How Low Can Central Banks Go? JPMorgan Reckons Way Lower | Hacker News Reader

How Low Can Central Banks Go? JPMorgan Reckons Way Lower

bloomberg.com

80 pointsrandomname2130 comments

I remember Reid Hoffman talking about some of the mistakes he's made as an entrepreneur (http://ecorner.stanford.edu/podcasts)

He said one of the big ones he made was in times of frothy capital markets when all your competitors are well capitalized, its was a mistake to be frugal and not take as much investors money as they could.

We are currently in a time of very frothy capital markets. Money is just being given away. This is going to lead to, if it hasn't already, a big jump in the gap between the rich and the poor.

These lower interest rates are allowing hedge funds to make money via currency carry trades (http://www.investopedia.com/terms/c/currencycarrytrade.asp) while the average person is unlikely to be able to take advantage of this situation, if anything it make sit harder for the average person to save for retirement due to the paltry interest rates that are being paid on the products available to them.

I don't know what the solution to this is.

I guess if there is any good news in this, its that every single government who matters has already forced their bansk to go through some pretty strenuous stress tests wrt negative interest rates and there hasn't really been alot of bad news to come out of Europe, Canada or the US.....yet

To add to this, the trend in corporate America today is to reduce capital on balance sheets. Hoarding cash or assets that can be borrowed against is considered very passe, and many CEOs have been either fired or forced to do stock buybacks by activist investors for not deploying capital or returning it to investors. That is, they're being encouraged to withdraw investments at a time when it's easiest to get investment.

It will be interesting to see what happens when companies that are reliant on capital markets encounter both a draw down in income and vanishing liquidity for their need to borrow (and hint, these things are highly correlated with recessions).

Corporations are hoarding record amounts of cash:

http://www.nytimes.com/2016/01/24/magazine/why-are-corporati...

Isn't that why there is pressure on CEOs to return capital to shareholders? Because they're holding onto more of it than ever before.

To start with Google and Facebook don't feel any pressure to do any of this. Their founders have complete control of the company, and they do not have to listen to anyone.

That article is a little misleading because it does not net cash holdings with liabilities. The notion of "holding cash" is a ridiculously misleading concept. For example, Apple does have a lot of cash and cash equivalents: roughly $250bn worth. But they also have a lot of debt. $165bn of debt according to their latest filing[1]. And what's more, Apple holds this cash offshore, and borrow money domestically. So, they use the money they borrow to buy back their stock and pay dividends, but leave their cash offshore, with the hopes of one day getting a tax holiday that would allow that money to come back to the US tax free to pay back the aforementioned debt.

Even still Apple is a cash-heavy company, but that same narrative is playing out in every business that has an international presence. They accumulate "cash" overseas, borrow against it domestically to do stock buybacks, and then the NYT can write misleading articles.

[1] http://finance.yahoo.com/q/bs?s=AAPL

Corporations have to hoard that cash, they've taken on record amounts of debt obligations. If they discharge that cash or otherwise spend it, their balance sheets start to violate debt covenants. The very large stock buyback binge that has been going on courtesy of the Fed's low rates, has been paid for via a lot of debt.

>We are currently in a time of very frothy capital markets.

We were.

Welcome to the bear.

We were in a time of froth, it appears to have ended with markdowns and public market bloodbath.

A leveraged fx position and an interest bearing savings account have very different risk profiles and it seems silly to compare the two.

I never oncee compared them:)

I said that the large spread between the dollar and Yen benefits hedge funds. And I also said that low interest rates makes it harder for the average person to save.

I stand by both those comments. I don't think you need to be rude or to try and twist my words, just to try and refute a point no one was making;)

The rate difference only benefits hedge funds if USDJPY also plays along. That trade has fx risk and you're making it sound like a sure thing. If USDJPY goes the wrong way, the trade loses money and the average joe whose savings account is roughly flat looks pretty smart (in relative terms).

Pardon my ignorance , but why is it that normal people can't borrow like hedge funds ?

ZIRP as it's done today is basically a massive wealth transfer.

Normal people aren't structurally important parts of the economy.

Not that I think it's clear that hedge funds and big banks are structurally necessary, but they've managed to create a system where they are considered important by all the people that matter.

> Normal people aren't structurally important parts of the economy.

I suggest we try to remove them to see what happens! :)

Low interest rates reduce borrowing cost. While it's debatable whether that's a wealth transfer, if it is, the transfer is from holders of capital (generally, though not always, lenders) to borrowers.

