Dutch entrepreneurs avoiding negative interest by opening multiple bank accounts
nltimes.nl
nltimes.nl
For a central bank there's no such thing as no policy. Even inaction is a policy.
(Of course, there are systems that work without a central bank. And can work very well in fact. But that's not what the Dutch as part of the Euro zone have.)
Inaction is the only policy. All the other actions are stuff that these people do to justify their existence .
With all due respect for Jerome Powell, Bernanke etc. these people are kind of frauds.
They are the only academic which are globally known and get all the respect and bows as well as recognition.
But their craft is a pseudoscience. The Nobel committee knows this, in fact the Nobel Prize for Economics is commonly referred as such but in reality it's:
"The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel"
Worlds apart.
If they were real men they'd pick a real science and face real irrelevance like real men if they are wrong or fail to make important contributions. Only in economics people are still around after getting it wrong so many times.
It seems like the more wrong you are , the more recognition you get, as people anticipate that economists who shoot frequently will get it right more than those who shoot infrequently given the randomness of their predictions
I'll admit I'm pretty furious at the fed right now though. As someone with a lot of assets in cash who was hoping to buy a house last year, I have been double penetrated by inflation and spiraling home prices. The housing market accelerated just out of my reach before I could make a move and my cash pile is on fire. I'd have moved back into the stock market to protect it, but it seemed risky given historical valuations and such. Now I'm poorer and I can't help but think Powell effectively just stole from me and I've been punished for being defensive and not participating in the fueling of an asset bubble.
I suspect you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral triggered by the lockdowns. Can't get a mortgage if you're out of work, ya know?
> As someone with a lot of assets in cash who was hoping to buy a house last year...
Let me stop you right there. Generally speaking, you shouldn't hold cash. Nobody should hold cash. Nobody should have ever held cash because even at the baseline expectation 2% inflation that's still a loss.
> I have been double penetrated by inflation...
Inflation is somewhere between 2 and 5%. That's not what I would call "penetration." Mild discomfort maybe.
> ...and spiraling home prices.
Housing affordability hasn't really changed on a monthly basis, because on a 30-year fixed rate mortgage the drop in interest rates from 4.xx% to 2.xx% means that a monthly payment two years ago on a $1M property is the same as it would be today on a $1.2M property. That's napkin math, I believe the spread is even larger IRL.
In fact, if you can lock in a 2.xx% mortgage in a 2-5% inflationary environment then it is in real dollar terms a zero-interest loan. Before factoring in tax deductions.
What's become more painful is making the down-payment.
> Now I'm poorer and I can't help but think Powell effectively just stole from me and I've been punished for being defensive and not participating in the fueling of an asset bubble.
You're not poorer, you're not as rich as you thought you'd be.
arcticbull said '... you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral ...'
Deflation makes cash have more purchasing power, so arcticbull your speculation is wrong. Completely backwards.
I suspect anything in between would have led to a huge spike in interest rates making borrowing yet less affordable no?
> Deflation makes cash have more purchasing power, so arcticbull your speculation is wrong. Completely backwards.
>> Can't get a mortgage if you're out of work, ya know?
So no, not really... unless you stopped reading before you got to that sentence ;)
"stagflation" is simply what happens when inflation keeps up with deflationary trends. It doesn't mean monetary policy is doing nothing. It likely means it's working as intended.
> Japan has had serious struggles fighting off deflation
But the CPI in Japan hasn't gone down, if anything it's gone up more years than it's gone down. Moreover, in what way is Japan terrible? Due to less inflation, there's less income inequality. Maybe deflation isn't bad.
In an inflationary economy, people spend their money quickly, since it's worth less sitting around. In a deflationary economy people hoard cash because the value of cash just increases in the bank. Why invest in anything (companies, labor, capital investment) if your money just earns 10% in the bank?
If enough people do that jobs disappear, as they realize they don't need to market any new product or service to make their money.
FWIW, they call that period in Japan "The Lost Decade(s)" https://en.m.wikipedia.org/wiki/Lost_Decades_(Japan)
Austrians and the HN community talk past each other because it's not easy to get the latter (which I am a part of) to see that their large salaries in FAANG companies are partly due to the Fed largesse.
If currency loses 100% of value, it will be worth zero. A complete, 100%, total loss.
A 500% loss would be spectacular! And not possible using commonly accepted laws of the universe such as math.
A dozen peaches experience 100% deflation. They completely 100% go to zero. There are zero peaches. They are gone.
What would 500% deflation do? Using regular math and experiences with donuts and peaches, what happens at theoretical 101% deflation? And 500% deflation? How can something be reduced more than 100%, the point at which it already disappeared?
So for example, a 500% deflation just means that one dollar today buys $6 worth of whatever it could have bought in the past (my math might be off)?
Inflation is about the loss of value, not deflation. 1£ today will be worth x£ tomorrow, where x < 1.
No, what I'm saying is the government failed to act sufficiently and forced the fed to act when they shouldn't have(or at least to the level they have).
> Generally speaking, you shouldn't hold cash.
Now come on that's not really true in the short term. Generally speaking, you shouldn't put your money in the market if you need it in the next 5 years. Sure I could have bought CDs but have you looked at rates lately? That wouldn't have helped. My only option would have been to pile into an asset, and by the time I needed to park my money assets had already appreciated above historical norms. I'd be gambling against a reversion to the mean.
> Housing affordability hasn't really changed on a monthly basis
The market I am familiar with and was planning on going back into is up about 35% from late 2019. You're also then gambling that these historically high valuations will hold going forward. Homebuyer sentiment has plummeted because folks like me no longer think paying these high prices(https://fred.stlouisfed.org/series/CSUSHPINSA) makes sense.
Did you really mean 5 years, or 5 months, or something else? I'm not sure if I can take this statement seriously, or if it's meant to be a joke. 5 years is a long time.
If you're young and you've only seen the market go up you need to familiarize yourself with normal volatility patterns. The market can easily take a dump at any time and fail to provide a positive return for years.
...or decades: "Nikkei index hits 30,000 for first time in three decades"
https://asia.nikkei.com/Business/Markets/Nikkei-index-hits-3...
According to whom? Right now, nothing pays out any yield, it’s stocks or lose to inflation.
I’ve followed ARCC, MAIN and GSBD for years, and there’s the more diversified Van Eck Vectors BDC ETF (BIZD), with an 8.5% yield. But I digress.
What should the government have done?
This is a factor worth considering for anyone who is currently looking to buy a home. As long as you can afford the downpayment, you could lock in a fixed-rate mortgage while your earnings or other savings could grow at a higher rate. This is analogous to what some companies have done in recent years, loading up on low interest debt.
If the Fed and the government are going to reward those who leverage up on risk, might as well. As '08 shows you'll even be rewarded when the crash happens
If interest rates decrease and home prices increase vs. interest rates increase but home prices decrease, then there is a point where the two will intersect, and there are many points around the intersection where the difference between the two is fairly insignificant.
How does the common expression go -- "The house always wins?"
Also, “don’t worry, just look at the monthly payment” is something that should only ever be said by a car salesman.
Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!
> On a 30 year fixed mortgage what else matters?
I think the general criticism regarding monthly payments is more targeted at products like interest-only mortgages, which were hot in the early oughts. Those aren't as common these days. Maybe some people have 10/1 ARMs and similar in mind, but that's a stretch. (Anyhow, today the spreads between ARMs and 30-year are ridiculously small.)
> Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!
You don’t know how long the search for a home will take. That’s the point.
I don’t think they intended to be holding cash, they were setting up for a large purchase and the timing was bad. But yeah, arguably when there’s no immediate prospect of the opportunity resurfacing, probably reinvesting that paper would be more congruent with the system we have before us.
Nah, holding cash is fine under some circumstances.
Yes, the 2% inflation that the Fed chose to aim for makes holding cash costly.
But everybody holds cash. It's just that higher inflation expectations makes people hold less cash in real terms.
But then, you can be angry at the Fed for choosing that particular inflation target. The Fed could just as well go for 0% inflation. Or even go for a stable nominal GDP 65,000 USD per year per capita in perpetuity. (The latter would basically automatically ensure its dual mandate. Though most of the proponents of nominal GDP level targeting suggest to target a slight increase over time.)
In such a stable nominal-GDP system, holding cash would be rational in many more circumstances than today, because in general cash would slowly increase in real value as productivity and thus real GDP improved.
That money that would have gone towards your equity, is being spent in interest. This is why people making 60k/yr. buy $65,000 trucks. Interest rates drop and they only look at the monthly payment amount.
You don’t always get the full tax deduction on a first home either. In high tax states the 10k deduction limit kicks in when your paying high state taxes + mortgage interest.
There's a lot wrong with the Netherlands and Dutch people but economically everything is still chugging along nicely. Our sole saving grace.
If they could afford an X/month mortgage, so bidded a higher total cash price because X/month suddenly was a higher total purchase price due to lower interest rates, and the original poster could only afford a X-$300/month mortage, the original poster isn't beating them anyway.
There has been an extreme shortage of supply due to some combination of people not wanting to move due to Covid because of exposure to lots of people being required, people valuing homes with more space over apartments more than they did in the past, and people not wanting to try to "trade up" because the houses they'd upgrade to were also being hit by the price increase. That shortage is what fucked the original poster here, not stimulus checks.
Say that he's got $500K in cash but can put only $3.8K/month toward the mortgage, while the average person around him has $250K but can put $5K/month toward a mortgage. Average housing prices are $1.25M, so at 4.5% interest rates he's competitive. He puts down $500K and borrows $750K @ $3.8K/month for a $1.25M house, while the average borrower puts down 20% ($250K) and borrows $1M @ $5K/month.
If interest rates go down to 2.5% like they did now, the average borrower can now borrow $1.25M, so home prices go up to $1.5M. His cash stash still would require a $1M loan, which would cost around $4K/month, so he has been priced out.
If interest rates go up to 20% like in 1980, then the average borrower can only borrow $300K to maintain $5K/month, so home prices drop to around $550K and he can purchase with cash, or a tiny mortgage. All of the homes between $550K-730K (previously, roughly $1.25M-$1.7M) are now unaffordable to the average mortgage buyer, but are well within OP's range.
