Denmark's Jyske Bank lowers its negative rates on deposits
reuters.com
reuters.com
Scenario 1: If interest rates go up significantly this would bankrupt entire nations such as Italy, France and Greece (again) + runaway deflation. Conclusion: interest rates cannot and will not go up. This would be political suicide. Also deflation is the number 1 enemy of central banks and the economy in general.
Scenario 2: Lowering interest rates causes rich people, businesses and governments to lend as much as they possibly can to convert debt into "stuff" that they can charge more currency for. This causes zombification of governments, businesses and rich people: productivity of real estate is 0, productivity of businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) goes towards 0, same for governments. Startups struggle to compete with larger companies, because they don't have the capital (and political lobby) and if they can somehow compete they just get bought. Also perhaps most importantly: this increases the divide between rich and poor and thus social unrest. The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. AKA: the rich are home owners and the poor are home renters at ever increasing rents.
I don't believe for a second that interest rates will go up in the years to come. So scenario 2 is where we are (heading). Smells of hyperinflation to me. Scenario 1 = 1930 all over again.
I don't see any possible positive outcome, unless by some miracle the trade wars (and other government control over markets) end. And even then...
Disclaimer: economics n00b interpreting central bank president talks and stock trader news websites.
I've always thought this was a weird claim, put this simply. Consumer electronics and computers have been deflationary for ever: You can always get a better TV, phone, or computer for less money if you are willing to wait for a year. Yet people can't stop buying them. Because they want them enough. Deflation should only hurt businesses producing stuff that customers aren't really interested in.
> businesses that can't go bankrupt (because you can't miss interest payments if there's no interest)
I would expect that on business loans you don't just pay interest, you are also expected to regularly pay back actual fractions of the principal. But I admit that I don't know how this works.
> The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them.
I've never understood this angle either. Buying stuff doesn't make stuff appear out of thin air. Buying stuff means buying stuff from the people who already have it, which for valuable things like housing is already the rich. The difference between buying an apartment and renting it is whether I give the rich person 30 years' worth of rent right now in a lump some or slowly over time. I don't see how I "win" against the rich person by giving them my money earlier.
Lending always carries the risk of not being paid back, where you can always just keep your own money. So, a 100$ loan needs to return the original 100$ + the risk + some incentive not to use this money for something else.
Thus loans are effectively the absolute value of (inflation or deflation rates) + a constant factor.
There are 2 ways to make a profit on a property investment:
1. Sell at a higher price in the future which offsets all of the costs of holding the property (rented out or not).
2. Rent out at a higher monthly price than whatever the monthly cost is (cost spread out over whatever your investment horizon is), right now.
Number 2 means (assuming the house was purchased on credit, which at negative interest rates it should always be as much as possible) that you as the renter(s) are paying back the owners credit he took out for the house, the house's maintenance, the owner's house insurance and taxes and all other costs + THE APPRECIATION IN VALUE OF THE HOUSE FOR THE TIME YOU RENT (higher housing prices = higher monthly rent) + a profit.
When you buy a house, you're not giving the owner 30 years worth of rent. You're giving the owner the value of the house, which is way less than the accumulated rent would be over 30 years.
Buying a house (on credit) is only ever a net loss if the house's value goes down significantly for whatever reason. Reasons can be: uninsured destruction (war, fire, bad renters) or deflation (due to oversupply of houses such as is the case in Japan right now or due to the overall economy going bad).
In other words: assuming a healthy economy, buying a property as an investment (with a 15 - 30 year investment horizon to be able to spread all initial costs over a longer period of time) is ALWAYS a win assuming you can find renters. In the current market (at least in most cities of Western Europe) you will always find renters, because a significant part of the population who would like to buy a house simply can't get the credit they need to buy a house close to where their employment is. Due to the housing prices being too inflated relative to average income from employment.
Summary: housing prices higher than the credit people can afford = people can't get credit to buy a house = lots of renters on the market (people rent instead) = makes it interesting to own houses to rent out for profit = housing prices higher = poor people can't get credit to buy a house = lots of renters on the market and so on.
