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Interest Rates: Naturally Negative?

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Re: Interest Rates: Naturally Negative?

#141

Post by ZainRiz »

freddie_mercury wrote: post #71
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 r…

Are you saying my high school economics professor taught me something without verifying it's authenticity and just relying on social proof?

mild_shock.jpg

that was a good reminder though to revisit my cached belief, thanks :)

Re: Interest Rates: Naturally Negative?

#142

Post by Double_Cast »

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…

Time preference is a comparison between the present and future. So the relevant factor is the time differential, rather than the value at any particular point in time. The relevant question is not "does a dollar bill represent at least $1 of utility?". The relevant question is "does a dollar bill have more utility today than tomorrow?" Eg. suppose we're in the midst of hyperinflation. Any savings I have are practically worthless today, and also are worth less tomorrow than if I'd spent it today.

Re: Interest Rates: Naturally Negative?

#143

Post by caseysoftware »

AnimalMuppet wrote: post #83
caseysoftware wrote: post #80

Earlier quoted context omitted.

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…

No, I'm pretty sure there's going to be an upper limit, and it's going to be somewhat less than 100% of the purchase price. It's not carte blanche to borrow unlimited amounts of money. In fact, I would be surprised if you could get away with no payments (a balloon payment loan, as it were). I would be rather shocked if they were offering such loans. Absent data that they are actually offering such loans (balloon and/…

It's not all the way there but the first steps are occurring:

"In Denmark, the ultra-low interest rate environment has in turn caused home prices to increase as borrowers could afford pricier homes."

Ref: https://www.msn.com/en-us/finance/markets/a-danish-bank-is-o...

Re: Interest Rates: Naturally Negative?

#144

Post by djyaz1200 »

remarkEon wrote: post #91
djyaz1200 wrote: post #86

5 months ago on HN... 10 points by djyaz1200 5 months ago | parent [-] | on: U.S. personal income posts first drop in over thre... "We can't sit there and leave interests rates low forever" ...says who? What force dictates that the equilibrium for rates must be higher? Yes that's historically been the case but that doesn't mean that's the right path for us now and in the future. I would argue that low interest rates…

>Inflation is less of a risk now because of technology + globalization, right now we are experiencing significant deflationary pressure as products and labor converge towards global pricing/wages. I've seen this point frequently cited on blogs, but I've yet to see any academic data that supports it. Intuitively it makes sense to me. I just haven't seen any raw data that backs it up yet. Indeed, isn't this what Trump…

I agree, I have yet to see hard data on this but academic research tends to shed light on things long after the fact... while a big part of making money is about what is happening right now. Anecdotally I've seen (and you probably have too) that I can buy many of the items I need for daily life for dirt cheap online, and when I need labor for my company I can hire nationally/globally on sites like upwork for a fraction of what local talent would cost. Both have low transaction costs and because of ratings I waste much less time and money buying the wrong thing or hiring the wrong person... which is an aspect of inflation.

That final point is probably worth study. My thesis would be that when the economy is hot everyone is in a hurry and more likely to hire people/vendors and buy things that aren't ideal. Online rating systems tend to direct demand to the vendors who can successfully satisfy that demand. The web also makes discovery of new vendors and products very quick lowering the switching costs.

Re: Interest Rates: Naturally Negative?

#145

Post by H8crilA »

scottmsul wrote: post #138
H8crilA wrote: post #119

Earlier quoted context omitted.

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.

Well 10yr or 20yr should still be above zero even if short term rates are kept around zero for an extended period of time. This is due to the cost of locking money in for a long period of time. What the article is trying to say by "negative time preference" is that this sound logic: "I'm giving you money for 20 years instead of lending money 80 times for 3 months each time; pay me more for that privilege" is disappearing in the market.

Re: Interest Rates: Naturally Negative?

#146

Post by kebman »

zxcmx wrote: post #123
refurb wrote: post #104

Earlier quoted context omitted.

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?

Because the bank would never let you borrow a billion dollars unless you could prove to them that you also have the income AND the discipline to service such a loan. For that you'll have to show them quite a bit about your personal economy, which may even include showing them your tax bill. They'll also want papers that prove that they have a stake (mortgage) in what you're loaning money for. On the other hand, if you know your way around law and certain organizational structures, then there are more ways than one to get quite exorbitant loans depending how you go about it. ;)
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