Inflation acts as a tax on savers and a subsidy for debtors.
Slightly tangental, but you piqued my interest. If it's clear the Fed can print more money, which causes inflation, which is a tax on savers. Then why do savers or anyone need to pay taxes? Could the Fed just not use inflation as a form of taxes in general? Instead of taking x% of people's income, the dollar could just print the money they need, and inflate the dollar's value to recoup their costs.
I'm not saying this is a good idea or anything. I am not knowledgable enough in economics to argue for/against this. It's just a food for thought kind of thing.
The macroeconomic answer is yes, assuming that you can control inflation and spend your money in a wise disciplined manner, you can do this. An inflation rate of 10% is basically a wealth tax on currency-denominated assets of 1/1.1 ~= 9%, collected implicitly. And it has many benefits. Administration cost is near-zero, the government just needs to print money and let price levels do the rest. As a wealth tax, it's progressive. It encourages consumer spending, and encourages people to hold productive assets rather than currency-denominated financial instruments. Aside from land & externality taxes, it's one of the best types of tax.
The historical reality is much nuanced, and negative. In reality, you never get uniform inflation across all prices; instead you get something called Cantillon Effects [1], where money pools at the places it's injected within the economy and at monopolies, and never makes it to ordinary consumers. This ruins a lot of the progressiveness of inflation: Google and Facebook shareholders will enjoy higher ad prices (which is happening now), but the ordinary service worker on the street still lacks the bargaining power to get a raise. And it's also easier to dodge than governments believe: instead of holding wealth in cash, wealthy individuals will simply hold stocks, cryptocurrency, art, NFTs, and other "floating" assets whose value rises along inflation (this is also happening now). Inflation also acts on a tax on the economic efficiency of businesses and consumers - instead of the government collecting the tax, businesses simply have to re-price all of their items, and consumers may need to find alternate sources if relative prices change.
The worst case, though, is that it's unclear whether it's possible to maintain steady, government-controlled inflation at appropriate tax levels (which would have to be about 50% to maintain government spending levels of about 35% of the economy). Looking at incidents of high & hyperinflation [2], it's very difficult to find time periods where inflation exceeded 20% but then did not go on to exceed hundreds of percent. Businessmen seem to have a binary approach to inflation - either they can think of a world of stable prices (where maybe they give 2-3% CoL increases each year), or they must grab all the money they can right now because all their costs are going up too and if they don't they'll go out of business. There are many historical examples where governments thought "Okay, we can tolerate just a few percent higher inflation to fund this one war, and the spoils will pay it back later" and instead they found themselves tipped into hyperinflation and unable to rein the economy back in.
[1] https://mattstoller.substack.com/p/the-cantillon-effect-why-...
[2] https://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hig...
No, the real problem is the deadweight cost:
The higher your inflation, the less cash people want to hold in real terms. But that amount of cash is what you collect your inflation tax on.
> An inflation rate of 10% is basically a wealth tax on currency-denominated assets of 1/1.1 ~= 9%, collected implicitly.
What makes you say so? Expected inflation would purely be a tax on cash. Currency-denominated assets like loans and bonds would just get a higher interest rate up front.
Your next paragraph describes exactly that 'dodging' of the inflation tax.
Btw, you can also simply dodge eg a USD inflation tax by holding Swiss Franks. No need for NFTs.
(Of course, if you have a capital gains tax levied on nominal gains, then inflation effectively increases the capital gains tax. The solution here is to charge capital gains taxes only on real gains. That's a real problem in the real world.)
> In reality, you never get uniform inflation across all prices; instead you get something called Cantillon Effects [1], where money pools at the places it's injected within the economy and at monopolies, and never makes it to ordinary consumers.
The Cantillon effect is controversial to say the least.
In order to work like Internet Austrians commonly describe the effect, people have to be idiots who act purely on historical data and do not form any expectations.
In the real world, when the Fed announces some future policy in advance (like a taper or a new round of QE), that announcement has effects on eg the stock market right away, even when the Fed hasn't added or removed any money yet.
In contrast, for the Cantillon effect to work as described, money would need to act sort-of like a liquid or gas and 'slosh around the economy' and get stuck in nooks and crannies.
If I understand the very basic gist of MMT correctly, it's basically that the government "invents" currency simply by spending. If the government wants to finance, e.g., an enormous infrastructure project, all it has to do is will it into existence and the money will get printed - mostly because the full faith in credit of the United States Treasury will make sure the right people are paid.
If this is true, what then is the point of taxes? Taxes are a buffer to "sop up" excess cash in the economy to keep inflation under control.
Another central tenet of MMT is that the end goal of tuning these knobs should be 0% unemployment, because that's when your economy is producing maximally.
I'm sure I got a lot of that wrong, because (like I said) I'm not an expert, but what you described reminded me of the MMT Wikipedia rabbithole I ended up in a few years back.
Unfortunately, MMT is either a meaningless tautology that doesn't change anything about our understanding of the world. Or, it's wrong. Depending on what definition the MMT people use at any one point in time during a discussion.
In some sense, they already do that.
But it's more complicated than it first appears.
First, most of the money the Fed+government makes from issuing money comes from seigniorage, not from inflation.
Simplified a bit, seigniorage just means that the cash people hold in their wallets (and bank accounts) took the government pennies to print, but the people offered real goods and services in exchange to acquire it.
Second, higher inflation makes people hold less cash in real terms. A simple illustration: when Germany had hyperinflation in the early 1920s, some people might have carried cash by the wheelbarrow, but even a whole wheelbarrow would only be worth eg a few apples and potatoes.
In contemporary Germany with a stable currency, it's not too unusual to carry enough cash in a slim wallet to be able to afford wheelbarrows full of apples and potatoes.
So if the government+central bank want to maximize how much real benefit they get from printing money, they can't just crank up inflation. In fact, lower inflation is probably better, if you want to maximize this.
So honest hardworking people got triple-fucked.
I can't imagine how well UBI would ever go. This should be the nail in the coffin for UBI for me, I will never vote for it.
UBI would help a lot with homelessness and blight. Also seattle is not nearly as bad as the rest of those places in 90+% of the area.
Having homeless people and a high crime rate does not == 3rd world. In fact, it only means many, many people want to live there due to the overwhelming economic prosperity that is clearly not equitably split.
Also fun fact: the three "third world" states you mention have a combined GDP higher than EVERY OTHER COUNTRY IN THE WORLD after the US, China and Japan.
Sure, GDP is higher, thanks to big corporations and wealthy NIMBYs camping out in their caves, voting for their own demise.
> many people want to live there due to the overwhelming economic prosperity
No one wants to live in Bay Area. In fact, most engineers I've talked to want to leave and they have been leaving in droves.
Not everyone got it, so it wasn't universal.
They shut down most small businesses, so the benefits of the extra income were consolidated in a few major companies.
The housing market went up because people who were previously happy to live in an expensive small apartment in a busy city were suddenly forced to stay inside most of the time, and realized they would rather have a bigger place.
Though since we're talking about it, I think UBI might work if we also outlawed fractional reserve banking.
Currently, new money is created when banks lend out more than they have, I think they like to call it "leverage." This creates a type of inflation, but the only ones benefiting are the banks and the people/businesses they choose to loan money to.
Instead of allowing leveraged bank loans, we could create the same inflation by blatantly printing new money every year and distributing it equally. This would give the benefits of inflation to everyone. If you wanted to start a business, instead of getting a cheap loan you would have to crowd fund it, because all the money(power) that was in the hands of banks is now everywhere. If we needed to control inflation, we could have taxes and remove the money collected from the pool instead of using it.
It would be a bit of a balancing act to make sure enough people keep working, and that prices don't get too high, but I think it's doable.
1) I don't think UBI would be that much money per person. The UBI proposals are alternatives to food stamps, not jobs.
2) The people with money to burn and buy assets and $20 burgers would lost more than their UBI due to taxes.
Aside, in expensive west coast cities we already have $20 burgers
I am fine with providing social services to alleviate homelessness needs. Getting these people jobs would be the way to go. For those that cannot find jobs or are mentally unstable - they can continue to live off welfare.
UBI would go to 99.9% of the polulation that is not homeless.
> So honest hardworking people got triple-fucked.
You're absolutely right. Real wages are actually down. If I wasn't a relatively rich SW guy and was a laborer I might be out in the streets lighting shit on fire right about now. I feel frustrated because I might not be able to buy a home again for a year or two, but there are people who are seeing their dreams disappear forever in front of their eyes. Imagine being a low-skilled person who was aiming to buy a house in a lower-tier market until outside speculators and investors move in, searching for anywhere they can park their leveraged cash piles before inflation sets them aflame. I can only hope that these piles of capital go up in smoke as the malinvestments driven by fanatical fed policy prove unwise.
Yes, that is exactly it. The economy falls apart if everyone saves too much. Money is an imaginary number designed to facilitate separation of labor, if too many people save and retire early then there won't be enough people working.
FWIW I am the same way, and used to be angry about it, but I have accepted it for what it is. I bought my house 15 years ago at the height of the last housing bubble. I was under water for a while, but I didn't qualify for any of the assistance because I bought a house I could afford. If I had bought a more expensive house, or if I made slightly less money I would have been able to get some money from the government. It was all based on the ratio of income to mortgage payment, which is still kind of annoying.
Only way I could cut my losses in my mind was to pay off the house as quickly as possible, to save money on interest. So now it's paid off, and for the first time since a year after I moved in Zillow has it at a higher price than I paid for it, though just barely.
But back to the point, don't keep your assets in cash, or any one thing for that matter. Index funds, mutual funds, commodities, collectables, anything that is easy to sell and will generally go up in price with inflation. These policies are meant to encourage people with cash to do things with that cash, instead of hoarding it.
Yes, this I recently learned is called the paradox of thrift. [1]
[1] https://www.investopedia.com/terms/p/paradox-of-thrift.asp
See this in the case of Greece vs Germany. Germany is trying to boost exports by cutting back on imports. If Greece would retaliate by following the exact strategy there would be less trade between them overall. Meanwhile if both countries tried to boost imports, then both of them would be better off.
