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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: 2) by Non Sequor on Saturday February 07 2015, @01:36PM

    by Non Sequor (1005) on Saturday February 07 2015, @01:36PM (#142211) Journal

    I've been thinking that historically before the last few centuries, what we call the fixed interest rate loan or bond was forbidden or restricted by many cultures.

    The ancient Hebrews actually had a 50 year Jubilee cycle where if you could not build up your family's wealth forever because the Jubilee canceled debts and reverted land ownership, resetting the game. In the middle ages, most fixed interest lending was across religious lines because in Europe each religion forbade lending at interest within the religion. To some extent religious violence was motivated by clearing debts.

    The rich try to build up a level of assets that lets all of their descendants live off of it indefinitely. I wonder if these historical restrictions were motivated by observations of the unsustainability of this goal.

    That said, it could be that investments like stocks and joint ventures may not be unsustainable since if conditions change, the welfare of both the person providing the cash and the person making use of the cash can be rebalanced for the new conditions.

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  • (Score: 2) by maxwell demon on Saturday February 07 2015, @01:49PM

    by maxwell demon (1608) Subscriber Badge on Saturday February 07 2015, @01:49PM (#142213) Journal

    The difference between stocks and loans is that with stocks, the one giving the money loses if the business goes bad. With loans, he only loses if the business goes so bad that repaying the loan is not possible. In other words, with stocks, the one giving the capital shares the risk. With loans, the one giving the capital reduces his risk at the expense of the one receiving it.

    The Tao of math: The numbers you can count are not the real numbers.
    • (Score: 2) by Non Sequor on Saturday February 07 2015, @07:23PM

      by Non Sequor (1005) on Saturday February 07 2015, @07:23PM (#142273) Journal

      I'm fully familiar with those concepts. I think they may have other more subtle impact on social dynamics than we currently understand.

      Currently, the most common instrument of finance is the loan (in various forms) where the terms of repayment are fixed at the beginning and only subject to change under exceptional circumstances (and the definition of exceptional circumstances is also subject to change due to changes bankruptcy laws). This is exactly the manner in which most financing is done for governments, companies, and individuals.

      The borrower and lender look at conditions at the beginning and set terms they both think are agreeable (we'll assume they're both reasonably well-informed in this decision). Conditions may change to make it easier for the borrower to repay the loan or harder for the borrower to repay the loan. The current status quo is that these contracts are enforced unless a threshold is exceeded where bankruptcy is permitted.

      Most of our economic policy is actually dedicated towards preventing economic downturns from causing spikes in default rates since they can have a spiraling effect. What this effectively means is that our economic policy guarantees that no matter how much money you have, there will always be investments with guarantees implicitly backed by government policy. We maintain levels of insulation against risk and preventing them from being breached is a policy imperative.

      Is there a point where this isn't workable? Can the opportunities for safe investments be "overfished" to the point where trying to smooth out the business cycle doesn't work? Would we have the same problems if more financing were structured with sharing of outcomes between borrower and lender?

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