Those with assets - that is, lenders - would generally prefer a higher [risk-free rate](https://en.wikipedia.org/wiki/Risk-free_interest_rate#Proxie...), not a lower one.w

Hedge funds are in fact losing money as well: http://uk.businessinsider.com/hedge-funds-returns-in-2015-20...

The negative rates are only on central bank deposits. Loans within the finance industry are usually collateralised as well; if you had $1m of collateral you'd find it a lot easier to borrow another million.

ZIRP is a massive wealth transfer as opposed to what? Positive rates?

ZIRP is a wealth transfer in the opposite direction if you compare it to what should be in place right now: very negative rates.

The wealth transfer argument makes no sense in the context of monetary policy.

In order for anyone who has money in the bank to pull out money, they must still see a positive IRR, compared to leaving money in the bank. If they don't the central banks eat that money. So yeah it's a wealth transfer from private money to central bankers. Or else the government should ask for the difference for its own coffers and reinvest that into the economy.

How it is a wealth transfer? Is there some fundamental right to risk free interest?

Banks provide a service and those services cost money. If the value to the bank of your money is less than it costs to provide those services than you need to make up the difference. No one is being "screwed".

The way it actually works is that if the value of a bank to society is less than the profit the bank wishes to make, even after making stupid and bad business choices, taxpayers need to make up the difference.

Hence "screwed."

The government gets the difference:

http://www.latimes.com/business/la-fi-federal-reserve-profit...

>These lower interest rates are allowing hedge funds to make money via currency carry trades

What does the absolute level of interest rates have to do with being able to perform a carry trade? It's the spread that matters, and that spread exists whether average rates are high or low, on average, across economies.

I assumed there was an implicit than the US there. So you are correct that its the spread that matters.

The article was about lower Japanese rates as compared to the US, which has relatively high interest rates.

Negative interest rates really aren't scary, they're just unusual in an era (since early 1980's) where inflation targeting (which is closely coupled with interest rates) of ~2% is the norm for the world's most important central banks. Here's a good overview from Bernanke (pre chairman of Fed years). [1]

In the short run, nothing will change from a day-to-day consumer perspective. Your 0.05% interest-rate saving account might drop to a 0.01% interest-rate account. If you have a lot (tens of millions) of money that you'd like to put in a liquid savings account, you might be charged a slightly negative interest rate. Some banks are already doing this with institutional investors, but I doubt it will trickle down into commercial consumer banking. [2]

Kocherlakota, an ex-fed economist whose views I respect, called for negative rates yesterday: "The FOMC needs to go negative - and that's a gigantic fiscal policy failure." I have to agree.

As he points out, low real interest rates present "an incredible opportunity" for US gov to make huge, necessary infrastructure investments. Read more here: https://sites.google.com/site/kocherlakota009/home/policy/th...

The only scary implication of negative rates comes from the fact that central banks do not want to go negative, but may be forced to. So they continue to lose control over once-powerful monetary policy tools. This is only scary if you put a lot of stock into a central bank's altruism, benevolence, and ability to effectively guide an extremely complex and intertwined economic/financial system.

[1] http://www.federalreserve.gov/Boarddocs/speeches/2003/200303...

[2] http://www.bloomberg.com/news/articles/2015-02-26/julius-bae...

I agree: since we're giving away free money, we might as well try to get something in return. But that's the beauty of our current system: one side gets money without having to give anything back. Companies would be suckers for agreeing to do anything in exchange for government money, today. Why do anything, when they can sit on their free non-inflating money and even get paid for it when rates go negative?

Which is why any real recovery from the current state of play can only be led by industrial and economic policy led by the State itself. The State will have to mass-hire and build something, anything, to kickstart new economic activity, because the private sector is just not going to do anything.

You're mistakingly conflating negative interest rates and negative inflation (aka deflation). They are quite different; in fact, their correlation is quite strongly negative, i.e. increasing the interest rate tends to decrease the inflation rate.

On the topic of rescussitating the economy, funding public works projects would certainly have better long-term success than the current QE policy (i.e. the FED buying securities that never should have been legally issued in the first place).

Even better would be a modern debt jubilee, a la Steve Keen's suggestion, in which all citizens are given a cash infusion that automatically pays down any outstanding debt, if present, or becomes a liquid asset if the citizen is debt free. This would reset the monetary system back to a state in which further investment can be financed within the system. The amount would of course need to be controlled so as to not induce immediate inflation, and restrictions on banks (e.g. Glass-Steagall) would need to be reinstated and enforced so as to delay the inevitable return to record high private debt levels.

> increasing the interest rate tends to decrease the inflation rate.