How exactly does Germany do it? The government is simply enacting policies to destroy the bargaining power of labor. Yes, Germany is trying to compete with Greece based on labor costs. It's trying to pass off a questionable economic policy that destabilizes the eurozone as strength because of moral attachments to export industries and saving money while blaming the other side for importing its products and borrowing to pay for them. This is why the eurozone is a failure and every country should have its own currency.
The central bank can always just keep printing enough money to keep nominal GDP stable, if they want. No matter how much people want to save.
Sorry, that was a bit sloppy. When we say that eg the Fed prints money, we mean that they buy assets with newly created money.
Typically that asset is government debt. But they have been known to buy other stuff as well. And if they run out of government debt to buy, and nominal GDP still hasn't picked up, they can keep buying up the rest of the world.
Just to keep in mind: real GDP = nominal GDP - inflation.
Printing money like isn't expected to do much for real GDP.
I have no problem with policies meant to encourage people to do things with their cash, but only if proper social measures are taken to provide safety and well-being for those people if and when unfortunate events strike e.g. encouraging people to not save their money is a little bit more palatable in a country where socialized health care, public transportation, free public education, etc..
In other words, perhaps people wouldn't need to save so much money if more of their basic needs were covered. In my country (USA), not having savings is like playing a game of Russian roulette with one's financial well-being, assuming one is fortunate enough to have enough income to even have savings.
> These policies are meant to encourage people with cash to do things with that cash, instead of hoarding it.
Which cause the rich to get richer, and the poor get poorer.
This cannot be overstated enough. In the USA a myth has developed about "personal responsibility" in which people have a choice, they can save for retirement or they can spend their money on other things; we tend to forget that for roughly half the country there is no such choice because just paying for basic living expenses (food, shelter, clothing, and transportation to a job) will leave nothing to save. People bought the myth and allowed defined-benefit pension plans to be replaced by IRAs and 401k plans.
"Which cause the rich to get richer, and the poor get poorer."
The rich should get richer if they are compounding their investment returns over time. The problem is that for more than 40 years America has been in the grip of politicians who have attacked government programs of all kinds, insisting that we cannot afford to pay for anything that benefits the poor while also insisting that we have to cut taxes on the rich (naturally, the tax cuts also benefit those very politicians). The fact that the poor cannot invest (for lack of capital) is not the reason they are getting poorer; they are getting poorer because for decades we have reduced the scale and scope of government programs that benefit the poor (or that benefit everyone equally).
However, asset inflation is not quite the solution it seems, as the government taxes the illusory capital "gains" due to inflation. I suspect the stock market surge over the last year is mostly fake inflation gains.
It's not really possible to make 100% gains out of 5% inflation. Not every price increase is inflation!
The increase in the price of stocks isn't really inflation (except with respect to CPI) because 1 share of AAPL buys you far more CPI goods than 1 share of AAPL bought you 2 years ago. For it to be "inflation" and "entirely illusory" 1 AAPL share, while priced at $150 would have to only buy you as much a 1 AAPL share 2 years ago at $50.
That makes the increase in asset prices "ROI" not inflation.
What you're seeing is a massive increase in personal savings among Americans, recently at near all-time highs. [1] Combined with FINRA margin debt at near all-time highs due to the low-cost and broader availability of loans. [2] That's my theory anyways.
[1] https://fred.stlouisfed.org/series/PSAVERT
[2] https://www.advisorperspectives.com/dshort/updates/2021/08/1...
BTW, what the shares of one company does means nothing in this discussion. What the S&P 500 does means something.
(2) ok the same exact thing applies to SPY shares and doubly so when you include dividends. I mean AAPL is 7% of the S&P500 and 12% of the NASDAQ and so is fairly representative but your point is well taken.
There are two reasons why stock prices go up. Inflation raises revenue expectations. Lower interest rates raise the value of future cash flows. This is especially bad with land because it can absorb any additional money you get from lower interest rates. Low interest rates make your car cheap but not your house... It's a big problem.
Financial markets don't seem to expect either. Inflation expectations (via TIPS spreads) are where the Fed wants them.
After that, further decreases of the interest rate can only work if cash withdrawals are restricted to prevent bank runs, or alternatively if the value of physical cash and digital deposits are decoupled. The IMF has posted something about the latter option[1].
[1] https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-nega...
What happens when the only way the state can sell debt is to print the money and buy it itself? What happens in the next crises when we need to stimulate the economy and rates are still negative?
At some point you can't keep kicking the can down the road. When do we reach that point? Are we there now?
I'm not a doom and gloom kind of fellow, but this does not appear to be sustainable to me. As with climate change, destruction of ecosystems, and draining groundwater reserves, all unsustainable practices come to an end. Abruptly if not planned for. It looks like we're nearing that point with monetary policy.
Clearly not, the peak was in 1981 which is more than 50 years after the Great Depression: https://advisor.visualcapitalist.com/us-interest-rates/
We are at crazy lows compared to most of this time frame.
https://fred.stlouisfed.org/series/WALCL
We already see the impact in massive asset price inflation over the last decade, a distorted bond market, growing inequality, an inefficient stock market, and a proliferation of scams and fraud. This is not going to end well and MMT is not a panacea.
How do we now leave ZIRP and QE without crashing markets and entering another depression? They have already tried several times to exit and had to abandon it.
And, what is your alternative plan to quantitative easing (QE)?
I am struggling to believe this is a serious suggestion.
Can you please (oh please HN don't down vote me!) provide more details?
Almost all highly industrialised, wealthy nations are heavily dependent upon trade. If you default on your national debts to foreigners, they are very unlikely to want to trade with you in the (near) future. How to do you propose to overcome this issue? See Argentina!
> See Argentina!
Perfect example. The country defaulted and it's honestly not a terrible place to be, considering what it's been through. Not everything is an exact parallel, but compare it to Brazil, where the country inflated instead of defaulted.
Not a good choice if you can avoid it!
I think you're really talking about a soft default here with 'default on the currency' (normally you default on debts, not currency), which is in fact the current policy of risking inflation to get rid of debts, but then you're following that up by suggesting austerity, which was also tried as a response to 2008 (the UK is a prominent example), and failed miserably as well.
There's nothing wrong with borrowing for counter-cyclical spending, or with borrowing in general IMO. There are other answers than borrowing to pay for everything or never borrowing and during a recession a little government support (monetary and fiscal stimulus) can go a long way.
What is wrong and dangerous IMO is to pretend that we don't need taxes any more and that countries can simply print their way out of any problem (as has become orthodoxy with MMT). This used to be called debt monetisation, and was frown upon as debasing the currency in this way usually eventually ends in financial crisis and/or hyperinflation. We'll see where it leads as this is the policy we've been pursuing since 2008 and supercharged in 2020 as you can see in the graph above.
1. You're stealing from the poor (via currency devaluation) to give to the rich (via government grants, if you are struggling in the tenderloin you are not getting a SBA)
2. Contemporary ethical government is predicated on the principle that the actions of the government have the consent of the governed. Sure, you can't always have that, but you want to try not minimize not getting the consent of the governed. If government borrows money, then people who could not have voted against the borrowing of that money are enjoined to pay it back (for example, people who became of the voting age after the act of borrowing). If you go to a pay-go system, the voters have approved of the taxation and the voters have approved of the use, and the chain of consent is not broken.
See the linked graph above for evidence of just how abnormal the last decade has been.
QE is a failure on its own terms. It was to be targeted and of short duration and to promote growth and suppress inflation. None of those objectives were achieved and we’re now addicted to it in ever increasing amounts, along with zirp. What do we do when the next crisis hits if we don’t normalise rates and bond buying again? How will the bond market function when the gov owns more than half its own debt? How will stock markets function when governments step in to buy even corporate bonds indiscriminately with new money?
My point: I think housing prices in Australia, New Zealand, Canada, US, and UK are "out of control" because we read a lot of English-language media about the richest places in those countries where housing supply is highly constrained. As a result, it seems like housing prices are run-away. But no one is saying that about Perth, Australia, or Leeds, UK, or Minneapolis, Minnesota, US, or Ontario, Canada. Do you see my point?
Another thing to consider, most regions of France and Germany carefully plan how much housing supply is needed, then build it -- public or private. This seems to work very well to keep housing prices very stable and affordable for middle class and below.
And Japan has national and universally applied land usage and building codes. It is almost impossible to practice "NIMBY-ism" in Japan. So plenty of houses get built, even in very crowded places like Tokyo, Nagoya, and Osaka.
Does that give you confidence? 80 years doesn't seem long to me.
I’d also like to point out that prior to the current system, market panics occurred significantly more often than once in 80 years. So if we’re comparing the system we have today and the system that existed 80 years before it, the current system seems measurably more stable.
And 80 years is roughly 50% of all years of industrialised economies that started around 1850. Recall that the world economy had zero growth per capita until the industrial revolution started around 1850.
Of the countries part of the UN, only 14 countries have a constitutions older than 80 years. The oldest is the US in 1788, and the youngest is Ireland in 1937.
Predicting timeframes is tricky. An inflationary spiral by its very nature is an exponential process, so you can seem fine for a while and then all of a sudden there's no way out except through a singular process and things are really bad.
My entire family s moving assets around in creative ways as to save money. In anticipation of my the death of my grandparent, he is now loaning money to his children in the legal sense to avoid inheritance tax so that when he dies they don't have to pay it. — All of this is legal, and it is silly.
Silly? Yes, I agree. I favour about 50% inheritance tax with almost zero minimum. Inheritance is fuel for the fire of income inequality. Families create dynasties by avoiding inheritance tax. Most highly industrialised, wealthy countries would have much less income inequality with vastly higher inheritance taxes.
Its trivial for someone with lots of money to find ways to avoid dying with money but still ensure the next generation has a good life. As grandparent comment suggests. I don't think any tax or any plan that is not destructively over-burdensome can avoid people ensuring their next of kin have a good life.
How do you feel about my suggestion of 50% inheritance tax without loop holes and minimums? It should decrease inherited wealth by greater than a geometric rate.
