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posted by janrinok on Saturday February 07 2015, @03:57AM   Printer-friendly
from the keep-it-under-the-mattress dept.

Matthew Yglesias writes at Vox that something really weird that economists thought was impossible is happening now in Europe where interest rates have gone negative on a range of debt — mostly government bonds from countries like Denmark, Switzerland, and Germany but also corporate bonds from Nestlé and, briefly, Shell. As in you give the owner of a Nestlé bond 100 euros, and four years later Nestlé gives you back less than that. "In the most literal sense, negative interest rates are a simple case of supply and demand. A bond is a kind of tradable loan," says Yglesias. "If there isn't much demand for buying the bonds, the interest rate has to go up to make customers more willing to buy. If there's a lot of demand, the interest rate will fall."

But why would you want to buy a negative interest rate loan? The question itself seems absurd – the very idea that anyone should have to pay someone to keep their money safe rather than demand an interest payment for the use of their money is counter-intuitive. But according to Yglesias, very rich people and big companies need to do something with their money and most European banks only guarantee 100,000 euros.Plowing the money into negative-yielding government bonds can appeal to banks when the alternative is to pay even more to store cash on deposit. J.P. Morgan calculates there is currently 220 billion euros of bank reserves subject to negative interest rates, which looks set to grow exponentially because of the European Central Bank’s forthcoming colossal bond-buying program. "It may be the case that if governments push the negative interest rates thing too far the entire economy would become a cash based system," says Merryn Somerset Webb. "But that might take a while to get to."

 
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  • (Score: 5, Interesting) by aristarchus on Saturday February 07 2015, @05:04AM

    by aristarchus (2645) on Saturday February 07 2015, @05:04AM (#142136) Journal

    No science is more susceptible to obfustation than economics. Yes, some how, capital earns returns. How? Well, people own it, so aren't they entitled to something for all their effort of owning it? Do you have any idea what would happen if they just didn't own it, and let it go to pot?

    Now this is why, under neoclassical economics, courtesy of the Vienna Circle, that negative interest is theoretically impossible. Capital must demand a return, or else, capital will decrease, as would be the case if the market decided that capital was actually a liability . . . OMG! Do you know what this means? Capital does not necessarily deserve a return, and a some point people will pay you to take it off their hands, at a loss, but not as much of a lost as it could have been? An entire economy based on shorting. Not possible. And that, I think, is the point. Those of us in the real economy, who produce good and services, are not much concerned with what the parasitical capital class does with their "capital", we will produce nonetheless. I like using the word "nonetheless". But, nonetheless, the emergence of negative interest, which the American Central Bank has be circling for quite some time, marks the end of capitalism.

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  • (Score: 5, Insightful) by Anonymous Coward on Saturday February 07 2015, @05:19AM

    by Anonymous Coward on Saturday February 07 2015, @05:19AM (#142141)

    marks the end of capitalism

    Hardly.

    It means holding one particular currency is considered more risky than paying someone to hold onto your money. It means the market is having little to low confidence in the euro, in particular nations inside the euro zone.

    Also in some cases they are required to by the 'by laws' of their organization to buy bonds. No matter what. They will quickly fix that at the next shareholders meeting. Or they will see massive exodus flows on their hedgefunds and bond funds.

    What does that mean? Short term not much. But long term you may see louder calls for disbanding the euro. And you will see people moving their money into things that make the money. Not things that cost them money. What you are seeing is deflation at work not 'the end of capitalism'. If kept up it will completely freeze the loan markets (if you thought 2008 was bad this would be worse).

    I am pretty surprised to see anyone buy bonds at these levels of finance. It shows many of these dudes deserved to go under in 2008. Instead we bailed them out.

    • (Score: 3, Informative) by maxwell demon on Saturday February 07 2015, @07:25AM

      by maxwell demon (1608) Subscriber Badge on Saturday February 07 2015, @07:25AM (#142163) Journal

      It means holding one particular currency is considered more risky than paying someone to hold onto your money.

      Since those loans are in Euro, those loans contain the very same currency risk as holding the Euro itself. In other words, no matter what happens with the Euro, you're never going to get back more from those loans than if you just put the Euros under your pillar.

      --
      The Tao of math: The numbers you can count are not the real numbers.
      • (Score: 1) by soylentsandor on Sunday February 08 2015, @08:04AM

        by soylentsandor (309) on Sunday February 08 2015, @08:04AM (#142392)

        Except it's generally big organizations holding these bonds, holding a total of 220 billion Euros looking at a negative interest rate. They'd need to buy a lot of pillars -or pillows- to stash all that in cash. Plus big vaults and a lot of security guards and stuff. These bonds will likely still be the cheaper option.

        • (Score: 1) by alioth on Sunday February 08 2015, @09:31AM

          by alioth (3279) on Sunday February 08 2015, @09:31AM (#142403)

          Actually, they don't need much space - money isn't usually stored physically any more - that much money will fit quite happily in a 64-bit int.

