Hugh Pickens writes:
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."
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.
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.
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.
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.
Whoops. 64 - 17 = 47 of the most significant bits lost.