See what's happening? Those who can afford real estate investments start receiving an ever larger portion of the income of people who can't afford real estate investments. AKA: the poor and middle class get poorer and the rich get richer.
Yes, that's what I said. If the rich control apartments, they can always arrange to get richer. I cannot cheat them out of that.
Deflation will destabilize the economy if there is massive borrowing, and since most Western government owe about 100 % of GDP, they will prevent deflation for the very reasons you describe. But the middle class should embrace deflation and so should the general economy as it encourages savings which encourages investments which is where the growth in productivity comes from.
You're right. Deflation is not always a bad thing. But runaway deflation is. And runaway deflation is especially likely when there is no increased productivity (like their was in the period you mention) combined with massive debts (which didn't exist in the period you mention, because there was not fractional reserve banking like we have now and value of currencies where intrinsically backed by scarcity of gold).
A little deflation shouldn't be bad for a healthy economy with "sound money", but as you describe yourself: that's not what we're working with here.
It's not just governments who have massive amounts of debt. It's also large businesses and most real estate owners. The middle class should definitely not embrace deflation right now, because deflation could very quickly spiral into runaway deflation.
Runaway deflation = lower wages, lower housing prices, less government budget (less absolute taxes coming in). Less government budget = greater inequality, worse educational quality, leading to decrease in productivity, more crime, more corruption, more waste of resources and aside from government issues: less investments by companies, lower stock market prices, insufficient pension fund reserves due to investments going down (= lower pensions), people losing their house (lower wage = some people can't afford payments on house credit and are foreclosed), housing prices going down more because of foreclosures and bad economy, people increasingly start selling their house at an increasing loss, housing prices go down further, more people start losing and so on.
End result: Japan. Or perhaps worse: the 1930's crash (a prime example of runaway deflation), subsequent poverty, social unrest and wars.
I feel this is not a great explanation though, perhaps someone else can do better.
Usually it was not a gradual improvement in the lifes of common people from poor farmers to well-off middle class. By far the most people not employed in the agrarian sector were working class (working in factories, mines, etc.) and their situation was, compared to today, a hellish nightmare: overcrowded slums, poor access to water and medicine, unstable food-supply. These conditions only improved slightly by the end of that period, usually out of pressure/fear of socialist/communist mass agitation.
-----
You are right, the life of most people living in that time period improved significantly. But I would say despite of a deflationary economy, not because of it. And only a minimal percentage of those were middle class.
Yes, technological advances have improved life and have allowed economic growth.
No. Society as it is currently could not have been financed by those things alone. Massive loans that cannot and will not ever be paid back cannot exist without an inflationary economy (powered by fiat currency with no limit to currency supply and fractional reserve banking). And those types of loans and the inflationary economy have been crucial for the US/The West to attain and maintain their world domination politically, economically and militarily. That's where the term "military industrial complex" comes from.
Nixon moved away from the gold standard for a reason: the US was unable to afford its wars (Vietnam at the time) and keep its military happy and in check without an inflationary economy.
Inflationary economy = massive free buying power out of thin air for whoever controls the world currency, until they control the world currency no more and an empire falls.
Again: I'm no expert at all, this is just my limited understanding.
But did that really improve the lives for people globally? Couldn't it be seen as a global redistribution of wealth, from countries who used the USD to the U.S? If you were cynical you might even say the U.S. robbed the other countries.
I wouldn't be so sure to conclude that inflation has allowed economic growth from your example, but more a redistribution of one.
Inflation: bails out debtors, punishes savers
Deflation: punishes debtors, rewards savers
I’m also suspecting that politicians will step in with deductions, etc.
https://www.riksbank.se/en-gb/press-and-published/notices-an...
High and growing household indebtedness continues to pose the greatest risk in the Swedish economy. To come to grips with the problems associated with household indebtedness, it is, above all, important that measures are taken within housing and tax policy. At the same time, there are structural vulnerabilities and risks linked to the banking system in Sweden. It is therefore important that the banks have sufficient capital and insure themselves against liquidity risks in different currencies. As the risks linked to international developments are assessed to be greater now than in the spring, it is even more important to manage the risks and vulnerabilities in the Swedish financial system.
