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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: 5, Interesting) by frojack on Saturday February 07 2015, @05:55AM
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.
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(Score: 5, Insightful) by aristarchus on Saturday February 07 2015, @06:41AM
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
Nothing is impossible in economics because it's all human/social construct.
(Score: 2) by mtrycz on Saturday February 07 2015, @09:18AM
Can I ask for data sustaining your claim that there is deflation in Europe/Euro.
It's just devaluing slower than the Dollar.
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(Score: 3, Interesting) by q.kontinuum on Saturday February 07 2015, @09:54AM
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.
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(Score: 3, Informative) by frojack on Saturday February 07 2015, @08:45PM
Google works for you, just as well as it does for me.
http://news.yahoo.com/eu-raises-eurozone-growth-outlook-2015-1-3-101633266.html [yahoo.com]
http://uk.businessinsider.com/europe-is-officially-heading-into-a-year-of-deflation-2015-2 [businessinsider.com]
http://www.dw.de/eu-forecasts-higher-growth-amid-brief-deflation/a-18235660 [www.dw.de]
Slightly older, but indicative that deflation has been on the horizon for some time...
http://www.theguardian.com/commentisfree/2014/sep/07/deflation-secular-stagnation-europe-economic-nightmare [theguardian.com]
http://www.businessinsider.com/europe-and-deflation-2014-10 [businessinsider.com]
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(Score: 2) by mtrycz on Sunday February 08 2015, @09:08AM
Yeah, but the burden of proof and stuff.
Thanks.
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(Score: 2) by frojack on Sunday February 08 2015, @09:42AM
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
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.
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(Score: 0) by Anonymous Coward on Sunday February 08 2015, @06:11AM
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
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.