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Interest Rates Have Gone Negative in Europe

posted by janrinok on Saturday February 07 2015, @03:57AM   Printer-friendly
from the keep-it-under-the-mattress dept.

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."

 
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  • (Score: 2) by urza9814 on Tuesday February 10 2015, @02:44PM

    by urza9814 (3954) on Tuesday February 10 2015, @02:44PM (#143145) Journal

    When I looked at US wage distribution, I found that somewhere around 60% of US workers fall below the $20 per hour mark, a good portion well below. That indicates to me that a high minimum wage would be brutal to employment of US workers. We already have rather high unemployment of young adults and African Americans, for example. A $20 per hour minimum wage would make that much worse.

    Studies show this is not what happens. [udel.edu] Minimum wage goes up, employment also goes up. Granted, there's probably a balancing point above which that is no longer true, but it does appear that we're below that line right now.

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  • (Score: 1) by khallow on Wednesday February 11 2015, @04:02AM

    by khallow (3766) Subscriber Badge on Wednesday February 11 2015, @04:02AM (#143435) Journal

    Studies show this is not what happens. Minimum wage goes up, employment also goes up.

    The study in question did not study increases to $20. The biggest increase was by $1 per hour. It also didn't study any long term effects.

  • (Score: 1) by khallow on Wednesday February 11 2015, @04:09AM

    by khallow (3766) Subscriber Badge on Wednesday February 11 2015, @04:09AM (#143439) Journal
    As to long term effects of minimum wage, I'll point to the high unemployment among US youth and African Americans as an indication that minimum wage is not beneficial.