If any Germans / Austrians / Taiwanese / Koreans / Japanese are reading this thread: Can you comment about how to handle inheriting a family business than is worth more than 1M EUR? (They are all famous for "Der Mittelstand"[1].) My point: When you begin to add exceptions, 1M EUR quickly becomes 10M EUR and 100M EUR! Idea: You "pay" the tax on a family business inheritance buy guaranteeing payments to national tax authority / treasury as long as the business is open. (Assume business does not go bankrupt!) You can discount the future cashflows and get a present value that appears as a debt on the company balance sheet.
How does this work? There are always loopholes. I don't think it could exist, nor will exist with the incentives of politicians, frankly. It would be nice though.
> How do you feel about my suggestion of 50% inheritance tax without loop holes and minimums? It should decrease inherited wealth by greater than a geometric rate.
I have no issue, in theory with aggressive taxes. I of course don't want to lose my income if the taxes don't help society, but i have no issue with useful tax. As a not-billionaire without inter-generational wealth protect, i see inheritance taxes value. I think, realistically, that people will always prefer to protect/provide to kin, at expense of society, and we have to work around that.
Can i create a holding company, co-owned between me and next-of-kin and "invest" my money in it then let them liquidate?
Can i loan them the money? Can i gift them money? Can i store in trust? Do other nations have successful ways to do this?
> Idea: You "pay" the tax on a family business inheritance buy guaranteeing payments to national tax authority / treasury as long as the business is open.
This seems like its burdensome to the business, in a way that could be destructive to it. If you suspend payment when its not profitable, then you can act like amazon and many other corps and eternally run a deficit to avoid tax. If you don't allow that, then you're draining the cashflow of a valid business which may kill it.
Frankly, i think its backwards too. Giving cash or liquid assets to your kids? Tax the S*T out of it. Giving a successful business that employees lots of people in your local town? Don't ruin the business trying to tax an old (wo)man giving it to their kids - that's destructive. Tax the kids when they cash-out from the business (sell biz, receive income, etc). I'm not particularly biz friendly, but they have real value to people outside of the family and produce something for society.
I also don't think its unreasonable to not tax real estate transfers, especially if its a primary residence. Maybe estate that actually stays in the family multiple generations doesnt get taxed, idk. Lots of people have strong multi-generational attachment to physical places. That's what really makes this hard.
> Can i create a holding company, co-owned between me and next-of-kin and "invest" my money in it then let them liquidate?
You'll always have to transfer the stock to your next-of-kin somehow. This is where a tax would apply.
> Can i loan them the money?
Yes, but they'll need to pay it back someday. That makes the debt a taxable asset. (i.e. when you inherit you inherit the "asset" = the obligation, which is taxed with 50%)
> Can i gift them money?
In Germany the gift tax is the same as the inheritance tax.
> Can i store in trust?
Yes, and that's why I agree with you. It's just not as simple to avoid inheritance tax as you make it out to be.
I'm not claiming that all those are successful ways to do it. But rich people seem to find a way to do it, probably using a combination of the above and other tricks i don't know.
Lots of ideas... no idea what works well. It's a hard issue to avoid and a harder issue to catch those avoiding.
Your father is simply wrong. It can, and is done in my family to avoid losing out on university, rent, and health insurance subsidies that only apply to the poorest segment of society.
By moving our assets around, the poorest members of the family can continue to receive them all the while effectively being slightly over this treshold.
There is much to gain from creative accounting for the poor in countries that provide assistance to the poor by making one appear poorer than one is.
> Silly? Yes, I agree. I favour about 50% inheritance tax with almost zero minimum. Inheritance is fuel for the fire of income inequality. Families create dynasties by avoiding inheritance tax. Most highly industrialised, wealthy countries would have much less income inequality with vastly higher inheritance taxes.
The problem is that it is very easy to avoid it in a number of ways such as simply creating a shell company jointly with one's heirs and then donating the assets to the company; the heir then becomes the sole owner of the company after death, as if such taxes were to apply to stakes in a company, then companies would go defunct upon the deaths of some of their owners.
Tax laws in many ways rely on citizens not being clever enough to exploit the numerous loopholes, — but then again “idiot tax” is not something I'm entirely opposed to.
It's true that extremely tax-heavy countries generally have poorer populations with a more even wealth distribution, but that's more or less the result of "nobody will get rich if you take everyone's money".
The vast majority of millionaires in the US are self made, so inheritance taxes couldn't possibly change that?
The masterplan is this: Let the banks mess things up, ruin people's trust in their governments and in capitalism, you move to a country that's unlikely to fall to communism, HODL your crypto, then wait it out then watch your crypto price moon as capitalists desperately try to flee into crypto to protect their wealth while their home countries fall to communism.
There already is. Asset seizures and wealth redistribution are central planks for Sanders & Warren.
Do you consider the wide and deep social safety nets of Canada, Uruguay, Ireland, France, UK, Germany, Austria, Belgium, Netherlands, Denmark/Nordics, Spain, Italy, Israel, Australia, New Zealand, Taiwan, Korea, and Japan as "wealth redistribution"?
From the perspective of an academic economist: I do.
From the perspective of an average working Joe, who is lucky to not yet fall into such safety net: I do not.
The social safety net is essential for a well-balanced, modern, highly industialised, capitalistic, wealthy country.
To be clear, when I use the term "social safety net", I mean (at least): healthcare, education, housing, unemployment, and retirement pension.
> who is lucky
I know it's popular these days to say one's success is all luck, but we both know better :-) You've made some good choices along the way.
But the thing is that if the monetary system continues down the current path, eventually, the most ardent capitalists will grow to resent capitalism and might turn to communism. Already a lot of young people want communism even those who believe that it's not going to work out; they like the reset aspect of it.
Same reason why people turn to dictators. When the situation gets desperate enough, people will willingly accept an obviously terrible option; just to reset the board. There is a point when people just want to see heads on spikes and are willing to do it at a cost to themselves.
Honestly, I'm tired of "boomer capitalism" i.e. capitalism that thinks exponential growth that followed a devastating war should be permanent for all eternity. Essentially demanding that we have periodic wars according to the broken window fallacy.
Where is the "maximalist" capitalism that lets humanity reach its full potential instead of insisting on profit expectations that are divorced from reality?
I don't know what you mean by protecting "their wealth" because money is a promise to work. You cannot protect such a thing by using it to purchase a commodity because there is no promise that the commodity will be worth anything. Sure, the speculation is sort of reliable but it is still speculation.
http://rootbug.com/interstellar-oikeassa-aikaan-liittyvat-ol...
>That people’s “time preference”, impatience, cannot be negative in the long run — and hence the possibility of negative real interest rates is not needed.
How does time preference become negative? Aging populations consist of people who need to work now, because they cannot work later. Alternatively, rich people at the top consider money a measure of wealth and optimize it like a high score. Third cause. Banks have written an excessive amount of money losing bonds and the money they have issued does not actually reflect the losses in the bond market (2008). In other words, people use money to isolate themselves from losses in the real economy because it is insured by the government.
I will say this: Over the long term interest rates are not set by banks, not even the central bank. It is primarily the availability of solvent borrowers. Companies essentially offer an investment opportunity to the bank and promise a fixed rate of return. The banks purpose is to price risk, effectively it is determining whether that promise is the real deal. The fact that low interest rates have not lead to inflation simply means that there are no solvent borrowers at that level of interest.
Here is a perverse fact about deflation: Once you have deflation, money itself provides a risk free rate of return that competes with labor (the thing that backs debt based money) for capital. When there is deflation there is no market mechanism that can determine an interest rate that balances credit (savings) and debt (borrowing). According to the Friedman Rule [0] the best interest rate is 0% and it is assuming no inflation or deflation. When you have deflation interest rates must become negative.
Buffet became very rich because of this fact. In the current environment, revenue, profit, growth are what drives valuations. Cigarette butt value investing? Not so much.
But what if you have deflation and/or high taxes? A building, land, machinery, yourself, etc are what you should invest in because they can be used to make money. Those who get rich in these environments are the ones that are making a bet on depreciation of capital (property, goods, etc) being less because of an increase in value or their useful life in an environment that rewards those who put their money to work.
That's where you lose me. Prices are going up for many things all over the world (including in the Tech world which used to be highly deflationary). Let's not forget that we are in a pandemic (loss of demand) and that oil prices are relatively low. Prices should have gone down. The only thing going down right now is the government CPI.
Negative rates have been around since 2014. And this "trick" of opening multiple bank accounts has been exploited across the EU for pretty much the same period of time.
For example, I've frequently done business with German companies. They don't even hide it. It is not in the slightest bit uncommon to receive an invoice with four or five EUR bank accounts printed on it. You can randomly pick your "preferred" account to pay to and the company's accountant will rebalance the accounts at the end of the quarter (or wahtever).
Also, it's usually a good idea to have a backup just in case something goes wrong with your primary bank account. Dealing with bureaucracy is bad enough, dealing with it while you're also unable to send or receive payments is way worse.
Isn't Germany subject to SEPA time constraints like everyone else ?
> ...[A]ll standard SEPA transfers should arrive within a maximum of 2 working days. Keep in mind that if a transfer is made just before a weekend or holiday, the time frame will be extended to a maximum of 3 working days.
> You’ve probably heard that all SEPA transfers have to be completed within one “banking day,” so let’s clarify what that means—one banking day is equivalent to two working days due to the opening hours of the banks involved. Any weekday that is not a holiday is considered a working day.
[1] https://support.n26.com/en-eu/payments-transfers-and-withdra...
Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
Maybe its just my perspective having (mostly) dealt with SME's. I would guess larger companies are more clever about it (e.g. perhaps they have one "receipt" account and then the money gets automatically spread out from there once received).
You could load-balance once per-customer and not trip this, but that doesn’t get you fully automatic rebalancing.
They could have it randomize per vendor I suppose but all that is a lot of hassle when you can just put five accounts in the Payment Advice field in your accounting software and let the vendors do with it as they choose.
Would be interesting to learn if they give the list in the same order always or if they randomize the order of the account numbers listed, DNS round robin style :)
The simple answer to this is because "Payment Advice" is a big text field in your accounting software and "Randomize per invoice" or "Randomize per vendor" isn't an option it has.
Fees are usually lowest and the transfer is fastest if source and destination accounts are at the same bank.
Slovenia has 5 or so popular banks. Thus it’s feasable for a company to cover banks of most payees.
