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, Insightful) by bradley13 on Saturday February 07 2015, @08:18AM
This is hardly new, having been the case for months now. Nor was there ever any reason to see it as impossible, although it points toward a possible spectre of deflation. The negative interest rates indicate two problems:
- The governments and central banks: Denial of reality. Government debt must be brought under control [coyoteblog.com]; instead they continue to print more and more money. The latest ECB maneuver: another trillion Euros to buy up government bonds held by banks. They claim they want the banks to go lend that money to industry, but it is pretty obvious that the banks will just refill their portfolios with more government bonds. No money will actually flow into the economy.
- The big banks: They refuse to do actual, traditional banking. As a private business, getting a loan is just as impossible as it ever was; if you do get an offer, it will be at usurious interest rates. The banks would apparently rather hold government bonds, and earn their money by speculation, interest rate manipulation, etc.. If you want actual banking services, either as an individual or as an SME, you go to a small bank. The big banks actively work to get rid of your business. It's really strange.
Everyone is somebody else's weirdo.
(Score: 4, Informative) by bradley13 on Saturday February 07 2015, @01:09PM
Just a quick note about the Swiss franc, which is a bit of a special case. The Swiss currency is viewed by a lot of rich individuals, companies and even countries as a "safe haven". This tends to drive up the value of the Swiss franc, which is a disaster for our export industries. The Swiss National Bank has therefore introduced negative interest in an attempt to drive people away from the franc, in order to keep its value down, so that our export industries can remain competitive without moving their production out of the country.
Everyone is somebody else's weirdo.