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Interest Rates: Naturally Negative?

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Re: Interest Rates: Naturally Negative?

#131

Post by imtringued »

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…

Even if you transferred the money directly into the bank account of those corporations they would just merely pay it out as a dividend or give the CEO a bonus. What then? "Invest" again?

A corporation doesn't need a third factory if no one is buying their products. Because of deflation it may even want to get rid of it's second factory.

Re: Interest Rates: Naturally Negative?

#132

Post by imtringued »

Mathnerd314 wrote: post #120
refurb wrote: post #103

Earlier quoted context omitted.

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.

One can argue that owning a car saves you from the expense of buying a car. After your asset expires you have another $10k bill at the end. If your car is a super reliable prius and lasts twice as long as your old car then it may haved saved you money by reducing your transportation expenses.

Re: Interest Rates: Naturally Negative?

#133

Post by quantguy11959 »

rocqua wrote: post #112
quantguy11959 wrote: post #9

Earlier quoted context omitted.

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!

What’s 0.05% minus 1.5% inflation ? Negative

Re: Interest Rates: Naturally Negative?

#135

Post by imtringued »

acd wrote: post #69

I argue that centrals banks are a monopoly that artificially manipulate interest rates in the favor of banks. Low interest rates drive up home prices as people can borrow more with the same monthly payment. High house prices hurts first time home buyers younger generations the most. Older generation do not need to loan to buy a home as much as the have enjoyed price gain on their homes. This is a form of generation i…

Easy, just reduce the interest rates until even the children can afford their 70 year mortgage.

Re: Interest Rates: Naturally Negative?

#136

Post by aalleavitch »

imtringued wrote: post #132
Mathnerd314 wrote: post #120

Earlier quoted context omitted.

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.

One can argue that owning a car saves you from the expense of buying a car. After your asset expires you have another $10k bill at the end. If your car is a super reliable prius and lasts twice as long as your old car then it may haved saved you money by reducing your transportation expenses.

Cars are liabilities. Almost invariably they will break down and require repairs, which are generally expensive. The moment you buy a car you are losing money on it. You’re losing it slower than if you had thrown the money off of a bridge, but it’s not an investment. Any money saved by making a good vehicle purchase is more of a discount on a cost you’re paying anyway.

Re: Interest Rates: Naturally Negative?

#137

Post by aalleavitch »

imtringued wrote: post #131
atq2119 wrote: post #108

Earlier quoted context omitted.

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…

Even if you transferred the money directly into the bank account of those corporations they would just merely pay it out as a dividend or give the CEO a bonus. What then? "Invest" again? A corporation doesn't need a third factory if no one is buying their products. Because of deflation it may even want to get rid of it's second factory.

It’s like that comic with the dog holding the ball going “no take, only throw!”

“No purchase, only invest!”

At the end of the day the economy only works because it’s extracting profit from consumers, if the profit you’re extracting is money you lent them in the first place...where is the profit coming from? Hence the negative interest rates: you NEED them to take on more debt so they can even buy things from you to begin with. It’s the market itself saying “you need to give them more money”.

Re: Interest Rates: Naturally Negative?

#138

Post by scottmsul »

H8crilA wrote: post #119
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 t…

> The central banks normally determine only the short term interest rates (up to 3-6 months).

But if the short-term rates are manually set by central banks to be artificially low, wouldn't that be the primary driver behind negative long-term interest rates even if the exact number is determined by supply and demand? The article is talking about natural drivers like "negative time preference" which just sounds wrong.

Re: Interest Rates: Naturally Negative?

#139

Post by nootka »

allana wrote: post #77
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 effe…

Another request if you have a paper or other source; not because I doubt it though! I'm interested in how velocity of money would properly be modeled and observed as a function of the Lorenz curve.

I'm pretty amateur when it comes to math, but I'm working on it.

Re: Interest Rates: Naturally Negative?

#140

Post by pbk1 »

rossriley wrote: post #64
programmertote wrote: post #60

Earlier quoted context omitted.

Could you elaborate on this a bit more? How could one gain anything from buying negative yielding bond?

Because the bond pays out at the end of the term, but you can sell it at any point of the term for whatever the market price is. So for example let's say you bought a -0.1% yield, but newly issued bonds are now only offering a -0.5% yield you can now actually sell your bonds paying out -0.1% at a profit, since even if they paid you a 3.5% premium on the price you paid, it would still be more attractive than the rate…

Piggy backing off of this followup, bond prices move inversely with yields. Ceteris paribus, a -0.5% yielding bond commands a higher price than a -0.1% yielding bond. Bonds are quoted in yields but traded on a dollar price (typically as a percentage of par) hence the capital gain I implied above being realized with the higher price should yields/rates fall further.
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