Some of the best paid economists in the world say to avoid capex with longer than 5 year payback time as rates are almost destined to go up due to multiple strong factors, including emerging markets becoming more attractive investments.
Would make sense to some extend.
The only threat is China and China's aging too...
Korea? Which one? North Korea? Please :-)
[1] https://en.wikipedia.org/wiki/Anti-Japanese_sentiment_in_Kor...
Yep exactly.
The same thing happens with cars too. The salesman does everything in their power to focus only on the monthly payment amount instead of what you're really paying total in the end.
It's way worse for houses because you can end up in a situation where if you make non-optimal choices with mortgages you can be paying off your mortgage for multiple generations on a low end house. Interest is crazy, but unfortunately most people don't pay enough attention to it or their debt (which makes sense since you need to go out of your way to really learn about it).
So what if your housing price drops? If you are in for the long term, just ride it out. The risk in a long term loan isn't fluctuating prices, it is income stability. People don't lose homes because their home value drops, they lose them because they lose their jobs and can't afford to make payments.
That is how borrowing works. Otherwise the lender would not make a profit.
>It creates too much debt in society and generally makes the economy more fragile than it has to be.
and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates.
> The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth from house owners to people seeking to enter the market, a transfer of wealth from the younger generations to the boomers.
Plenty of millennials own homes. There are tons of examples on Reddit of people in their 20s and 30s with homes and investments. Low rates makes it easier to get a mortgage and compound wealth by owning a home. Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created.
The economic expansion outside in the Eurozone is already over and that's despite interests rates going lower and lower. The Fed is done raising rates and it's exactly because the markets absolutely tanked in 2018 with the prospect of rising interest rates.
> There are tons of examples on Reddit of people in their 20s and 30s with homes and investments.
Why don't you look at a statistic instead of Reddit?
> Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created. Low rates makes it easier to get a mortgage and compound wealth by owning a home.
Rising prices do not equal an increase in wealth. If you pay double the price for the same home at a low interest rate, that's still a huge markup. If the prices fall, you will lose big time. The expectation is that prices can't fall because interest rates will not be allowed to rise. However, CPI inflation can still catch up to asset price inflation, it just hasn't happened yet.
> Historically speaking, the homeownership rate has risen above the 50-year low it reached during the second quarter of 2016 when it clocked in at 62.9 percent. Still, it's several percentage points away from its pre-recession peak of 69.2 percent. [0]
[0]: https://www.thebalance.com/the-homeownership-rate-what-is-it...
Edit: you can also have a look at the graph on page five here. It shows that the home ownership rate topped around 2003 and has been on a steady decline since then:
https://www.census.gov/housing/hvs/files/currenthvspress.pdf
It is a wealth transfer, and asset prices can’t go up infinitely, unless wages rise equally for the population of house buyers. It seems wages have been stagnating in the US for a while now.
When there’s a shock or wide drop, the latest buyers will be left holding the bag.
But nobody knows for sure, maybe it really is different this time.
A crisis is not an economic fact that magically happens when some predetermined values for some set of indicators are reached.
A crisis is a mix of two things: 1) a big financial/economic issue that affects an important sector of the economy, 2) widespread panic.
There are already multiple candidates for 1), but what hasn't happened is 2).
Why? That's anybody's guess.
My guess is Trump.
For people to panic, there needs to be sustained media coverage and focus. But now whatever Trump says is more important than anything else for the media.
If you look at the media since Trump became president, the most important issues have been all stuff related to his government, and whenever the media has focused on anything for too long, he's come out with some other thing that the media shifts their attention to.
So we've had lots of small panics, which by now have mostly desensitized the public.
If someone like Trump can continuously interrupt the media, they effectively control it through disruption, and then the media cannot focus for long enough on anything for people to fully panic and cause a full blown crisis.
