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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 frojack on Sunday February 08 2015, @09:26AM

    by frojack (1554) Subscriber Badge on Sunday February 08 2015, @09:26AM (#142402) Journal

    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.

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