So it's worth knowing which "banks" are really just different different brands of the same parent institution, if you're trying to diversify because of this limit.
https://www.fscs.org.uk/what-we-cover/banks-building-societi...
_If you have money in multiple accounts with banks that are part of the same banking group (and share a banking licence) we have to treat them as one bank. This means that our compensation limit applies to the total amount you hold across all these accounts, not to each separate account._
To take an extreme example, imagine running Apple’s reserves. It’s probably close in scale to the finances of a fairly large country (and considerably more profitable).
Czech Republic GDP (2021) $276 billion
That means Apple, one entity, receives (not including spending) as much money as every single transaction that occurred in the entire country of the Czech Republic in a given year. Any people say Apple is overvalued...
Not that individual depositors get a say, but isn't this (the consolidation of banks to relatively few players) the larger source of risk?
In the US, my understanding is that there are a lot of small local banks, but that they are all dependent clients on a much smaller number of larger banks. If I go to my local credit union, I don't think I have a straight-forward way of knowing which mega-bank they depend on, if any. If "per-bank" limits are meant to spread out risk, isn't this undermined by consolidation? Or do I misunderstand the structure of mutual dependence between banks?
That's because branch banking used to be banned.
Predictably, the US also had a history of bank instability.
Canada, by comparison, has enjoyed stable banks with many branches diversified over the whole country for centuries.
I'd ask for sources if you want to make claims that broad.
Well, 'centuries' interpreted as an integer multiply of 100s of years was probably overstating things a bit.
See also https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
Of course, this is not limited to big businesses. You can do the same with an IB brokerage account but I guess the added complexity is what puts people off.
Wealthy people opening multiple accounts to stay under the FDIC limit is just an example of folks finding a loophole to receive a government benefit that was never really intended for them in the first place.
For instance, I keep $XX,000 in my bank account but a negative $XXX,000 balance in my brokerage account.
And I'm not particularly wealthy.
This way I have an isolated cash cushion buffer separate from my investments, and I don't really care what, if anything, that money makes. It's actually invested in my brokerage account, at a [edit](1.25%) margin APR, that's tax deductible - and offsets my capital gains.
[edit] correction: I double-checked, I guess I'm paying closer to 1.25%. Looks like margin rates are both up at IBKR, and my recollection was off. Thanks for the spot-check throwaway2037. It's hard to find the historical rates, too.
If you want to keep the banking system stable, it's good to keep some skin in the game for depositors.
There's always government bonds (and money market funds that invest in government bonds, and narrow banks that only invest in government bonds etc) for people who want as much of a guarantee as FDIC can give you.
Or more concrete: without something like FDIC banks have some incentive to arrange they balance sheet in such a way that it's (a) safe, and (b) simple and transparent enough to convince customers that it's safe. Customers have an incentive to look for banks that are simple and safe.
(Customers don't have to do the balance sheet analysis themselves. They can rely on third parties.)
With something like FDIC, customers don't care how risky their bank is. In fact, more risk is better if that ever so slightly raises the returns available.
(FDIC charges insurance premiums, but they are not properly risk adjusted.)
First, the stated reasons might not be the real reasons.
Second, the stated reasons might be the reasons as intended, but the people making the laws might still misunderstand what's actually happening.
See eg https://www.alt-m.org/2021/05/20/how-u-s-government-paper-cu... for some wider background.
And those places had very stable banking systems during that time. The Canadian experience is especially instructive when compared to its tightly (but fragmentedly) regulated neighbour in the south.
In any case, 'strict' but fixed regulations but shielding customers from consequences just leads to gaming of the regulations.
It's better to give customers (and other stakeholders) skin in the game, and reduce the regulation to perhaps a duty to disclose truthfully. Then customers can police their banks.
You get shit like Nikola, like Theranos - all that had sophisticated accredited investors looking at the books, not just randos, and look how that turned out. Ones dead and the other is pushing cars down hills in PR stunts worth billions in market cap.
The directionality around regulation is clear: without it, rivers caught fire. Then we got environmental regulations and lo and behold, no river fire. The idea that customers can just police the environment is equally baseless. Customers aren’t experts in finance or the environment. That’s why we delegate the work to a group of experts who are.
Banks are too important to yolo. Retailers can get their risk on elsewhere.
See https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
Do you not agree that the average individual is not an expert in what makes for a successful banking system? If that's the case why would you leave it up to them?
I agree I overstepped when I said it "never" works - generously, I was being hyperbolic, however cherry picking a few good outcomes doesn't a blueprint make, IMO.
> In this book, Robert Anderson, a development consultant and former World Bank economist, recommends a different approach. Instead of adopting policies that are common in rich countries, Anderson suggests that policymakers take into account the institutional weaknesses typical of developing countries - corruption, deficient rule of law, cronyism, and so on. Simpler, market-oriented policies are more suitable to poor countries institutional environments and more likely to produce growth and keep the private and public sectors honest.Anderson recommends sometimes counterintuitive policy solutions for a number of areas - banking, privatization, corporate governance, bankruptcy, and competition. For instance, he argues that "rich countries were once poor countries" and that "examples from the past in rich countries may be more appropriate for poor countries today."
I chatted with the author a bit. Many of his suggestions are useful for rich countries as well.
The argument starts from the observation that honest and competent civil servants are one of the most precious commodities a country can posses. They are in limited supply, and should be used wisely and sparingly.
To give an example from child rearing: instead of the parents always intervening for how to share, teach your kids the divide-and-choose rule. https://en.wikipedia.org/wiki/Divide_and_choose
Similarly, in the US there are essentially two kinds of bankruptcies: chapter 7 and chapter 11.
Simplified, in chapter 7 the business just gets auctioned off, and proceeds go to the creditors.
In chapter 11, the business keeps running mostly under old management, but with lots of micromanaging from a court.
The former is rather simple. The latter has lots of opportunities for incompetence and corruption.
The author suggests not implementing something like chapter 11.
> Do you not agree that the average individual is not an expert in what makes for a successful banking system? If that's the case why would you leave it up to them?
The average individual is not an expert in making shoes. But we allow everyone to manufacture shoes.
Customers are by and large wise enough to buy shoes from competent producers.
Historically, for banking it turns out that regulating them like shoe factories works really well. Adding special regulations just leads to lots of gaming of the system, and to regulatory capture and suppression of competition etc.
From a game theoretic point of view, governments also have a hard time committing themselves. Eg committing themselves to paying back their debts or not issuing too much of a currency even in emergencies.
That's because governments are, in a sense, too powerful.
A normal company can bind itself with contracts, and they will be enforced in court.
A government can try to do the same, but they can always pass a law that makes the old contracts void.
(Rant over for now. It's becoming a bit rambly.)
Of course, even if the FDIC doesn't charge enough, you'd still have meetings about how to game the system so that your bank pays less. It's still a cost to the business.
In 1934 (the year after the FDIC was created) the FSLIC was created[1] (Federal Savings and Loan Insurance Corporation). It served the same purpose as the FDIC, but for financial institutions incorporated as Savings and Loans rather than Banks.
By 1980, the FSLIC insured approximately 4,000 savings and loan institutions with total assets of $604 billion.[2] They failed en-mass. By 1982 the net worth of the entire S&L industry was approximately 0.[2] Yet we did not have a major "run on the banks" like we had seen during the Great Depression.[3] Under federal control, the FSLIC closed or converted essentially all remaining S&Ls and that industry ceased to exist -- but WITHOUT individual citizens losing all their savings.
This was the very reason that the FDIC was created in the first place. A complete collapse has already happened once (albeit with the FSLIC, not the FDIC). FDIC regulation affects the kinds of risks that banks take even today. In fact, most every year, there are a few banks the FDIC is forced to take control of and liquidate (their ultimate power).[4]
The FDIC is VERY much a useful institution. We have chosen to expect major investors and regulators to assess the stability of banks, but to insulate individual consumers from doing so by removing their "skin in the game" and personally I believe that is the right decision as those individual investors don't have and could not obtain the information they would need to make wise choices.
[1] https://www.investopedia.com/terms/f/federal-savings-and-loa...
[2] https://www.fdic.gov/bank/historical/history/167_188.pdf
[3] https://www.history.com/topics/great-depression/bank-run
[4] https://www.fdic.gov/resources/resolutions/bank-failures/fai...
The Savings and Loan crisis also didn't happen in a vacuum. See https://www.econlib.org/library/Enc/SavingsandLoanCrisis.htm... for some background. A short excerpt from the start:
> Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis. Deposit insurance was actuarially unsound from its inception, primarily because all S&Ls were charged the same Insurance premium rate regardless of how safe or risky they were. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for decades. No sound insurance program would have done that. Congress tried to rectify this problem in 1991 when it directed the FDIC to begin charging risk-sensitive deposit-insurance premiums. However, because those who should pay the most would scream the loudest to Congress, the FDIC’s premium structure still does not charge the riskiest banks and S&Ls enough. Much of the time, the “drunk drivers” of the S&L and banking world pay no more for their deposit insurance than do their sober siblings. Those who do pay more still do not pay enough.
The article goes on to talk about regulation Q and other regulatory choices that contributed to the crises.
But when you say this:
> customers would have had an incentive to push back against the banking behaviours that led to these mass failures
I'm not persuaded. Do you think that customers would have gotten savings and loan corporate officers to provide them with detailed documentation of the S&L's risk portfolio and then would have analyzed this in detail and chosen where to save their money based on the results? Because I don't believe ANY customers could have done that. As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
I can dig up how that worked in practice in the free banking eras in Scotland and Canada.
> As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
In general the regulatory regime for banking is a bit weird in this respect:
The government tends to give minimum quality standards for the balance sheets of eg banks, and then hands out an implicit (or explicit) guarantee that anything meeting these minimum standards is fine.
In the regime I am suggesting the government would at most force banks to truthfully disclose what's on their balance sheet, but would not put up any minimum requirements.
What happened in practice in Scotland and Canada is that banks would have very low reserves, for every 100 dollars in deposits and notes issued, they would keep around 2 dollars in gold around. (The equivalent today would be central bank reserves.) Basically, just enough to meet redemption demands in the short term.