But the problem is exactly that this correlation doesn't seem to apply in the opposite direction today: decreasing interest rates are not generating inflation across the board, quite the opposite. You can debate why that is the case, but that's what we see: central banks keep cutting rates expecting economic activity to get hot and generate inflation, but this is not happening. The Japanese experience would seem to indicate this is "the new normal", where monetary policy is simply a brake and not an engine; which means we have to find alternative engines.

You are looking at a car driving on a hilly road. The car's engine is not powerful enough. You observe that on the uphills, the driver is flooring the gas pedal and yet the speed of the car is decreasing. Confusing correlation and causation leads to the faulty conclusion => the gas pedal must really be the brake pedal

Enabling (arbitrarily) negative rates is equivalent to lifting the power limit on the engine and would simply allow the driver to keep the car at constant speed on all hills (the brakes already have unlimited power)

Except this driver has a stake in petrol companies and he does not pay for his petrol, so he gets richer the more fuel is blown while standing still. By the time you've taken out any "power limit", he's just blocked the gearbox on neutral and revving, while shouting "it's not going anywhere! I need more power!"

The economy is not physics - it's psychology.

Ok. With that kind of argument, I suppose anything can make sense.

Come one, its not worse than anything that professional economists come up with. They can't even agree on things amongst themselves.

Economists agree much more often than not. But that doesn't seem to matter, even when nearly 100% of economists agree on something, the public think it knows better...

http://www.economist.com/news/finance-and-economics/21569378...

Cutting interest rates has absolutely 0 effect on the bottom 90% of the population. The only way to increase their spending is by taxing the rich and transferring wealth back down the chain.

Negative rates are scary if they go low enough, where an inverse of the problems with high inflation come about. Rather than try to collect payments as fast as possible due to the eroding value of money, there will be an incentive to delay receipt of payment as long as possible. Taxes will be overpaid to be reclaimed in the following year. How would your local telco handle being treated as an implicit temporary checking account?

I don't claim to understand all the implications, but it's an odd experiment we would probably be better off not trying. What's worse, how do we ever get back to some range between [-2,2] once we've gone that far negative?

Right, hyper [inflation, deflation] is bad and usually ends in the governing body losing all power over the economy as people switch over to another country's currency (Zimbabwe) or a new government's currency (Germany). That's a discussion we should have when we get to -2.0% interest on long-term assets.

Fair enough, luckily we're not there yet, but what's concerning is that the title of the article uses the words "way, way lower"!

It's also going to push people into equities, which I believe to be the real motivator for these kinds of articles. With negative interest rates why wouldn't you buy, say, gold ETFs instead of losing a bit of money every month (even before inflation) to the bank?

it just a race to the bottom. An attempt to force your currency lower until the other guy does it, one bank will lose. Eventually it will push the US to do similar if the currency exchange gets too out of whack.

it really does nothing to spur growth, if anything its an acknowledgment that those in charge cannot see the problem which means the credit market will stay stagnate and growth won't occur. Sadly it can also lead to more government borrowing under the idea "its free!"

if they want to spur economic growth they really need to look at the regulations which impact it and the tax laws the deter it. then top that off with forcing governments back to spending within their means so as not to take so much money out of the system

Nope.

Every currency can have low interest rates at the same time. It's not rates relative to each other that matters that impacts nominal activity, it's the absolute rate of each.

All currencies could have -10% rate at the same time (if they all introduced an exchange rate between cash and digital deposits).

Hard to claim that credit is the problem because we know for a fact that monetary policy is too tight right now (as indicated by where the nominal aggregates are). In any case the govt should largely not attempt to influence credit.

Until monetary policy is back to neutral, all other problems most economic ills are likely to be a consequence of bad money policy.

What do you mean too tight? The FOMC shouldn't have raised interest rates? Should be doing more QE? What would constitute neutral monetary policy?

The stance of monetary policy can't be assessed by looking at the level of interest rate (or the amount QE) -- otherwise you'd conclude that inflationary basket case Argentina has much tighter monetary policy than deflationary basket case Eurozone.

I'm not inventing this, this is from Milton Friedman.

You judge monetary policy by its result: where are the variables you are targeting vs your targets?

The Fed's target is "low inflation and full employment". Since over the past decade we've had very little inflation and high unemployment, we can conclude that Fed monetary policy was tight.

You might blame the less-than-specific target that the policy makers have chosen for this and you'd be right, it's way too vague and not that useful.

A much better target would be the level of average nominal wage per capita, or highly related but simpler: level of nominal GDP.

Based on these targets, monetary policy has been very tight over the past few years, particularly in the Eurozone.

Monetary policy is neutral if nominal GDP remains on a 5%/year growth path. Big drops in NGDP is basically equivalent to the central bank punching the economy in the stomach.