Coordinated or systemic movement of money in any form can be a crisis. There doesn't have to be reporting or emotion for the situation to spiral out of control. That is to say, the panic can follow the crisis.
You are technically correct. Maybe I should have used the word recession instead.
What I mean is that a lot (most?) of the damage in a crisis is actuallly done by big masses of people reacting to it rather than the crisis itself.
Think about bank runs, widespread stock shorting and selling, people not investing because of uncertainty, lenders abruptly calling their loans, etc.
Coming out of two straight years of one collusion “bombshell” report after another I agree with you. I avoided the markets when I was unsure if what was being said was true (it definitely seemed true to me).
Now it seemed to be largely politically motivated and I’m totally “insensitive” to the MSM reports on Trump and I’m ready to make long term investments in the country again. Too bad I stayed out of the markets for the last year because those looked to be good times.
Saying that things are going well, therefore we are making good decisions is a terrible argument.
Negative rates are the market signalling that it's time for a wealth tax. Although these are tricky to implement because wealth can be moved very easily.
I've resorted to moving way out. I'm probably going to buy a house somewhere I can work remote from.
I'm not paying 300K+ for a small home near a city with jobs, sorry, it's just not happening. Whether I can afford it or not is irrelevant, the value just isn't there other than as a proxy for "this now allows me to get higher paying jobs in the city and... continue the cycle?"
I think this is something that really needs to be addressed from a climate perspective as well.
It is cheaper, dramatically so, for me to live way out, buy a car, and use it for everything. I use an electric car, and I chuck a load of the savings into offsetting, and I'm pretty sure I'm negative.
But a far better model would be if people just stopped the rent seeking bullshit and let me build close to town.
Clearly I live in the wrong city. 300k would get you a leasehold to someone backyard with a tent in it where I live.
I need to move.
So the alternative is rent, which at the moment in many places is looking like a less appealing alternative.
The transfer of wealth in the housing market happens from one group to another regardless.
I agree with a lot of your sentiment and what you're saying, but I think the monthly payment focus isn't irrational.
And there are no financial constructs to spread the risk?
Surely this can't end well?
Here in Sweden the house prices are so high in cities it's almost impossible for young people to get a house, sometimes even an apartment. We've been waiting for the housing bubble to pop a while, but how long must we wait? The longer we do the worse it'll be.
As someone who moved to London far too long ago and has expected some miraculous drop in house prices every time the economy catches a sniffle - stop waiting. It'll never happen. I mean, it may do, but to all practical degrees, house prices will creep upwards forever.
There's no 'right time' to get on the ladder, other than when you can actually afford.
Now all I hope is that I get out of London before I get too bitter about not having simply bit the bullet a decade or so ago.
Of course it's not possible for everyone and there are sacrifices with living in a small community as we do.
If what happened, exactly? If you already "own" a home and are paying back a loan on it, a price drop of other housing units would not affect you in any way unless you felt that you needed to sell right at that moment. Would your payments rise from falling housing prices? Or your income decrease?
Even if I have no plans on selling, you never know when you might be forced to sell (death, divorce, illness, work, ...).
Negative interest rates roughly imply that Denmark crowns have no ability to preserve wealth over time. If anyone gets paid in crowns they should attempt to spend them immediately and buy something durable.
It is hard to see how this is an improvement over letting money hold value over time. Now there will be more competition over scarce real resources instead of wealthy savers holding a "fake resource" of cash in a bank account. And anyone who doesn't understand interest rates might lost out from confusion.
(In an inflationary environment, the wise thing is to put your cash into hard assets, since it will be worth less in the future. Deflation in the opposite.)
EDIT And as I'm arguing elsewhere in the thread, they measure inflation and it is positive.
Inflation in Denmark august 2019 - july 2019 was -0.39%. That is, the value of money is increasing.
The value of money in terms of assets has been steadily decreasing.
Granted, most people don't think in terms of assets. It takes a while for asset prices to bleed through to consumer prices.