But to make up for that, they would keep very thick loss-absorbing equity cushions. Typically about one third of their balance sheet were financed by shareholder equity, and the other two thirds with deposits and bonds etc.
Banks also put these equity cushions in their advertisements to prospective customers. So it seems they believed that customers cared about them.
In some instances, shareholders and directors were also personally liable for losses beyond their paid-in capital. (Ie no limited liability shield for them.)
Interesting enough, the latter is also how eg Goldman Sachs used to be run when it was still a partnership and not a public company.
If you want to know more, have a look at eg http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf
(https://www.iea.org.uk/sites/default/files/publications/file... is also quite interesting, but on a slightly different topic.)
Minimal comfortable retirement at 65 requires is what, ~ 1M USD in assets? What the FDIC rule implies, is you can't do this in cash. So obviously, inflation makes it stupid to do that in cash, but even without inflation this FDIC rule basically forces you into playing the wall street game (aka subsidizing rich people) in order to retire comfortably. Think about that!
Of course, in our economy inflation is real, too, so pretty soon they are going to have to increase this to beyond $250k even.
ETA: 2011
Sometimes they result from a time where it took several bank working days to process a money transfer between different banks. Having bank accounts at banks with large customer bases (e.g. Sparkasse, Postbank, ..) allowed for quicker money transfers from these customer to the company. A customer could choose any of these bank accounts to settle the invoice.
Of course, a company could and can also have bank accounts not disclosed on an invoice.
Edit: Also note, that negative interest especially for major "online" banks just became a thing in Europe recently. Therefore, I think it is not only Entrepreneurs who redistribute their assets to avoid negative interest eating up their savings in addition to inflation, but also normal people.
After that, what will you do if you can't make enough money from loans for your employees (including yourself) and your other expenses?
Profit = Investment Returns - Operational Costs - Interest Paid to customers
Only you have to have sufficiently liquidity such that your customers can get withdrawals whenever they want. This means your investment pool is going to be conservative, thus limiting your returns. Now what happens when your nation's central bank craters interest rates, thus driving your investment returns down? Oh shit, now the revenue source is drying up. What gives? Profit, or your interest rates? Well profits have to be at minimum high enough to justify all this effort, so looks like the interest rates are going to drop and drop and drop as the cost of money goes down....
Congratulations, you are now in the same place as all those other institutions. Who would have guessed that an identical business model subjected to all the same economic push and pulls would end up at the same destination.
Who are you lending to? That’s the key - there’s a ton of money looking for returns but not enough people looking to borrow.
That's not how fractional reserve works. Banks are money multipliers because loans are deposited again. Eg one person saves $100, someone borrows $95 - then deposits it again, so the bank can make a new loan of $90 etc etc
At a 10% bank reserve rate, 10x the monetary base is created.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Don't take my word for it, take it from the Bank of England's Quarterly Bulletin [0] "Banks create create additional broad money whenever they create a loan... it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have. In fact, Loans create deposits, not the other way around."
Bank financing is counterintuitive: deposits are actually liabilities, and loans are assets... but banks also routinely borrow money (e.g. from the Fed) well in excess of their book value. For example, JP Morgan's current debt-to-equity ratio is 1.675 [1], meaning that they are also (in a sense) "mortgaged" well beyond their net assets. It's debt all the way down...
me -> deposit $100 in bank a -> bank a loans $95 to business -> business deposits $95 in bank b -> bank b loans $90.25
This loop repeats indefinitely until we're talking about fractions of pennies. The reserve ratio (and bank willingness to loan up to that ratio) determines the money multiplication effect. No bank is loaning more than it's actual deposits, it's just the effect of the same dollar getting deposited and loaned multiple times.
Maybe we are saying the same thing, I can't tell.
You may have missed the memo that went out in 2008 regarding how banks like to do things in general. A kind of "statement" regarding their ethics and base principles.
The inventor of Bitcoin didn't miss it, and created a slightly better system that was at least based on something: pointlessly throwing energy away.
Did quite well at proving the concept, it's worth trillions at the moment. So it seems to work. In fact, those old banks might want to start up their own. You know, to compete.
Ah, the exciting world of finance.
At least with a crypto system, we would (theoretically) be able to account for all the tokens issued... Case in point: "Holding U.S. Treasurys? Beware: Uncle Sam Can't Account For $21 Trillion"
https://www.forbes.com/sites/kotlikoff/2019/01/09/holding-u-...
It's all immaterial anyway; someone already beat me to the punch: USDT, USDC, etc.
Downturn hits. Depositors want to withdraw more money than you've kept around. You start trying to delay withdrawals long enough to satisfy them with the upcoming loan payments. Some of those payments start to be late. More people start demanding that you give them all their deposits back. Eventually get arrested, tried and jailed for running an unregulated, uninsured wildcat bank.
Note that most of the companies in said ETF are also doing this.
Banks don't loan out deposits. Banks create deposits by issuing loans.
So to start a Bank you don't need any deposits, and in a negative interest rate environment you don't need to chase them. Deposits backed by 'cash' will automatically come to you in the backfill process (which is how the deposits created by loans can be used to pay people at other banks).
That's how negative interest rates stimulate loans.
Where this ends is anybody's guess. But when the situation finally does resolve itself, it seems reasonable to expect economic and social dislocation both qualitatively and quantitatively beyond anything ever seen before.
The incremental manner in which the GFC continues to play out has numbed most people to the danger they are in.
Yes, negative nominal interest rates are fairly new.
But we had negative real interest rates on sovereign debt every now and then. Especially during the Great Inflation.
Honestly some commenters in the Netherlands were surprised over the past six months that people suddenly took action when their savings account went from 0% to -0.1% interest, but were entirely passive when their 0% interest account was exposed to 2% inflation for years, which has a much larger impact on purchasing power and was essentially subjecting people to negative annual returns on their purchasing power (i.e., the metric that matters).
My guess is that people expected bank accounts to work as something they have, that is secure and untouchable. It's not that it can't happen (a bank can go bankrupt and the CB refuses to cover the customers) but people who haven't gone through it, believe it can never happen. Their balance being reduced tipped them off that something is not quite alright.
What I'm trying to say is that people are more concerned about the bank dipping into their accounts (regardless of the amount) rather than them losing some Purchasing Power.
Also in DK, the limit for being charged negative interest is generally 100,000 DKK ~ €13,500. With IT salaries it can become a monthly hassle dealing with it.
Probably why their Estonian branch was used to launder money.
https://en.m.wikipedia.org/wiki/Danske_Bank_money_laundering...
Most (all?) online banks I've seen will charge negative rates.
But ultimately the "if, how and when" is a commercial decision for the bank.
Some of them set higher cut-off levels (e.g. 50k vs 100k vs 1m).
Some of them segregate by account type (e.g. higher cut-off for retail clients than for business customers).
It might well be that some of them have a "fair-use policy" where they silently "eat" the negative rates but will quietly invite you to pay or move elsewhere if you have a large balance.
This verges on pedantry in this context. Banks are required to have a certain amount of capital in reserve to make loans (the reserve requirements and capital adequacy ratios set by central banks). Deposits from consumers give the banks the reserve capital they need to make those loans.
Without a way to use the deposits to make money the banks would just as soon not have your money.
Those are 0% or effectively zero in most developed nations.
Not if these loans are secured then they can make as much money as they want from thin air.
> Deposits from consumers give the banks the reserve capital they need to make those loans.
No. At least in the US, they just need to secure the loan with an asset that can be held from the dealers. Most of the time, if you got your mortgage from a bank, they'll just liquidate for real cash.
> Without a way to use the deposits to make money the banks would just as soon not have your money.
Which is why, in this new system, banks have become hostile to customers. Banks are no longer in the business of helping customers but trading money market funds.
Banks grant credit (bank money) when debtors promise to work.
Your money is effectively a share in the bonds that banks hold onto. In other words, the point of banks is not for people to store their money and earn interest, it's to provide liquidity and a trusted intermediary. When the bank pays interest it basically tells you to keep your money to make room for the investment spending. You and a company want to buy a car, you say the company should go first and you wait until the next car is produced.
In theory you could do the same thing without the bank by writing an IOU saying you work x hours and then use that as money. The problem is that people have to trust you and the IOU is not fungible (it may be worth $4k when all you want to buy is $50 worth of groceries).
There is just SO MUCH cash right now in the hands of the wealthy classes and it's just sitting there in bank accounts not being circulated.
The only outrageous wealth you listed was real estate because of the land component. Nobody gets hurt by stocks. People get hurt if money ceases to circulate because money is needed to pay incomes, taxes and debts. If all the money piles up in one bank account everyone stops working. Meanwhile if one person owns all the stocks people can still work and be happy.
I know you didn't mean it quite so literally, but this paints a rather dystopian picture: a single person holding effectively all the material wealth while everyone else happily shows up every day to work for them
Note that low interest rates affect those with money (i.e. not poor) much more than those without much money.
I also didn't say the purpose is screwing poor people, but like many other things like car emissions caps, they introduce new regulations and laws and bullshit without thinking the poor are often disproportionately affected by them.
I disagree, wealthy people (even middle class) don't hold cash, they invest it
Yes, and the reason they can't make enough is because central banks are pushing down interest rates in order to nudge people into spending vs. saving. If central banks were not acting as a lender of last resort (at record low interest rates no less), the cost to borrow would be higher, and savers would likely be seeing higher interest rates.
Also, central banks have a mandate to be the lender of last resort. It’s one of their most fundamental duties and they’ve been doing it for as long as they’ve existed.
We don't know that, do we? It depends on the supply and demand for savings.
No, its not.
The Fed Board of Governors (like other independent federal agencies) is independent within the government; which is a term of art for executive-branch agencies with leadership board/council/commission that have terms (both length and staggering, usually) and partisan composition rules which prevent them from being reshaped over a short term to reflect the partisan interest of the current President and/or Senate majority, even when those are aligned.
Because its powers are assigned by Congress under law and freely changeable by Congress through new law, it is not and cannot be independent of government (even of by “government” you mean only the President and Congress.)
I am not familiar enough with the federal reserve to say how similar they are.
Positive interest is compensation for delaying spending and a fee for staying in debt.
Negative interest is a fee for delaying spending and compensation for keeping others in debt.