I'm not familiar enough with NGDP targeting (basically, I just heard the name, and know that it came up a few times after 2008), and sounds a hundredfold better than this wishy-washy design by a tea leaves cabal/committee. Though, I guess the committee then would determine the NGDP target. Which leads to the question, how do we know when a "deleveraging" is in order? (What's the consequence of sticking to 5% YoY GDP growth and never looking back? What if we overestimate the growth of the economy, that seems like real inflation.)

What are all these capital expenditures that are not viable at 0.25% but are viable at -0.5%? It's all just currency manipulation.

Firstly, note that these are negative deposit rates. As a bank you have to keep your spare money somewhere, and that is usually in an account at the local central bank which also serves as part of the interbank clearing system. Central banks are now proposing charging for keeping excessive reserves in this account.

The bigger picture is that wealth accumulation cannot outstrip economic growth long-term or even medium-term without causing serious strain somewhere. Pushing the rate of return on capital negative is the gentlest possible way to do this. But the real problem is real estate and its endless appreciation in value.

This is a disaster in the making: About 80% of small business loan applications in the US are denied. The cost of underwriting and servicing the loans and Federal regulations make these loans almost unprofitable for big banks. Negative interest rates won't help.

Negative interest rates will instead force big business to seek safe returns wherever they can - and that will not be by investing in small business. That money may well be deployed in competition against small business.

Consider this... the US Small Business Administration's loan portfolio is barely a rounding error compared to the cost of quantitative easing and national security expenditures these past years. Double or triple SBA loans and USGOV balance sheet will not feel it, but the impact on job creation, salaries and investment could well exceed any benefit in the US from negative interest rates.

Disagree. Your linkages are backwards.

This is about liquidity.

Lower rates are a way to create liquidity (as it makes is painful to hold onto cash).

My take: https://medium.com/@alexanderbcampbell/a-turn-in-thecapitalc...

https://research.stlouisfed.org/fred2/series/EXCSRESNS

There is no liquidity problem in the United States. Bank & large corporate balance sheets are flush with cash. There is very much a velocity problem.

https://research.stlouisfed.org/fred2/series/M2V

The velocity problem is the intersection of demographic changes (wealth holders are old), corporate tax policies (money is sequestered) and pervasive fear over global economic stability (china).

Negative interest rates cannot change any of these factors, and I question if negative interest rates will force the flow of significant funds into commodities, thus reversing the current deflationary spiral.

If the USGOV wants inflation create it the old fashioned way... incentivize risk taking.

About half of all new establishments survive five years or more and about one-third survive 10 years or more. As one would expect, the probability of survival increases with a firm’s age. Survival rates have changed little over time. - Source: U.S. Bureau of Labor Statistics, BED

Small business loans are inherently risky and an 80% rejection rate accurately reflects that risk. How would creating a bigger market for bad/risky loans help the situation in any way? Sure, it might boost employment/wages temporarily, but in the end a majority of small businesses fail and enter bankruptcy. They bring their loans to bankruptcy court where they are renegotiated, leading to a haircut for the banks, less liquidity, and a waste of time/money/effort that could have been better spent elsewhere.

Remember, bad loans in the mortgage market caused the great recession. Higher loan standards are a good thing - and a necessary outcome of the 2008 fiasco of irresponsible/non performing debt getting pushed off bank balance sheets to the fed and ultimately the public.

Let's understand what negative interest rates mean for US Banks. It likely means an increase in low margin loans and reserves for those loans - to a universe of borrowers no bigger, possibly even smaller, than at present. Negative interest rates do not loosen reserve requirements. They do not loosen lending standards. They do put downward pressure on the host country's currency, perhaps less so for the United States, due to the level of global anxiety. They create a "race to the bottom" for currencies and interest rates that is structurally unhealthy. Now compare that to doubling or tripling SBA loans and weigh the risks.

>"About 80% of small business loan applications in the US are denied."

Wow, I thought 80% was an overstatement. You are very much correct with regards to the "big" banks.

See: "big banks – that is, banks with $10 billion or more in assets – approved of 21.3 percent of small business loan applications in January 2015, up from 21.1 percent the month prior" [0]

Not the world's greatest source, but informative none the less: [0]: http://www.pymnts.com/news/b2b-payments/2015/big-bank-backed...

Even worse... a huge portion of loans to small businesses are made through secondary lenders charging 10-28% on the money. This debt burden increases default risk at the same time as it decreases additional investment.

Also, that's 80% of official applications. Countless others were given soft nos - "don't bother applying as a start-up/fico under 680/time in business under 3 years" etc.