If someone were to try that policy in an English speaking country I'd be very confident that the creation would outweigh the destruction and that there will be massive wealth transfers from people who have cash savings to people who borrow money. Denmark will probably go that way too.
If the trend spreads across other countries, and if you believe this is a trend that is hard to revert (falling interest rates), I'd say we're in for a few more years of the stock market climbing with bigger and bigger valuations at crazier revenue multiples. Even though lately it seems like everyone is predicting that a crash is right around the corner, I don't think it's likely without a big external event happening to disturb this trend. Either some cyber / regular war or some other event nobody is forseeing.
The 2008 big short dude recently predicted that the inflows of money into ETFs by a lot of very passive investors is gonna create a situation where big valuations are based on nothing other than people not having any other place to put their savings, but I think like in 2008, his prediction is very early again.
We'll see, interesting times ahead.
Every barrel of oil they don't use now either delays that or brings them money to invest, and using the income now to prep for later seems like a sane strategy.
The worlds largest Wind Turbine Manufacturer Vestas is danish.
Besides them, there's lots of green energy infrastructures companies that are expanding. Also of note, the Large Danish companies LEGO and Novo Nordisk have already gone 100% CO2 neutral on productions through various offsetting initiatives[1]. Oil money is not something to flush down the toilet, but the country is moving very heavily in the green direction. The oil will dry up, or we'll reach a point where it's political suicide to keep going after it. But the wind will keep blowing and the sun will keep shining.
[1] yes that's not enough, but a good milestone on the road forwards
When inflation finally strikes, there will be no tools left to fight it. Getting deeply into debt and buying as many assets as you can would then be the right thing to do.
Obviously, this is not financial advice.
It strikes me that the problem is that the tools to fight deflation are inadequate.
How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose?
No, because the economy has already adapted to these low interest rates. All the money that was put into high-risk instruments at relatively low yields will be desperate to move into these "low risk" bonds, which causes a huge selloff, which will be especially disastrous to those who bought in on margin.
Furthermore, those entities that have gotten used to financing old debt with ever cheaper new debt will have trouble finding new affordable debt.
> It strikes me that the problem is that the tools to fight deflation are inadequate.
What deflation? You mean the "deflation" of CPI staying below 2%? What about asset price inflation?
> How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose?
What real economic growth has been achieved by this unprecedented money-creation spree? Rising prices do not equal prosperity.
What about Japan, or the Eurozone? They have even lower interest rates and they're once again stagnating. You really believe if money was even cheaper, even more growth could be achieved?
We do have massive asset price inflation. We also have significant service-sector and rent price inflation. The CPI is only stable because productivity improvements have kept prices at bay for many consumer goods:
https://perspectives.pictet.com/wp-content/uploads/2015/04/U...
However, many of these consumer goods aren't made in the US. The dollar has been strong because, globally speaking, interest rates on it are high. If the US went back to QE and zero-interest, you could easily see a 25% drop in the value of the dollar, which immediately shows up as inflation for imported goods.
The tools to fight deflation/low-inflation are mostly left in the hands of government spending, which unfortunately governments refuse to do for political reasons, the central bank's tools are limited.
What about Japan, or the Eurozone?
The Eurozone's problem is clearly austerity in the face of the structural issues that the single currency creates, as long as the wealthy members are unwilling to spend and the rules prevent the poorer members from spending they are caught in a low-demand trap of their own creation. https://www.jstor.org/stable/24385696
They have even lower interest rates and they're once again stagnating.
You really believe if money was even cheaper, even more growth could be achieved?
If you can borrow money at negative interest rates and build assets of any future value then you should do it and make citizens' lives better now and in the future.
They raised them very briefly for a couple of months. And half a percent? That's basically background noise. In the past, to fight inflation, rates went up as high as fifteen percent.
> The US Fed had been steadily raising rates since 2016 and has since admitted that it was a mistake and reversed course.
They've reversed course in 2018 because the markets were tanking in 2018. The Fed never admitted making any mistakes, as far as I know.