It's not about "governments thinking", it's about maintaining the balance of supply and demand between debt and credit.
The fact that you desire to hold onto money at 0% just shows how profitable it is.
I would assume since the 100k are guaranteed by law that the state does not further step in on losses above that.
When there is no law like that in place the situation is entirely different.
FDIC deposit insurance, 250k per FDIC-insured bank, per ownership category.
Are the two that come to mind. Cyprus deposits in a couple of banks in 2013 above 100k were lost I believe. Icesave played out badly in the UK in 08, quite a few councils etc took some nasty lossses.
Either way, waiting for multiple years, winding up and down of court cases, bankrupcy proceedings etc to find out if the rest of your money is gone or not is not much fun.
The kind of person parking a couple of 100k in cash accounts is almost by definition risk averse.
If you have decent money, using single account/country is not just lazy, but stupid.
Below the list of the world's top 50 safest banks
https://d2tyltutevw8th.cloudfront.net/media/document/press-r...
Iceland bank issues were widely covered too
https://www.dnb.nl/betrouwbare-financiele-sector/nederlandse...
The germans made this official in the 2007 crisis by declaring that all bank accounts are guaranteed by state, with a 1 billion euro limit.
My bank account's got robbed by European Commission. Over 700k is lost.
The most of circulating assets on our business Current Account are blocked. Over 700k of expropriated money will be used to repay country's debt. Probably we will get back about 20% of this amount in 6-7 years.
I'm not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation.
The business is definitely ruined, all Cypriot workers to be fired. We are moving to small Caribbean country where authorities have more respect to people's assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners.
Special thanks to:
- Jeroen Dijsselbloem - Angela Merkel - Manuel Barroso - the rest of officials of "European Comission"
P.S. The worst thing is, that even a month ago I was suspecting that things can go wrong. In February, I several times called my banker and lawyer and asked them if money on the account is safe, mentioning that article in Financial Times. But they convinced me that there is no reason to worry, and even if country goes default, in no way current accounts may be affected. "This is European Union and banks here can't just grab your money and go" I was told. I got a hard lesson and now I know the meaning of phrase "TRUST NO ONE".
(...)
The stealing of my money is now finalized.
Yesterday I looked at my Laiki account and found that frozen amount is not more shown on my balance. 100% of frozen funds is now appears as outgoing transaction to nobody with comment "DECREE".
Also there are some news from lawyers.
Quote The Supreme Court has not announced its decision yet. It examines preliminary objections raised by the Attorney on a basis that the Law and the Order are political acts of the state (like decision to start war) and therefore cannot be examined or controlled by the Supreme Court and that the matter in issue should be considered as a private and not a public law matter.
Also, there is recent translation of the "Capital Controls imposing DECREE"
[ 2013-07-10 10:49:23 PM Update ] "Blocked Funds" amount has finally disappeared from our Laiki account. Bank told me it's "waived" (their interpretation of word "stolen"). We won't receive any bank shares as compensation for confiscated amount since the bank is liquidated. The rest of the money (100k EUR) are still subject to Capital Control and we can only transfer 5K monthly.
Today I had a conversation with a manager from Laiki Bank. He has been honest and confirmed that we may forget about anything over 100K as it's already spent to pay country's debts. Also, I was warned that the financial situation in the country is getting worse and worse and we should be ready to lose even part of insured (under 100K) money during this year (this is why they keep capital control enforced).
By the way, this style of "bank restructuring" is going to be adopted in the whole European Union. Soon, everyone's uninsured money (over 100K EUR) in EU banks will be at risk of seizure.
Is this from around 2013, or more recent?
Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes[11] requires all member states to have a deposit guarantee scheme for at least 90% of the deposited amount, up to at least 20,000 euros per person. On October 7, 2008, the Ecofin meeting of EU's ministers of finance agreed to increase the minimum amount to 50,000. ...
Which is not EU-wide deposit insurance. It is a directive asking EU members to create national deposit insurance schemes.
So if you have 100k€ in the bank in Germany, that bank has to pay for 4k€ - that's just 20€ per annum and charges you 250€ (assuming a typical 50k€ exemption). At the same time they can lebd out 90k€ at a market rate of 1.5% to finance some housing. That's 1350€ revenue per annum. So in this simplified, idealized case, the bank just asks you to increase their revenue by 17% out of your own pocket.
The only case when the bank has to pay more is when they don't hand out enough credits and whose fault is that, frankly? Who should carry that risk?
In short, low interest rates are obviously a factor, but banks didn't have to do this. They're charging you because they can and because most banks are following suit.
If a bank is forbidden from investing your money, and thus putting your savings at risk, then it costs them money to safely manage it.
Banks have found ways to reinvest your deposits. If the earnings there are higher than the storage costs they can share some of the earnings with you. But if they can’t, they have to charge for their service.
And they are also loaning out your money to others at a non trivial rate of interest.
A couple years ago I put a lot of my HSA into investments and the market tanked.
New and used car prices are like a jump rope this year, regardless...can't hide from the market in cash.
I can’t have a down payment plunge because Yellen made an announcement or (as I saw last year) a roller coaster of an election year.
If anyone charged me negative interests rates on the whole balance I would cancel my account.
This is very dependent on the country you are in. Some countries have very conservative risk tolerances for their banks which are imposed on them and watched closely.
With central banks the risks of loss is low enough that nobody needs the just keep my money safe service anymore - except now they do because rates are so low
Long-gone are the times when high street banks were based on loaning out the deposits from savings accounts. Building Societies do/did this, but of course the banks bought up most of those too in their spending sprees of M&A to become 'bigger and better'. Well, bigger anyway
Lafarge met with other banksters in a castle, and they had a big fight.
Also, an interest rate of -0.5% is not that much worse than 0% -- they're both a few percentage points below inflation.
I would be willing to pay a lot of money for such a service. Of course, given that I already need it, I might as well choose a cheap option. If that cheap option happens to have a negative cost, I'm not going to complain.
As for the reason: it currently costs the bank money to have your money (ECB interest rate on overnight loans is negative), in addition to the costs of operating the bank itself.
Last year, oil futures prices turned negative. Which means "wait, I can take delivery of oil AND get cash for it too." So why didn't people do this? Because there's a cost of cary to oil - I need to pick it up in a train car at a specific place in the US and I need to store it somewhere, which is expensive. So while they were "paying you to take the oil" you couldn't really just jump on it and do it.
This is an analogous situation to what's going on with a negative interest rate. You're right, you're literally better off taking the money out into a pile of cash. And if you only have a few thousand bucks you could just do that (but then you need to drive to the bank, figure out how to store it, drive back when the rate goes back up, etc.) But if you have a few hundred thousand bucks - what are you gonna do? Cash it out in hundreds and keep it in your garage? At some point the logistics and theft risk of that adds up too.
Meaning, similarly to the oil example, while the raw numbers indicate one strategy, the practicality of carrying the asset on your own tends to outweigh the benefit. So yeah, someone may chose to incur negative interest if their only other option is to pile up cash in the house where they have to worry about it being stolen, burning in a fire, etc.
Gresham's Law is that "bad money drives out good" - when you have two forms of currency circulating within the economy and one is inflating at a faster rate than the other, people will tend to spend the inflating currency and hoard the appreciating one. The inverse of that is that they will tend to hoard the appreciating currency and spend the inflating one, i.e. as a store of value, nobody with long time preferences is going to hold cash. Instead they pile into any asset with zero cost of carry and a liquid market, which was stocks from about 1980-2010 and now also includes art, cryptocurrency, real estate, NFTs, other securities, etc.
It occurs to me that this could play tricks on how we measure interest rates. Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash. But nobody serious about future returns wants to lend cash! They've exited the cash market entirely, and only touch it when they need to convert long-term holdings to short-term holdings. Instead, they trade amongst themselves in asset markets, which have appreciated far quicker than 3% CPIs and 2% nominal interest rates would suggest. It could be that the divorce between stock market returns (10-15% in recent years) vs. interest rates (2-3% in recent years) might indicate that all of the firms with high time preferences have exited the cash market, leaving behind only those firms who need cash now.
Nitpick: It's the equilibrium between people who want to have savings and those who want to have debt. When you have deflation no such mechanism exists which is why the central bank has to set the interest rate manually.
Is the risk zero? No. Should you put all your funds there? No. But parking a small segment to balance out the negative bank yields is pretty attractive from a risk reward standpoint. If you’re getting negative 0.5% at the bank, you can protect your capital from decaying by moving 10% or less of your cash savings into DeFi.
Currently to get crypto on Coinbase or wherever, one needs to go through a crazy signup process where you deliver photos of documents that enables anyone who gets ahold of these photos to identify as you and use these to sign up as you on other places.
It is a catch 22. There should be a crypto way of doing KYC. Not signing up by delivering a photo of you passport, but by signing a message cryptographically.
1: You can walk into a bank and sign up for an account. You cannot walk into Coinbase and sign up for an account.
2: Most people already have a bank account. Most people do not have a Coinbase account.
Really? I'd like to see a civil suit where an institution says I owe them money and shows a picture of my ID as proof of contract.
There are ways of signing legally binding things online (DocuSign for example, which AFAIK was actually tested in a trial in EU), but they have more sophistication than that.
What I mean is this: If online companies require a copy of some document as identification, then this document you just copied and sent out to them can be used to identify as you when signing up with other companies.
The old brick and mortar way was better: When you walk into a bank to sign up for an account, the bank now cannot walk into another bank as you.
A new crypto way would be better as well: Instead of copying data for identification, sign a message cryptographically.
Go on.
(this isn't an anti-crypto post, just making the point that 5% yields are not unique to crypto and that the choice isn't crypto vs. banks)
As far as I can tell, the risks of depositing stablecoins in something like Uniswap or Compound are the following:
1) The stablecoin might not be redeemable 1:1 for fiat in the future. Personally, I think this risk is negligible for USDC and minimal with DAI.
2) The smart contract code might have bugs leading to loss or theft of the deposited tokens. I think this is minimal with Uniswap or Compound. It's significantly higher with some other providers (which do seem to offer higher rewards, but not enough for my taste).