Yup. Couldn't even get a LOC for $15k when we had cash reserves of $35k and 2 years in business making $250k/year because we wouldn't become personal guarantors on the loan and we were a risky startup.... that was cash finances, no debt....

Okay. I don't pretend to understand. (We wanted the line to service hard goods / inventory instead of cash servicing inventory, which is a standard retail tactic. Oh well.)

Summary:

JPM estimates that if the ECB just focused on reserves equivalent to 2% of gross domestic product it could slice the rate it charges on bank deposits to -4.5%. Alternatively, if the ECB were to concentrate on 25% of reserves, it would be able to cut as low as -4.64%. That compares with minus 0.3% today and the minus 0.7% JPMorgan says it could reach by the middle of this year as reported yesterday.

In Japan, JPM calculates that the BOJ could go as low as -3.45% while Sweden’s is likely -3.27%.

Finally, if and when the Fed joins the monetary twilight race, it could cut to -1.3% and the Bank of England to -2.69%.

What could prompt the Fed to go NIRP: a recession.

"With IOER at 0.5% and the Fed maintaining concerns about US money markets, the US is not close to considering NIRP. However, if recession risks were realized, the need for substantial additional policy support would likely push the Fed towards NIRP."

Crony capitalism at its best. JP Morgan makes bets on central bankers moving lower, then publishes a study saying that they could. If they can shift opinion, then their bets just paid off.

Better yet if cronies of theirs in central banks buy the reasoning, the banks are likely to actually move lower, making for an even larger transfer of real wealth to the financial sector. Thereby paying off JP Morgan's bets even more AND giving it a shot at more free money from central bankers trying to "improve the economy".

The result is a very large wealth transfer to the financial sector. Who will then say that they, "deserve it for being so smart." And then try to figure out how to top what they did the last time.

How is that "crony capitalism?" Companies try to shift opinion in their favor all the time.

Crony capitalism describes any situation where success in business depends on close relationships between business people and government officials.

Over the last decade, top financial firms have succeeded due to central bank policies that the firms themselves have been part of shaping. For example estimates are that "too big to fail" banks make an extra $34 billion per year off of the implicit guarantee from the federal government.

Moving on, McKinsey studied the effects of the US government policy of quantitative easing. See http://www.mckinsey.com/insights/economic_studies/qe_and_ult... for the full study. The bottom line is that it is estimated to have directly enriched private companies to the tune of $460 billion dollars (about a third of which went to banks), and cost American households $360 billion. That's a pretty large and direct transfer of wealth!

This study examines how much room Europe has to pursue similar policies. JP Morgan is effectively telling the central banks, "Here is how much money we think you could afford to give us." But doing so in a sufficiently opaque way that it isn't obvious that that is what they said.

Even assuming any of that is credible, here were not talking about a personal relationship with government. We're talking about public projections and studies that at best influence government through persuasion not relationships.

This negative rates thing is fascinating and scary. Apparently economists have been talking about it for years. I remember reading about the magnetic stripe on the dollar bills suggestion in the WSJ some time around 2000. The idea is that over time the dollar bill becomes worth less, and this is tracked by the magnetic stripe.

Just found this interesting paper from the IMF:

https://goo.gl/65CuKF (scribd)

What will happen if they try to do something like this?

They don't have to do mess around with face value. Individuals and companies with billions of dollars in cash can't really stick it in a mattress and ignore it. They have to find storage, pay rent, heating/cooling/humidity control, security, etc. That costs money. Negative interest rates reflect that cost.

Security guards alone would cost round_up(24*7/40) = 5 security guards assuming you only need a single guard (and they never get sick or take vacation), which at a loaded labor cost of at least $150k (low end) is $750k, which is 4% interest on $18.75m. So, under $20m and you're happy to pay the central bank the money to guard your cash.

Individuals and companies with billions of dollars in cash can't really stick it in a mattress and ignore it.

True. Far better to bury it somewhere remote. See this "news article" from the future about how it plays out:

   The desert dollar industry 
   January 1, 2021

   These days, the desert is swimming in cash... literally.
   Over the last six months, a booming business in illegal   
   cash storage has sprung up in Nevada, New Mexico, and 
   Arizona where analysts estimate that $30 billion worth of 
   $100 notes have been hidden. By day, smugglers drive deep 
   into the desert, SUVs loaded down with suitcases full of 
   Ben Franklins. Once they've found an ideal spot, they wait 
   till the sun goes down and frantically dig a hole, only to    
   drive away the next morning with nothing but the cache's 
   GPS coordinates and a drone or two to guard it. When asked 
   about the sorts of people staying at her motel these days, 
   Smith shrugs. "I don't ask who they are and they pay cash."