> "Keynesianism totally works!" (paraphrased)
Remember, Keynesianism says you boost the economy short term to get it up to speed, then throttle it when times are good. Keynesianism is about pulling future demand into the present. Except times never get good enough for politicians to put in the throttle.
So you end up with a pile of debt that can't be serviced in any other way than inflation, and we haven't seen the end of that yet.
Do you believe that situation is better for the owning class, who bought up all the assets in exchange for cheap debt, or the serving class, who have to rent those assets, whose wages are losing more and more purchasing power?
> If you can borrow money at negative interest rates and build assets of any future value then you should do it and make citizens' lives better now and in the future.
That's not what's happening. You borrow money so you can own more of the future, and charge citizens for it.
Governments can borrow money to build infrastructure that make people's lives better, I don't know how you can dispute that this policy option exists or say that it "doesn't work that way" when you know, governments do that stuff all the time. When in doubt, and you have low interest rates, build a sewage treatment plant!
You can always point to numbers that are supposedly good (such as questionable government-issued employment statistics) and I can always point to numbers that are bad (the PMI, the Russell 2000, the unprecedented levels of sovereign and individual debt).
If the economy really was that great now for people on main street, why is Trump losing approval among the people that voted for him to fix this exact issue?
> Governments can borrow money to build infrastructure that make people's lives better, I don't know how you can dispute that this policy option exists or say that it "doesn't work that way" when you know, governments do that stuff all the time. When in doubt, and you have low interest rates, build a sewage treatment plant!
I'm not against emergency measures by any means, but the tendency with governments is to make the emergency measure of today the status quo of tomorrow. This idea that you can spend yourself wealthy at the national level is just as flawed as the idea of trickle-down-economics.
Sure, in the short term, debt-financed government programs can stimulate the economy, but that debt has to be paid off. You have moved demand from the future into the present. It will be missing from the future, because money spent on debt service cannot be spent on anything else. That is unless you don't pay off the debt, or you erase it through inflation, in which case that is still money missing from someone's pocket, and it's not just foreign pockets - most US debt is internal. It's also not going to be the rich guys' pockets, because they saw it all coming and bought up all the hard assets already.
Conversely fretting about debt in the way you describe, with a concern about the value of present investment in physical infrastructure for the future, has proven over and over again to be unfounded (tax cuts are otherwise clearly a case of leaving money on the table now that will not benefit the future). You'll see.
Not true. If you want to see that idea of economic policy fail, look at Turkey under Erdogan:
https://en.wikipedia.org/wiki/Turkish_currency_and_debt_cris...
The reason that Erdogan couldn't pull off this con for as long as the US is that he can't print Dollars or Euros. However, even those "reserve currencies" eventually can lose investor faith. You're just speculating that they never will.
If the US keeps up the deficit spending, it will either need to pay a huge amount of money on debt service, or it needs to monetize its debt - which means credibility will be lost and new debt will be more expensive.
Either way, it's not a free lunch.
Yes there is no free lunch, in particular for any country that is in a completely different circumstance than the country we are discussing.
2% inflation and 1% interest rate on savings is the same as 0% inflation and -1% interest rate.
Even getting a -1% mortgage creates inflation, because who sells houses can ask somewhat higher prices and buyers will be able to pay them.
I spoke to someone about this a while ago. These loans are often required by the government to message certain targets, and are meet positive for the banks because of other regulatory issues that may exist. These negative rates home loans wouldn't exist without some regulation various regulation and government incentives.
Either way, I was unsure which way rates had moved just from reading the title.
I realize crypto is still seen as risky, however if it takes hold and overall market volatility stabilizes, how would easy access to borderless liquid digital assets affect the neg interest rate strategy?
Edit: remove mention of specific cryptocurrency in an attempt to shift focus to broader strategy.
What you instead should ask what effect real cryptocurrencies like Bitcoin can have.
I'm personally quite positive to cryptocurrencies, but I don't have a crystal ball. If a single country is about to go under of course it's a good alternative, but of the global economy tanks it's all up in the air.