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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."
(Score: 2, Informative) by Anonymous Coward on Saturday February 07 2015, @05:54AM
Economists thought it was impossible? Which economists? Because Keynesians and other people following perfectly ordinary, text-book macroeconomics known that negative interest rates were absolutely possible. This has been considered possible at least since the analysis of Japan's stagnation starting in the 90s. Possibly it's been known for much, much longer. But I guess if you live in the freshwater/Austrian bubble, where reality itself cannot penetrate, the informed analysis of the majority of your field stands no chance.
(Score: 1, Informative) by Anonymous Coward on Saturday February 07 2015, @07:49AM
when you print billions or worthless dollars and euros, interest rates lose all meaning
eventually you might realize the stupidity of keynesian economics when it all implodes and you end up like zimbabwe
2008 was just the beginning of the end
just as keynesian interventionism prolonged the great depression, so will history look back on this period in time as a doomed failure of keynesian policy
http://en.wikipedia.org/wiki/Depression_of_1920–21 [wikipedia.org] is an example of how relatively short-lived a depression can be if government keeps its grubby hands off
also, http://fee.org/freeman/detail/the-depression-youve-never-heard-of-1920-1921 [fee.org]