   ...

http://jpkoning.blogspot.com/2015/12/the-desert-dollar-indus...

But one guard can guard a lot more than $20m. A normal-size briefcase holds about $1m in $100 bills, (http://www.cockeyed.com/inside/million/million.html, https://www.quora.com/How-many-$100-bills-can-you-fit-in-one...), or presumably about five times that if you store in 500-euro notes. So in the end people with amounts of cash in the single- or double-digit millions would probably get together and hire one guard instead of many (you don't get rich by spending six figures a year unnecessarily) ... and we start heading back towards reinventing banks.

It will happen that the rich will get richer, since they are literally paid by central banks to take their money and use it for non-cash assets, which is where their wealth is; and the poor will get poorer, since their economy is cash-based and will not benefit from any interest rate.

You'll have artificial inflation of asset values, likely not followed by salary inflation (because the whole point of negative rates is that the economy sucks), so the poor will get priced out even more.

Negative rates are really, really bad for everyone except the rich. We shouldn't try make them work, we should find new ways to avoid them.

the reason for negative interest rates is deflation. any poor person earning a wage of any sort is getting a raise just for working.

That compensates itself by shrinking employment numbers, which is what you expect during deflation / crisis (and indeed one of the causes of low rates in general).

I thought the only reason that banks had excess reserves was due to the fed paying 50 basis points of interest. This was the fed's way of preventing +/-$2.28 Trillion [1] from being loaned out thus adding $2.28 trillion x (fractional reserve rate...10 if mandatory reserves were 10%) to the money supply through lending. With negative interest rates excess reserves again become an expense, therefore removing banks disincentive to lend.

[1] https://research.stlouisfed.org/fred2/series/EXCSRESNS [2] https://en.wikipedia.org/wiki/Fractional-reserve_banking

The world economy has seen plenty of downturns but the whole developed world turning to negative interest rates is a new thing.

Is this a sign that the economic dogma underlying central bank decision making is not really based on anything solid but rather just follows keynesian trends of the day combined with the race to the bottom of "europe is doing it so we need to as well!"

Fortunately I hold a large bitcoin position which I believe hedges me pretty well in this situation.

They'll come for your bitcoin just like they once came for gold (if they so desire).

If it gets to that point, you might as well stock up on alcohol and chocolate for barter.

In a post-bank economy they're going to be a lot more valuable than bitcoins or PMs.

With negative interest rates, you would make money by taking out a loan. Banks literally have profit margins just from borrowing money and doing nothing with it. What would happen if we gave the same advantage to the general public?

Something seems very wrong.

If you borrowed $100 but kept it in a bank account, then you'd be losing to the negative interest rate on that sum too (and friction of having to make regular payments).

The only way to benefit is to borrow and invest that money, which is exactly what the fed wants (with the expectation that productive investments will boost economic growth).

I think the real issue is that if you're paying -5% for a loan. It's rational to invest that into something that returns -1% (and profit by 4%). This means people are incentivized to invest in unproductive resources... Which might be a bad thing in the long run.

Or borrow and keep a stack of $100 bills under your mattress to be used to pay back a smaller sum at the end of the term?

Keeping cash under mattress is risky. Why not buy gold(or precious metals)? Movement and hiding it is way easier than $100 bills and transport too is easier. Just wear it as jewellery.

That's why cash must be (gradually) banned, among other reasons. See Germany, Norway.

No need to ban cash for arbitrarily negative rates to work. Simply introduce an exchange rate between physical currency and deposits.

Simply introduce an exchange rate between the dollar and it's physical representation.

Barriers are largely people's lack of understanding of how this works and how huge the benefits would be for society.

> Maybe if you think government and society are the same thing.

No, I just think that neutral monetary policy which leads to full employment (defined as natural employment under given tax/regulatory regime) is good for society.

Also good for govt's ability to manage budget, but that's secondary.

> how huge the benefits would be for society

Maybe if you think government and society are the same thing.

But if you ban cash, you for the same reason also have to ban gold (even jewelry), collectible coins, non-perishable food, and anything else that can be bought and stored as a store of value. Good luck with all that.

Can one buy futures on Honey Buns?

http://gawker.com/5729214/honey-buns-are-the-new-prison-curr...

I don't see how that would fly in the US. Off the top, it would seem to violate at least the 1st and 4th amendments to the US Constitution.

I'd like to see an argument for that.

Argument for what?

Someone would need to propose a specific law. A law that says 'you may only contract with [insert privileged electronic currency here]" or something similar.

