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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, 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.

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  • (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?