can they?)

It depends on how badly you want to drive "growth". If you have $1000 today and can either spend it now or put it in the bank and withdraw $999 a year from now, what would you do? I suspect some would spend it now. But what if that number goes down to $990 or $975? More and more people will be willing to spend it now instead of savings therefore "growing" the economy now.

Denmark has introduced a negative interest rate mortgage. That's an interesting one because if you borrow $200k today and only owe $195k in 10 years, what happens?

First, since you don't have to make payments, you can't default.

If you can't default, why bother with qualification?

If you don't have to qualify, is there an upper limit to how much you can/should borrow?

If there's no upper limit and you never have to pay, it doesn't matter whether the seller charges $100k or $1M or $10M.. it demonstrates that the entire system is entirely made up.

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