If the enforcement is through confiscation of other currencies it will likely violate 4th amendment protections on personal effects.

If certain contracts are banned (instead of, or in addition to, confiscation) it would violate speech protections. Exchanging money (in any form) is speech, as are your contractual dealings.

> Argument for what?

An argument as to how restricting the use of cash (or eliminating the use of cash entirely) inherently conflicts with the first or fourth amendments.

> A law that says 'you may only contract with [insert privileged electronic currency here]" or something similar.

The usual method would be more like "All damages, including -- but not limited to -- those for breach of contracts specifying payment in some other currency, shall be awarded and assessed in [privileged currency] as of the date the debt became due and payable."

> If the enforcement is through confiscation of other currencies it will likely violate 4th amendment protections on personal effects.

That's a creative argument, but, no, Fourth Amendment search and seizure protections do not prohibit confiscation of contraband.

> If certain contracts are banned (instead of, or in addition to, confiscation) it would violate speech protections.

Contracts that are contrary to public policy -- such as those whose fulfillment requires an act prohibited by law -- are generally void for that reason; this is a well-settled principal of law and is not contrary to the First Amendment. The idea that the First Amendment means any contract obligation, without restriction, is immune from prohibition is, well, silly in the extreme.

Read article I section 8.

Congress may make money, collect taxes, and do other things, yes. What is the relevance?

It gives congress the power to regulate the value of cash.

Hmm, I don't remember seeing that. Which clause are you referring to?

"To coin Money, regulate the Value thereof"

Why wouldn't you just stick it in the mattress? When the loan matures, pay off the principal and keep the rest.

The risk is people borrowing money at low rates and further pushing up asset prices. Control of interest rates is supposed to influence investment, but it's tied to leveraged asset speculation.

If you could get an interest-only mortgage at zero rates, why wouldn't you buy the largest house the lender would allow?

> The only way to benefit is to borrow and invest that money, which is exactly what the fed wants (with the expectation that productive investments will boost economic growth).

Isn't this a foolish proposition, considering the out of control speculation that occurred when interest rates dropped to near-zero? With negative rates, banks will only be rewarded further for acting recklessly.

I think the honest thing to do would be to let all of these irrational and highly-leveraged investment environments collapse so that we can have a chance of starting over with a clean slate.

No wants to be holding the bag when music stops, since that is how politicians lose their jobs.

I'm no economist, but with 0% interest rates and nonzero government bond rates banks have been able to do essentially this for years - get money for free, loan it to the government, call that a good day's work.

dodd frank and various international banking rules have limited the amount of govt bonds a bank can hold on their balance sheet.

The Fed is insolvent and is playing ponzi scheme games to kick the can down the road. When it all comes collapsing back down expect a complete overturn of the currency and of the petrodollar system.

Oh no, people aren't buying enough stuff. Let's penalize them for saving money to encourage them to buy more stuff.

What's the impact on the environment?

Excessive saving can be a problem, which the Fed is trying to address. It can be problem that can depress demand and drive down inflation to deflationary levels, which can further depress demand as people put off payments.

On the issue of penalising savers: passive savers can't expect a good risk-less return on their investment when there isn't the economic growth to support it. Savers are basically asking for a free lunch while everyone else is suffering from depressed incomes and profits when they complain about the Fed's base rate decisions penalising savers.

> Excessive saving can be a problem, which the Fed is trying to address.

And maybe trying to address in exactly the wrong way.

Let's say I'm trying to save for retirement. If, during retirement, I'm going to be able to earn 4% return, I need some amount. If I'm going to earn 0.1%, I need a lot more, so I'd better save a lot more now. And if interest rates go negative, then I have to save even more...

So this approach may not actually lead to decreased saving.

That makes some intuitive sense, but I would raise two problems for that thought experiment.

Firstly, I very much doubt you will see negative rates within consumer or retail products, or even attached to the rates seen by pension funds who usually don't sit on cash held in cash saving accounts held with the Fed.

Secondly, I would think that if I were pension fund manager or an individual saving for retirement and I somehow encountered negative rates that persisted for cash savings, I would look for other types of investments that offer higher returns, or in the case of individuals, just spend the money as going to the cinema has greater utility than getting 0% returns on your investment. You would have to pessimistically assume that there are no viable investment opportunities with returns above 0% for your thought experiment to carry some water, which seems very unlikely.

If rates or yields remain positive for retail products, what's to stop hedge funds / companies with lots of cash / banks, from investing in those same products? Yields may be positive on paper, but I would suppose that fees will hide the fact that actual returns will be negative. Set up maximum account balance limits and you restrict investment by the non-retail crowd. Then again if these products are actually making profits for the small guy, what's the seller's incentive to keep providing them?