          • (Score: 1) by soylentsandor on Sunday February 08 2015, @08:26PM

            by soylentsandor (309) on Sunday February 08 2015, @08:26PM (#142534)

            Sure, but that only counts if that integer is owned by a bank. Which can go bust, in which case you lose at least 25 of its most significant bits (meaning some money is backed by the government). The key here is risk management. And apparently, putting up with negative interest is considered to be the smaller risk for 220 billion euros. It's like a game, but with rules that change while you're playing.

    • (Score: 2) by aristarchus on Saturday February 07 2015, @07:25AM

      by aristarchus (2645) on Saturday February 07 2015, @07:25AM (#142164) Journal

      Well, they will buy bonds like this to avoid greater losses! But are you suggesting this is just a currency issue? Not a reflection on the value of capital itself, the value behind the currency? Maybe. Do you feel, lucky?

  • (Score: 5, Interesting) by frojack on Saturday February 07 2015, @05:55AM

    by frojack (1554) Subscriber Badge on Saturday February 07 2015, @05:55AM (#142151) Journal

    Its actually much simpler than it seems.

    With DEFLATION, which the EU is generally experiencing today, 100 euros today can be reliably predicted to buy 110 euros tomorrow.

    If the deflation is expected to continue for a while, (and the best estimates is that this will continue in the EU for at least a couple more years) then it does not matter if you get your whole 100 euros back. Just so you don't lose it all.

    We just went through this in the states, where you were lucky if you could get 1% interest when loaning money, and the price of houses and hamburgers was falling like rocks. You saw how many banks failed during that time. We are on recovery, but the EU, while never in as deep as the US, is taking longer to come out of the depression.

    In Europe, they watched this process, and realized they don't want their money in banks for a while. Its not that hard to understand.

    And, (contrary to TFA) nothing in economics says negative interest is impossible. Its a theoretical short term condition that I clearly remember discussing 40 years ago in Monetary Theory.

    --
    No, you are mistaken. I've always had this sig.
    • (Score: 5, Insightful) by aristarchus on Saturday February 07 2015, @06:41AM

      by aristarchus (2645) on Saturday February 07 2015, @06:41AM (#142160) Journal

      See, economic theory is a playground for ideology! Deflation is the situation where the prices of commodities are falling. That is not the same as a falling return on capital, although, given enough time, it would have that effect. But in either case, negative interest suggests first that commodity prices were driven artificially high by, as Alan Greenspan hisself put it, unbridled enthusiasm. Of course, the second conclusion is that prices an capital were similarly over valued, and thus the situation we are in now. So, pump it up again? Buy enough tulips to keep the market from crashing? Or perhaps, just maybe, we try to put human productivity on a slightly more rational scale than the crap shoot of markets?

    • (Score: 2, Informative) by Anonymous Coward on Saturday February 07 2015, @07:59AM

      by Anonymous Coward on Saturday February 07 2015, @07:59AM (#142169)

      And, (contrary to TFA) nothing in economics says negative interest is impossible.

      Nothing is impossible in economics because it's all human/social construct.

    • (Score: 2) by mtrycz on Saturday February 07 2015, @09:18AM

      by mtrycz (60) on Saturday February 07 2015, @09:18AM (#142181)

      Can I ask for data sustaining your claim that there is deflation in Europe/Euro.

      It's just devaluing slower than the Dollar.

      --
      In capitalist America, ads view YOU!
      • (Score: 3, Interesting) by q.kontinuum on Saturday February 07 2015, @09:54AM

        by q.kontinuum (532) on Saturday February 07 2015, @09:54AM (#142189) Journal

        The Guardian [theguardian.com] has an article with some statistics about it. I just checked it briefly.

        My impression is that the low oil-prices are the only reason for the short-term deflation we are experiencing. Since gasoline for cars is a substantial part of monthly expenses for most families, a decrease by ~30% has a strong impact. For those households heating with oil the impact is even stronger, and for other goods it has some minor impact on the prices because their transport gets cheaper.

        I wouldn't expect the oil-prices to stay that low for too long, though.

        --
        Registered IRC nick on chat.soylentnews.org: qkontinuum
      • (Score: 3, Informative) by frojack on Saturday February 07 2015, @08:45PM

        by frojack (1554) Subscriber Badge on Saturday February 07 2015, @08:45PM (#142294) Journal
        --
        No, you are mistaken. I've always had this sig.
        • (Score: 2) by mtrycz on Sunday February 08 2015, @09:08AM

          by mtrycz (60) on Sunday February 08 2015, @09:08AM (#142401)

          Yeah, but the burden of proof and stuff.

          Thanks.

          --
          In capitalist America, ads view YOU!
          • (Score: 2) by frojack on Sunday February 08 2015, @09:42AM

            by frojack (1554) Subscriber Badge on Sunday February 08 2015, @09:42AM (#142406) Journal

            Ok, wise guy, the experts say its official. Read the links.

