Interest Rates: Naturally Negative? • Hacker News Board

Re: Interest Rates: Naturally Negative?

#111

Post by kgwgk » Wed, Aug 14, 2019, 6:40 AM UTC

ac29 wrote: post #55

everybodyknows wrote: post #54

Earlier quoted context omitted.

If in the U.S., buy your $10k quota of Savings Bond, Series I: Pays at least the CPI-U inflation rate, liquid after one year, favorable tax treatment, highly convenient. https://treasurydirect.gov/indiv/research/indepth/ibonds/res...

At least at the moment, it would seemingly make more sense to invest in 1-year treasury bonds. The interest rate is higher, they are more liquid, they are more convenient to buy and sell, and they are taxed the same as I-bonds. There's also no limit to the amount you can buy.

And what are you going to do with that money in one year. If you’ll need to invest it again the answer is not so obvious.

Re: Interest Rates: Naturally Negative?

#112

Post by rocqua » Wed, Aug 14, 2019, 6:49 AM UTC

quantguy11959 wrote: post #9

wefarrell wrote: post #6

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.

It’s positive for now, in Europe the deposit accounts are negative as well for the most part.

I still get 0,05٪ interest! That is technically positive!

Re: Interest Rates: Naturally Negative?

#113

Post by Lukasa » Wed, Aug 14, 2019, 6:50 AM UTC

caseysoftware wrote: post #80

caseysoftware wrote: post #76

Earlier quoted context omitted.

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 p…

You can definitely default on a negative rate mortgage, by not paying your monthly payment. You cannot pay nothing each month. Instead, the principal reduces each month by more than the amount you paid. You still have a term over which you have to pay the mortgage off. No-one is offering (or will offer) a negative interest rate _interest only_ mortgage.

Negative interest rates make sense if you consider them as a lender trading current cash-on-hand for future cash flow. That is, the bank has $200k today, but it would rather see that broken up into payments over 10 years, even if it has to pay you to do it.

When viewed through this lens, it becomes clear that the factor driving this is likely that the bank is being disincentivised from storing the cash directly.

Re: Interest Rates: Naturally Negative?

#114

Post by bubble_talk » Wed, Aug 14, 2019, 7:00 AM UTC

caf wrote: post #110

bubble_talk wrote: post #98

When I see people defend negative interest rates, I am reminded of this saying by Orwell: "One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool." >>One likely factor behind the savings glut and negative interest rates is negative “time preference.” Once upon a time, economic theory maintained that people always value today’s consumption more than tomorrow’s consump…

Your alternative theory doesn't make sense: being presented with options like negative interest rates ought to nudge people further towards current consumption (a positive time preference) rather than the opposite.

Are we actually disagreeing? This seems to be a case of ambiguous terminology [1]. But either way, what you said here is exactly what governments want:

>>being presented with options like negative interest rates ought to nudge people further together (I think you meant towards) current consumption

[1] https://en.wikipedia.org/wiki/Time_preference

Re: Interest Rates: Naturally Negative?

#115

Post by rolltiide » Wed, Aug 14, 2019, 7:02 AM UTC

I like what this perspective adds, where Central Banks are only reactionary. Yes, Central Banks want to distort the market so that savers are forced to invest if they want to keep their wealth growing.

But adding another dimension to why savers do what they do is fascinating. Time value and life expectancy. Very fascinating. I don't think it explains the last 10 years as an accelerant to suddenly consider this, but it is interesting how it happens to coincide with other monetary policy adjustments.

Its like people stopped trusting the markets and money supply, so central banks reacted to add liquidity to markets. This coincided with people realizing en masse that they can also delay gratisfaction for a rosier economic reality, and Central Banks react to that further by trying to push saved liquidity in the markets.

So far, private persons have barely budged and will rather pay for the privilege of keeping their money.

Re: Interest Rates: Naturally Negative?

#116

Post by kromem » Wed, Aug 14, 2019, 7:04 AM UTC

bubble_talk wrote: post #98

When I see people defend negative interest rates, I am reminded of this saying by Orwell: "One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool." >>One likely factor behind the savings glut and negative interest rates is negative “time preference.” Once upon a time, economic theory maintained that people always value today’s consumption more than tomorrow’s consump…

I've recently been thinking about how we often talk academically about the idea of the market being efficient, but not so much about the time frame for that efficiency.

In essence, the market is simply an economic manifestation of evolutionary theory.