3) High Ethereum gas fees could make it very costly to withdraw your funds in the future. So far, I have seen these fees spike as high as US$200-300, but only for a brief period of time. Usually they settle back to $20-50. This might be the highest risk but is still acceptable, to me, anyway.
Taken together, these risks are well worth getting ~5% instead of 0.1%, to me. YMMV, of course.
I'm a big believer in crypto, but I don't think stablecoins are it.
CDs and treasuries and commercial paper are pretty solid stuff - but they definitely aren’t cash.
https://www.bloomberg.com/news/articles/2021-08-23/coinbase-...
I don't know how you feel about short term treasury bonds, but I think they are nearly as good as cash. Slightly less liquid but with some return.
Gas prices increased by 4% in just last 3 months:
https://www.mwv.de/statistiken/verbraucherpreise/
The most food prices increased by 5% - 20% in the last year:
https://www.az.com.na/nachrichten/nahrungsmittelpreise-gesti...
Citation needed.
E.g. young people are more likely to rent than owning an appartement. But the general inflation reflects only the average spending on housing. So if 50% of the population owns a home, rising rents are only reflected half as strong for the general population.
However I could not find any reliable numbers how strong the contrast for each demographic group is...
source: https://de.statista.com/statistik/daten/studie/1045/umfrage/...
gas prices in germany are highly volatile in general. It is currently as expensive as it was 2012.
source: https://www.adac.de/verkehr/tanken-kraftstoff-antrieb/deutsc...
Yes, the loan rates are on a historical low, but have been already for a few years now.
Like, salaries do not seem to have similarly risen, so who the hell is buying these houses?
People and institutions looking for a way to 'park' their funds in a safe investment.
Interest on saving accounts is < 1%, loans are cheap, so everybody's trying to buy houses right now. House prices are rocketing up.
There will be lots of tears and people will lose their home once this starts to change and the fixed rates run out on some of those very cheap loans.
I think I'm confused. I have zero experience with Germany, so please be graceful with what may be a stupid question.
So you're saying the super low rate is only for a set period of time, and will change at some point in the future, correct? If the rate is set to change at some point, you can't really call it a fixed rate, can you? I thought fixed rate meant that it was just that rate for the life of the loan. Hence, fixed versus variable.
What am I missing?
The lower x is, the lower the interest you pay during those years.
For example, banks can offer the following loans: - 20 year fixed rate at 1.30% - 30 year fixed rate at 1.42%
So there is a possibility to gamble with the interest rates while still having a "fixed" rate.
Ie in Switzerland with their specific mortgages, it can easily go from USD 800 to USD 8000 per month if things go south, with drop in prices matching this development.
So
Floating rate: 0.7%
1 year fixed rate: 0.9%
5 year fixed rate: 1.2%
10 year fixed rate: 1.4%
35 year fixed rate: 1.6%
Fixed rate mortage has fixed percentage for an agreed period of time (fixation duration). Variable rate mortgage is based on current inter-bank market rate (or some other index), e.g. EURIBOR + X %.
I mean, what became of the business where entrepreneurs go to a bank and loan money to finance building new ventures? For that the bank needs money, right?
So I guess that they don't want money from customers anymore means they get it from elsewhere. Probably from the government in the form of permission to print money?
Let me know if I am wrong here.
So no, banks don't lend other people's money. Not a single bank in the modern world lends other people's money.
Bank lending in fact CREATES deposits. All the money you have in your bank account came from either A) Government spending B) Someone took out a loan. Either public spending or private debt.
See: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
So a bank run could be done online? If enough customers of bank A send money to bank B, then bank A has to file for bancruptcy?
That's easy then. In case of a bank run, just give everyone their money back. They never loaned their customers' money, so they should have 100% of it ready to go.
Imagine a new bank with no money and no customers.
First customer walks in "Can I loan $100?".
Bank: Sure. We make an account for you. Your account number is 1. Your balance is $100.
Next day the customer walks in again. "I'd like to get my $100 in cash to go shopping".
Bank: "Uh oh. Sorry, we have to file for bankruptcy."
At least in the UK, you're typically not charged for having a basic bank account; fancier ones do have monthly charges.
Under current economic policy, banks basically don’t want your money. They have plenty of money they can’t get return on. Processing your dirty cash, maintainibg secure ATMs and servers is not worth it.
They can borrow money from central banks at 0% or negative (return back less than borrowed) with less trouble.
Did anyone think this wouldn't happen?
Remember, you can beat the system, but you can't beat the house...
It could also mean that any amount you borrow would result in you paying back less. It would be a negative interest rate...
When interest rates set by fiscal policy are so low that the bank can't make enough through investing deposits to offset the operational costs, negative interest rates must occur.
If 200k euros of working capital is worth less to you than 500 euros/year then you're really, really bad at capitalism.
The article also fails to mention that bank deposits are only gauranteed up to 100k as well, so if you have a bunch of cash sitting around it is wise to spread it around different institutions anyway.
Current best instant access rate is around 0.65%.
I’ve never quite understood -- can’t the bank do that for you?
If the obstacle is that savings accounts are expected to have a guaranteed rate with zero risk, the banks ought to provide very easy access to investment accounts, with the ability to move money around frictionlessly.
Is there just no demand for that kind of service, or regulatory problems, or something of that kind?
Edit to add: I always felt that offset mortgages (https://en.wikipedia.org/wiki/Flexible_mortgage#Offset_mortg...) were a nice solution to this problem; it gives you a place to stash your savings and get a reasonable rate of return (basically matching your mortgage rate) while still being accessible if needed. But they seem to have gone out of fashion again, at least in the UK. Anyone know if there was some problem or disadvantage (either to consumers or to the banks)?
You want them to tell you you have a fixed, gauranteed rate of return and use it to buy some apple stock or some bitcoin with it?
The answer is they can do it for you, they do, do it for you, but you have to sign up for the gambling account not the instant access cash savings account.
I guess there ought to be some safeguards, e.g. at least XX% of your money in a safe place. But there’s a point at which safeguards become friction that just stop you investing at all.
For example, in the UK you have ISA accounts, which should work like that, but the restrictions are so annoying (yearly cap on deposits) and the benefits so weak (tax exempt, but on a pitiful interest rate so it makes no difference for most people) that they’re not very useful. Unless I’m missing something.
Your investment options are limited to actual investments basically, so essensially shares. Term deposits dont seem to be a big thing in the UK for whatever reason, and we dont have the US tax breaks to buy municipal bonds etc.
ISA's are great, you can go buy some apple stock or some FTSE funds or depending on the provider one of 1000's of funds with it. 'Cash ISAs' while rare are still around are no better or worse than a savings account (IMO).
This is a good nudge for me to look around for better/easier options to store petty cash in, so I’m going to do that. Thanks!
What's the CFO going to do when Eurobonds are negative too ?
Converting it un-necessarily into another currency introduces exposure to forex risk.
"Investing", aside from the risk, is not cash or cash-equivalent, so that's out of the question.
Hence the best answer is generally just splitting out into multiple Euro bank accounts.
Government bonds? Corporate bonds? Stocks? Crypto?
Are you willing to cover their potential losses with government guarantees?
Savings accounts are supposed to be a safe storage of money. They have certain insurance guarantees because of that. Encouraging banks to use that money to speculate is exactly what you don’t want them to do. Savings banks are not known to employ the most brilliant investment minds.
I once met a woman for some short class on business plans on zoom, and she was actually taught how to create a holding and the whole loophole package to optimize taxes. I asked about the morality of such thing, and I was shocked to realize she did not seem to care at all.
The banality of evil allows some people to just get access to an easier life by not caring.
In fact, evading paying taxes in a legal way should not be an excepction, but the norm.
Stop romanticizing taxes.
I do not understand why you would personally care about profiting from tax fraud/optimization? I understand that it would be good to prevent this on a societal level, but no personally.
"Optimize taxes" - What exactly would be wrong with wanting to reduce the taxes you pay?
Did you ever calculate how much you are paying % wise in taxes? If you add all taxes including VAT, fuel taxes, random taxes and such you'll be suprised at the % you get "the priviledge" to pay as an employee every year.
I'm not an entrepreneur and don't have that much money in the bank but this really worries me because I want to buy a house at some point. This is becoming crazily difficult.
I think it's pretty insane that the ECB still does this negative interest thing. Even at zero interest we're already losing savings all the time due to inflation. It's really undermining my trust in the banking system, basically I'm leaving my money in a tank that's slowly draining.. Totally counter to the concept of a bank which should be trusted and safe. I can understand they need to be paid too, but they already charge a fee for the account. But actually taking money away is ridiculous.. Meanwhile house prices are increasing dramatically yet banks need ever more personal investment to provide a mortgage. How can I ever get this if I can't even save money anymore?
They should really stop trying to appease multinationals who benefit from this for cheap exports, and gain consumer trust back. These multinationals are also the ones avoiding taxes on a wide scale (e.g. Apple not paying any tax in Ireland on all their European profits) and not even contributing to our system.
The things that are very wrong that are causing it, have come into existence. It started in EU country central bank lending to banks. Now end consumers are seeing that in their personal banking.
Imaging a world where the Dutch now have a "bank" that is over the internet in another country. Their money is stored in USD stable coin, or another countries stable coin. Citizens could flee there, in mass.
First, the country (Netherlands), would try to stop the on-ramps. But sooner or later, there will be other entrepreneurs who make easy ACHes/wires that re-route to a crypto account and buy-into crypto (like a USD stable coin).
Then the country in mass, could move their bank accounts out of the Netherlands. Then banks in the Netherlands could collapse... ....or be replaced by a healthy alternative (foreign USD Stable coin backed accounts).
Then the massive fundamental problems going on in macroeconomics that cause the negative interest rates will become visible. These problems remain hidden from the citizen-base because of how technical they are. It would require they be fixed, instead of draining money from citizens to put-their-finger-in-the-dike patching the problem.
I don't fully understand your dutch over the internet bank stablecoin comparison, but if you mean that people could flee into different currencies than this is not new at all, some years ago this happened already with the swiss franc. It's also not hidden because there're well enough economists talking about the implications, it's not as complex as you think and yes people with money in the bank are going to be expropriated but this happens anyway if you print more money.