            I'd like to know just what level of proof you were expecting over the internet?
            If you won't accept the published data and analysis of the European Commission, or the Economic Affairs Commissioner of the EU, just what the fuck were you expecting from me?

            Next time you ask for something, please post a detailed list of exactly what you will accept as proof, who's signature it has to bear, and how many people have to witness the signatures. You asked for data, I posted links to data, now you want to move the goal post.

            Lets see you post some current data showing the there ISN'T deflation. Must be provided by Independent auditors, of an internationally recognized auditing firm, signed by the finance ministers of no less that 5 EU member states. In triplicate.

            --
            No, you are mistaken. I've always had this sig.
            • (Score: 2) by mtrycz on Sunday February 08 2015, @08:25PM

              by mtrycz (60) on Sunday February 08 2015, @08:25PM (#142533)

              Calm down.

              You claimed something, I asked for references (with an uninformed opinion, yes), you provided references saying I could google that myself, I said that it's your burden to provide the sources.

              I stand corrected and that's the end of it. I wasn't provoking you or anything.

              --
              In capitalist America, ads view YOU!
    • (Score: 0) by Anonymous Coward on Sunday February 08 2015, @06:11AM

      by Anonymous Coward on Sunday February 08 2015, @06:11AM (#142385)

      It still doesn't make sense. It's true that in a deflation situation, that even with negative interest rates you could end up with more than you invested when the bond matures, but that's still less than if you just took the money and stuffed it into your mattress. Which is of course, why deflation is seen as such a bad thing.

      • (Score: 2) by frojack on Sunday February 08 2015, @09:26AM

        by frojack (1554) Subscriber Badge on Sunday February 08 2015, @09:26AM (#142402) Journal

        How much money do you think you can get under a mattress?
        How much money do you want in your home, attracting buglers and thieves?

        If you know that you will be able to buy the same new 500,000 euro house for 400,000 euros 6 months from now due to creeping deflation, wouldn't it be worth paying someone .005% per month to keep your money in a safe negotiable form for 6 months rather than paying 100,000 euros to armed men to guard your mattress for 6 months,

        Deflation is not necessarily a bad thing. You don't have to fight for the big raise, because your money goes farther. If it continued long enough, you might take a pay cut, but it seldom does persist for that long, and you don't care that much because everything goes down in price.

        Inflation is much more insidious.

        --
        No, you are mistaken. I've always had this sig.
  • (Score: 5, Informative) by c0lo on Saturday February 07 2015, @08:23AM

    by c0lo (156) on Saturday February 07 2015, @08:23AM (#142176) Journal

    But, nonetheless, the emergence of negative interest, which the American Central Bank has be circling for quite some time, marks the end of capitalism.

    No it means that storing your money in a bank is now a service which the bank provides to you at a cost.
    If you don't like the conditions, get them out of the bank and invest them. Or keep them under your mattress.

    --
    https://www.youtube.com/watch?v=aoFiw2jMy-0
    • (Score: 2) by Dunbal on Saturday February 07 2015, @07:27PM

      by Dunbal (3515) on Saturday February 07 2015, @07:27PM (#142275)

      I voted for investing. I now laugh at the 2% I might be able to get on a CD (without beginning to consider the myriad little charges banks feel they must tack on to my account for merely having one). So my wife shakes her head when I earn more in a month on my "half" of the money than she does in a full year. And this way we have the best of both worlds. Cash on hand in case of emergencies and an investment account growing at significant compound interest without all the management fees, withdrawal penalties, and other forms of guaranteed income "fund managers" feel they are entitled to take with your money (whether they earn or lose your money). Of course it takes a bit of time for research, a lot of patience, a lot of self discipline, and a bit of balls to stick with positions when you know you are right and the market seems to be telling you you are wrong.

      It really doesn't take all that much capital to start up, either. But hey if you prefer to leave your money in the hands of banks and greedy funds, well... you reap what you sow. They'll give you something for your money of course - if only a receipt.

      • (Score: 1, Informative) by Anonymous Coward on Saturday February 07 2015, @10:24PM

        by Anonymous Coward on Saturday February 07 2015, @10:24PM (#142318)

        Of course it takes a bit of time for research, a lot of patience, a lot of self discipline, and a bit of balls to stick with positions when you know you are right and the market seems to be telling you you are wrong.

        Or an indexed investment fund [stanford.edu]. I'm using Vanguard.

      • (Score: 1) by alioth on Sunday February 08 2015, @09:36AM

        by alioth (3279) on Sunday February 08 2015, @09:36AM (#142405)

        Keeping money in the bank has always had an effective negative interest rate - I've never seen a bank account (except in extraordinary conditions, which tend to be fairly brief) which actually beats inflation.

        But for the normal person, the bank is safe (with some deposit guaranteed, even if the bank fails). Most people are too risk averse to invest.