But the same way if evolution took place for an organism with rapid mutations and a short life cycle across seasons, you'd potentially have most of the species adapting to cold weather and then suddenly dying off during summer, our short outlooks are probably creating market optimizations that are adaptive in the short term but maladaptive in the long term (as an obvious example, trying to cover up global warming instead of plan around its inevitability).

I keep seeing the market make changes that make sense if the world was going to end in the next five years, and dig itself into a deeper and deeper hole, continually confident in its wisdom.

Re: Interest Rates: Naturally Negative?

#117

Post by caf » Wed, Aug 14, 2019, 7:31 AM UTC

bubble_talk wrote: post #114

caf wrote: post #110

Earlier quoted context omitted.

Your alternative theory doesn't make sense: being presented with options like negative interest rates ought to nudge people further towards current consumption (a positive time preference) rather than the opposite.

Are we actually disagreeing? This seems to be a case of ambiguous terminology [1]. But either way, what you said here is exactly what governments want: >>being presented with options like negative interest rates ought to nudge people further together (I think you meant towards) current consumption [1] https://en.wikipedia.org/wiki/Time_preference

So the point is that in the past, it didn't take negative interest rates in order to do that, because people overall seemed to naturally have a significant preference for current consumption (+ve time preference). Another way of putting this is that in aggregate, people wouldn't lend money even risk-free for less than a decent rate of interest (the idea of a 'natural rate of interest').

The hypothesis in the article is that the reason near-zero and even negative interest rates are seemingly required to give the same kind of nudge now is that the underlying preference for current consumption has weakened substantially. The other side of this coin being that people will now happily lend money for a much lower rate because they now value future consumption relatively more than was previously the case (the 'natural rate of interest' has gone down).

Re: Interest Rates: Naturally Negative?

#118

Post by YokoZar » Wed, Aug 14, 2019, 7:35 AM UTC

aalleavitch wrote: post #88

orangecat wrote: post #85

Earlier quoted context omitted.

over half of the American population owns less than nothing Median net worth is $97k, and between 80 and 90 percent of households are above zero: https://dqydj.com/net-worth-brackets-wealth-brackets-one-per...

I'm basing that claim on this: https://www.peoplespolicyproject.org/2019/06/14/top-1-up-21-... https://www.federalreserve.gov/releases/z1/dataviz/dfa/ >To derive this, I initially take the nominal net worth aggregates for each wealth group that are provided by the Federal Reserve and subtract out consumer durables. Consumer durables are things like cars and fridges that many academics who work on wealth distributions…

> What the final product reveals is a 2018 where the top 1 percent owns nearly $30 trillion of assets while the bottom half owns less than nothing, meaning they have more debts than they have assets.

Does the bottom half own less than nothing when summed, or does every person in the bottom half own less than nothing?

Re: Interest Rates: Naturally Negative?

#119

Post by H8crilA » Wed, Aug 14, 2019, 7:41 AM UTC

scottmsul wrote: post #45

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…

The article is talking mostly about long term interest rates (on 10, 20, 30 yr government bonds). Those are set by the market, by a simple demand/supply mechanism on individual bond issues. Things like QE have some impact, but the impact is hard to gauge. The central banks normally determine only the short term interest rates (up to 3-6 months).

Note that even as QE is being slowly reversed in the United States and the short term interest rates have been raised - the 10yr, 20yr, 30yr treasury yields are still tanking like crazy. So it is not the fault of the central banks, which is the point of the article.

In short - people are buying bonds which eventually drives the yield below zero. There's no rule that says "a bond can only be sold at below the levels that the 0% yield implies", therefore brace yourself for the possibility of breaching this level. For any currency, including USD.

Re: Interest Rates: Naturally Negative?

#120

Post by Mathnerd314 » Wed, Aug 14, 2019, 7:44 AM UTC

refurb wrote: post #103

aalleavitch wrote: post #88

Earlier quoted context omitted.

I'm basing that claim on this: https://www.peoplespolicyproject.org/2019/06/14/top-1-up-21-... https://www.federalreserve.gov/releases/z1/dataviz/dfa/ >To derive this, I initially take the nominal net worth aggregates for each wealth group that are provided by the Federal Reserve and subtract out consumer durables. Consumer durables are things like cars and fridges that many academics who work on wealth distributions…

Doesn't seem reasonable to suggest that someone who just bought $10K in durable consumer good for cash has a negative net worth.

Say someone buys a used car for $10K. Typically that is their only car, that they use work. They can't sell it because then they'd lose their job and probably be unable to buy food etc. So where is the cash value?

IMO "net worth" is kind of fuzzy, e.g. people have organs that could be sold for profit but those aren't included in calculations. I'd rather look at income minus expenses.