Because you can't buy $1 billion in individual cash saving accounts; there isn't a supply of them and a bank won't sell them to you. When you have very large sums your options of what you can buy and kind of the returns you can expect change. A small investor with $10k can experience greater volatility in their returns (good and poor), and can just go ahead and buy Apple shares without the FT writing an article about it.

Also, the base rate is only really encountered directly by Banks that have accounts with central, in the case of the US, or regional central banks. A normal company and even very large non-bank firms don't typically have accounts with the central bank. For consumers and most businesses the interest rate set by the fed is more of a benchmark that ends up being used to help calculate the returns of other products.

Firstly, consumers have already seen negative rates on their deposits in Europe (Denmark?).

Second, NIRP is designed to push money from low risk vehicles to high risk vehicles, including the stock market, and further inflate the current bubble.

>Excessive saving can be a problem, which the Fed is trying to address

Is this really what is being addressed here?

It seems more likely that the fed is just pushing harder on the same string.

I didn't say they would be successful, but merely 'trying'. If you want to address demand issues or excessive savings you typically look to fiscal policy, but that is basically a non-starter for political reasons. The Fed and many other central banks such as the ECB and BOE are operating basically as the first and last defence with regards to all macro issues.

negative rates won't happen in the retail market. it's fed to banks to enforce lending (and "economic activity").

Negative rates, maybe not. 0% rates, perhaps.

as best i can logic (my abilities here are extremely limited), i'd say only a public entity would ever consider lending at 0% or lower. they receive a payoff indirectly through generated activity and tax revenue so could stand the real upfront loss. no non-crooked private party would entertain lending with no interest (i certainly wouldn't).

If you had $800 million in cash, and you could either deposit it with the central bank and be paid -0.5% interest, or invest it in say, a 12-month Apple corporate bond at 0%, what would you do? Note that attempting to hold onto the cash in a vault has real costs as well.

BofA offered 0% loans about 5-7 years ago.

Fixed APR?

I didn't think so.

Yes. They were short-term however; 18 months or less, if I recall.

It'd be better if it did.

It's a deposit rate, no? i.e. you can pay the ECB x euros now and they'll pay you 0.993x euros in a year's time.

Take a loan, convert to cash, heat your house with the cash. Rinse. Repeat.

What percentage of world debt is on negative interest rates?

Very little at the moment. Remember this is only negative short term deposit rates at a few central banks. There's quite a bit at zero or near-zero rate though.

More governments should take the opportunity to borrow money at zero rates and invest in socially useful things.

Borrowing money is simply the government doing socially useful things now in exchange for giving up the ability to do so later. Sure, low interest rates give you better terms on this, but it's not obviously clear that this is the correct thing to do. Roads and bridges need maintenance, and in the future there will be more old people that we want to take care of.

Except if you don't invest in infrastructure and useful social things, there's no future of note anyway. I don't really think the economy will do too well if nobody can make it to work.

Right, there's obviously transportation and infrastructure projects that are positive-value. We should do those. What we shouldn't do is invest in transportation and infrastructure projects without evaluating whether or not they're positive-value. Even if we have unprecedented ability to cheaply invest in infrastructure, that doesn't mean that all projects are worth doing.

Somehow this gives me the image of a "high functioning" meth addict discovering the rush delivered by this wonderful drug called heroin. Surely he'll keep things under control.

And much like the heroin addict, the highs these days just aren't that high anymore, and it will never even glimpse the power of that first time.

A government aggressively trying to borrow less money gives you that image?

"borrow less" is the new "pay back what you owe"

Not paying back what you owe is default, and the countries in that position aren't the countries being talked about.

That is an incorrect definition of "owe." Owing begins at the inception of incurring a liability, not at the moment of being legally required to pay the obligation.

And even if you had used the correct definition, retorts like yours are pointlessly pedantic, petty and add no value to a discussion.

Countries are paying back what they owe. How does your original reply add anything or even make sense? If you are this worried about it you should probably at least understand what you are talking about.

I'm not sure I follow. Lowering rates encourage borrowing, is that not the point?

You are mixing up government borrowing with private borrowing.

When did I say anything about either? I made a general statement about the effect of interest rates on borrowing, which, the last I checked, is equally applicable to governments as it is to private borrowers.

In fact it seems you disagree with my original metaphor, and are commenting without having actually stated the way you interpreted it.

Lowering interest rates encourages private borrowing. Lower interest rates discourage buying treasuries from a government because the rates are lower. You didn't say anything about either because you didn't realize that's what you were referring to.

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