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Interest Rates: Naturally Negative?

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Re: Interest Rates: Naturally Negative?

#121

Post by anon9001 »

atq2119 wrote: post #108
refurb wrote: post #101

Earlier quoted context omitted.

Wealthy people are likely to invest any cash received immediately which would be invested or loaned out to businesses that purchase things and pay salaries. They don't take their extra $100K and stick it under a mattress.

Investment is a problematic word because it has so many subtly different meanings. Let's say you "invest" in the stock market. Does that actually cause any business to "invest" more? The answer is likely no. It'll drive up the stock prices of the company whose shares you buy, yes, but companies don't tend to make investment decisions based on their share price. Conversely, companies do make investment decisions based…

> companies don't tend to make investment decisions based on their share price

Isn't the whole point of a company to increase share price?

Re: Interest Rates: Naturally Negative?

#123

Post by zxcmx »

refurb wrote: post #104
gruez wrote: post #93

Earlier quoted context omitted.

Excuse me what? If something is already negative interest rate, how would fees and costs (which are also negative) push that to 0?

Cash you get (loan amount) minus cash you give (payments + fees) will give you a net interest rate. With negative mortgage interest rates you might borrow $200K and only pay back $190K, but if there are $10K in fees, then you're net interest rate is 0%.

Hm. This is going to be a dumb question but why wouldn't you borrow a billion dollars, spend your 5 million immediately, then pay the rest back in instalments?

Re: Interest Rates: Naturally Negative?

#124

Post by fitech »

I love the discussion on this topic. Classic HN. A bunch of pretty smart people throwing out claims and arguing assertions with no evidence or even an inkling of how they could justify their claims.

Perhaps this topic is especially suited to these types of arguments as economics and financial instruments _seem_ to follow some sort of intuition. The problem is that you can have lots of ideas about what causes something but unless you can build a model that seems to reflect the world properly and then introduce your change and see if it results in the outcome you expected, you have no idea if it is even close to possibly true.

Arguing off intuition is fun and could even give you some ideas but it is ultimately pointless if you don’t test your intuition and correct it if you are off.

Re: Interest Rates: Naturally Negative?

#125

Post by pjc50 »

beefield wrote: post #106
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…

Especially for rich people and for consumption (not investment) it looks obvious to me that they have negative time preference for consumption. Why? They could choose to consume all their money today to whatever they want (business jets, charity, space travel etc) and live rest of their lives in poverty if they face negative interest rates on their assets. That's what a positive time preference looks like. Of course,…

To me this comes back to the "r > g" controversy: https://www.ft.com/content/e1b9254e-f476-11e3-a143-00144feab...

In order to earn a positive rate of return without simply taking wealth off others, the overall world economy has to grow. This growth appears to be slowing, and also significant concentrations of wealth are being stashed away (e.g. Chinese investers in Vancouver and other cities).

Not to mention the huge "negative growth" risks presented by climate change. There's going to be significant investment needed to reduce CO2 and/or mitigate the impacts of these, just to maintain the same level of economic output! An exogenous source of negative growth.

Basically the wealthy have to choose between negative interest rates, voluntary charity, wealth taxes, sudden confiscation, or invalidation of worth due to collapse. You can't take it with you, as the saying goes.

Re: Interest Rates: Naturally Negative?

#126

Post by bubble_talk »

caf wrote: post #117
bubble_talk wrote: post #114

Earlier quoted context omitted.

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…

OK, sorry, now I understand.

>>the underlying preference for current consumption has weakened substantially

I have a feeling this is a rabbit hole I don't want to go down :-) - but has the underlying preference for current consumption weakened substantially because of (the author's claim) that people are living longer after retirement, or is it because people feel current consumption isn't giving them their money's worth? When you hand in your dollar, you expect to receive something worth that dollar.

In other words, if people suddenly woke up tomorrow and started accepting gold as currency, will the preference for current consumption be as weak? Or will it return to the previous levels because it is easier to see if you are getting your "unit of currency"'s worth? To be clear, I don't know the answer. But if it is the latter, then people's time preferences may not have really changed.

Re: Interest Rates: Naturally Negative?

#127

Post by bubble_talk »

fitech wrote: post #124

I love the discussion on this topic. Classic HN. A bunch of pretty smart people throwing out claims and arguing assertions with no evidence or even an inkling of how they could justify their claims. Perhaps this topic is especially suited to these types of arguments as economics and financial instruments _seem_ to follow some sort of intuition. The problem is that you can have lots of ideas about what causes somethin…

Unlike, say, the design of an actual rocket ship (where it is perfectly OK to leave everything to the experts), the economy is the truest form of democracy - of the people, for the people, by the people and all that. You cannot really opt out of it. And ignoring it is generally a bad idea. And to make it worse, someone you don't know and cannot influence (and is generally unaccountable to the elected political class also) controls policies which directly affect your livelihood.

We probably need more discussions, not less. But I agree with you that folks should also spend more time learning about economics. If you think there are good sources for learning the subject, please let us know.

Re: Interest Rates: Naturally Negative?

#128

Post by ptah »

refurb wrote: post #101
remarkEon wrote: post #89

Earlier quoted context omitted.

How so? It checks with my intuition quite fine. Do you mean as a total volume of dollars earned?

Wealthy people are likely to invest any cash received immediately which would be invested or loaned out to businesses that purchase things and pay salaries. They don't take their extra $100K and stick it under a mattress.

the trend is for corporations to keep large cash reserves, essentially they are "extreme hoarders" in the financial sense. it comes with all the negatives that physical hoarding comes with

Re: Interest Rates: Naturally Negative?

#130

Post by caf »

bubble_talk wrote: post #126
caf wrote: post #117

Earlier quoted context omitted.

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…

OK, sorry, now I understand. >>the underlying preference for current consumption has weakened substantially I have a feeling this is a rabbit hole I don't want to go down :-) - but has the underlying preference for current consumption weakened substantially because of (the author's claim) that people are living longer after retirement, or is it because people feel current consumption isn't giving them their money's w…

Do people naturally have a better sense of what a gram of gold 'should' buy versus a $50 note? I'm only going on personal experience here, but I doubt it.

Here's another possibility, though: what if a lot of the consumption that was stimulated since the GFC was really capital expenditure brought forward - things like households upgrading and replacing their durable goods - replacing that dodgy fridge a little earlier than was planned, that sort of thing? Eventually that well will run dry, and households might well start saving instead of buying concert tickets or whatever.

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