UK banks given six months to prepare for negative interest rates

I'm just a casual observer, but Japan had a "lost decade" post-bubble where average inflation and growth rates averaged 0%, but this has extended to a "lost two decades" now.

(Side note: Japan's cost of living has also not increased with the rest of the world, which is why it's much more affordable to travel there these days than it was before.)

One thing I don't understand (due to my own lack of knowledge) is related to real estate. Japan has been excellent by supplying enough medium and high density housing to keep housing prices relatively low and ensure individuals and families have access to that basic need. Presumably partially because of this (also because people generally don't want used houses), housing there isn't really considered an investment because the house is amortized over a 20-40 year period and demolished at the end of it. For those who know, how does this affect inflation and growth rates? (And feel free to correct anything I'm incorrect about.)

> not immigrant averse like Japan and not an island

As the past 4 years have demonstrated, there is a very large segment of the US population is very much against immigration, and would happily turn the country into an "island" by building walls around the land borders.

Pretty much all the countries in America have a fertility rate around 2 more or less. Even Mexico is approximately at 2.1 They will start to lose population in a few decades.

https://www.cepal.org/en/pressreleases/latin-america-and-car...

Why Europe yes but US no? Europe is also not immigrant-averse and not an island. It doesn't border on Mexico, but it does border on many other countries.

I don't see why Europe would suffer a much different fate from the US.

I think the main thing holding the EU back is their love for austerity. They could do a lot more to invest in their economy.

You might want to mention some sources in case people are interested in reading more on this theory.

Namely: Peter Zeihan. I'm a fan of the guy - his logic and rough predictions certainly seem to be bearing fruit over the last decade. If he's right about the coming decade we are in for a bit of a bumpy ride.

That's more short-term with regard to OP's question.

That would necessitate higher interest rates to cool down a heated economy, not low / negative rates.

At the current rate of vaccinations, 1.5m a week, with people needing 2 shots (750,000 people a week), it'll take approximately a year to get to 90% of the adult population vaccinated with 2 shots: 50m adults * 0.9 / 750,000 = 60 weeks (I've knocked off 8 weeks because vaccinations have already started). The idea that people will be back out spending again in the summer is ... ambitious.

Any idea what happens when T-Bills go negative as happens in Germany? Do people hoard physical cash or gold?

It's above 250.000 now..

I don't have that much but mind you, even at a slight positive rate (like 0.1%) you're already losing money every year due to inflation!

It's really ridiculous.. My confidence in the banking system is super low. I feel like they're just screwing us with the ECB's blessing (who initiated the low interests).

And that's why my money's in crypto and not a Danish bank.

This is the fundamental problem. 0% interest rates make it easier to start a business, but your startup doesn't get to borrow at 0% because there is the very real risk that your startup will fail. You'll get a nice 8% interest loan at best and no loan at all in most cases.

That risk doesn't exist for large companies but they don't have to invest their dollars domestically or even productively. They can spend them anywhere outside the US or just dump them into acquisitions and other stock market shenanigans.

See also: liquidity trap https://en.wikipedia.org/wiki/Liquidity_trap

It's when, despite low/negative rates, borrowers prefer to hold cash than to take out loans.

The biggest problem is that the things people want to buy are in short supply. So the extra money doesn't actually help anything, you just get asset price inflation.

I want to buy a house. If everyone has access to cheap mortgages, then everybody can buy a house! But there is a hard limit on how fast we can build housing. Even renovating a home has the same problem. Contractors in my area are raising their hourly rate now because everybody wants their home renovated! But there aren't enough contractors for everyone, so the price just goes up.

Look at the video card market. There's a hard limit on the amount of video cards that the industry can produce. That doesn't change if suddenly everyone can afford the $2,500 price tags. The price just goes up by exactly the amount of money people get loaned!

And there's a hard limit on the amount of entertainment I can consume in a day. A person has about 16-20 hours a day MAX to consume media. We literally can't listen to any more music, there's not enough time in the day. I can't spend any more money on media because I am physically unable to consume more.

I don't see how this would stimulate anything? The reason I'm not buying anything isn't because I can't afford it, it's because it's not available at all! (Probably why the stock market is experiencing volatility right now - it's the only thing providing utility right now)

But it's not just the rate with the central bank, they're forcing high street banks to prove that their systems can handle negative interest rates for consumer loans and mortgages.

It's obvious that it doesn't work. In order banks be able to lend money it's necessary the existence of business and households that want to spend money instead of saving.

What we are seeing, is the result of using the wrong tool, monetary policy instead of fiscal policy, because ideological reasons.

That’s the idea, yes. But it should be pretty obvious that it doesn’t work, for the same reasons QE doesn’t. Because banks can’t actually ‘loan out from reserves’ to their customers (they can loan reserves to other banks, but can’t to anyone who doesn’t have an account with the central bank). It actually can’t be made to work in terms of accounting operations. The role of reserves is settling transfers, so the bank obviously needs to have them as part of the process, but that happens later, after the loan is written (which creates the asset (loan) and liability (deposit) on the bank’s balance sheet). So having excess reserves doesn’t really increase the bank’s ability to extend more loans anyway, and taxing reserves just makes the bank want to buy more equities to get a positive rate.

Crypto?

If someone gives me a $10M loan at -1% interest, I would spend $200 on suitcases and a vacuum sealer kit and $200 to hire a mini-digger. I'd then go dig a 6 foot hole in a forest somewhere and hide the money as cash. I'd install some weather stations around the site with PIR sensors and 4G ($25 each, x4) just to see if someone comes hunting for my cash.

After 5 years, I return the cash. I earn $500k. Subtract off the $500 it cost me to set up and that's a pretty tidy profit for 2 days of my time. The chance of theft is well under 1% as long as nobody else knows where it is, so I still make a tidy profit even with a risk premium.

They're trying to avoid retail deflation. That is not usually related to asset deflation.

Asset inflation has been raging for at least a decade, maybe 2, inflating stock assets, housing and commodities, bitcoin and anything else which promises some return to unseen levels, since they started QE and dropped the low risk rate of return to 0. Retail inflation which they're trying to control is pretty much unaffected by QE and ZIRP and whatever levers they are pulling are not working, they just haven't noticed yet.

So at this point, if someone offers you free money, you say thanks very much and put it in the stock market, like everyone else, because where else can you get a return? And that goes on until the whole thing explodes in a panicked crash when public pretension differs too much from private reality.

Oops.

You say that, but this is already happening in some places: https://www.theguardian.com/money/2019/aug/13/danish-bank-la...

So, forgive the ingenuity, what prevents me from taking that 1000 loan, park it in my bank account, and repay the 990 due in a year (earning 10 in the process)?

> Many banks are already making lots of money

I think you mean some UK banks made money before rates went negative. The ones that made the most are in corporate and investment banking. Retail is a disaster zone.

> If you go to your local branch

I dont even have one any more. And I imagine most will be shutting down very quickly now.