Interest rates on some European government bonds have gone negative | Hacker News Reader

Interest rates on some European government bonds have gone negative

vox.com

70 pointscwal3778 comments

"And yet it seems the impossible has happened."

This is a great example showing how little we understand economics, which is very ironic: economics is the study of something that is 100% man-made, yet we cannot explain many of its aspects. Heck I am more confident in physicists able to explain physics, and mathematicians able to explain mathematics, than in economists able to explain economics. This is why topics such as basic income guarantee [1], Bitcoin and cryptocurrencies, inflation vs deflation, capitalism vs socialism, etc, are all so debated. Nobody agrees on anything because quite frankly, we don't know how to make the economy work optimally. I would not be surprised if, 50 or 100 years from now, widely accepted views on economics will completely change.

[1] There was a great HN post from yesterday: https://news.ycombinator.com/item?id=9004287

> we don't know how to make the economy work optimally

What's optimally? Seems that many people passionately disagree on this point and may help explain our difficulty in determining what should be done.

Additionally, economics is a young discipline that's more about trying to figure out unreproducible complex human behavior than something that can be replicated in a lab.

This would be fine except that economists and politicians seem to imply that they are running thing "optimally" and they know what they are doing.

>economics is the study of something that is 100% man-made, yet we cannot explain many of its aspects. Heck I am more confident in physicists able to explain physics, and mathematicians able to explain mathematics

You could easily argue that mathematics is something that is man-made.

True, but mathematical objects, unlike people, always behave rationally.

If anything, events like negative interest rates simply illustrate how ridiculous the classical economic notion of the "rational actor" is in the real world.

> This is a great example showing how little we understand economics, which is very ironic: economics is the study of something that is 100% man-made, yet we cannot explain many of its aspects. Heck I am more confident in physicists able to explain physics, and mathematicians able to explain mathematics, than in economists able to explain economics.

Physicists and mathematicians often have the advantage that if they run an experiment / solve a problem by using the same inputs, they can expect the same output. Obviously this is not the case for economics, which at its core is driven by human interactions. Not only does it often have many, many variables, but they're also difficult to control.

In my estimation, it's actually impressive we have as good a grasp as we do on economics.

What I find surprising is that a Soviet style state run economy has not proven to be more successful. By exercising central control they should have been able to drastically reduce the number of variables and with sufficiently sophisticated planning maybe eventually gained a competitive advantage. I guess unfortunately it collapsed before the advent of powerful enough computer systems.

North Korea has access to modern computers, yet people there are starving.

>By exercising central control they should have been able to drastically reduce

people's entrepreneural activity as well as overall productivity. (note: i was born and grew up in USSR)

I don't think there ever will be a computer powerful enough to solve such a large scale planning problem. On top of that, I don't think it is even possible to get the data for it. Each person has his own personal "utility function" which he is trying to maximize and it is locked inside his brain.

It may be dated, but some writers and economists hold that people aren't even consciously aware of their own preferences. So even if you could gather the data from what people way they want, there would still be error.

One of the most colorful examples of this comes not from economics, but a strange book on advertising called "The Hidden Persuaders". It also talks about erotic images airbrushed into the ice cubes of whiskey ads :) When I'd first heard of "Mad Men", I'd hoped it would be about that, but it wasn't.

Yes. That's exactly what I meant when I wrote "locked inside his brain".

The thing is centralized economy planning can never be the most efficient solution, no matter how powerful computer systems. The economy consists of individuals who drive supply and demand. They know best what they need and that's a simple and elegant solution.

I don't understand why even try to centrally plan the economy. It's stupid and doesn't make sense. Even if it was possible it would require resources to centrally run it. There would be no competitive edge because the economy is based on the people who participate in it. The information is already out there. It's publicly accessible. Centrally planning it would create an unnecessary middleman and break the perfect solution.

edit: clarification.

Look into the "Knowledge Problem". It's all very strange, and the naive first blush is that you'd be right. Turns out not to be true.

One version of the theory states that price information is just that - information - and you can't replace that with even excellent planning.

You could call China a hybrid of a planned/free economy, but as it's moved more to something akin to free markets, wealth has gone up, especially for the poorest there. This may be as close to an experiment as we can get in economics. Chinese Communism was never quite Soviet style Communism, but the results begin to look suspiciously like data.

You say it wasn't successful but they industrialised to an extent that they were one of the dominant superpowers within a generation. Aside from China, another planned economy I can't think of any other examples of that pace of economic development.

How do you explain something that has potentially unlimited inputs, and whose many inputs/actors do not act sensibly or in their best interest at all?

If you could fully explain an economic system down to the finest detail, you could more less accurately forecast all the human behavior within that system.

Economics describes emergent phenomena. And widely-held beliefs about economics affects the behavior of the thing being studied. This is self-referential interaction highly amplified.

> ...economics is the study of something that is 100% man-made

I take exception with the idea that economics is a human construct. Economics, in the broader sense of the term is about decision making and getting most out of limited resources.

Macro-economics is probably more like story telling or history rather than a hard science. It's a shame that it went the quantitative route over the years. No one tries to attribute an R^2 to a general's decision and their outcomes. I think modern macro-economics is suffering from scientism.

From Wikipedia: Scientism is belief in the universal applicability of the scientific method and approach, and the view that empirical science constitutes the most authoritative worldview or most valuable part of human learning to the exclusion of other viewpoints

This should be no news to consumers who have been accustomed to parking their money in negative bonds. These are called "checking and savings accounts", where interest is next to nonexistent, and the balance is nibbled away by various fees.

People still put their money in the bank for similar reasons why people buy these negative interest bonds: for example, it's secure, and cheaper than building your own safe, putting cash in it, and guarding it.

If you want to hold some foreign currency, you could just buy it and have it sitting in a trading account. But there are perhaps some fees involved which are worse than parking it in a negative bond. The account may also not be secured compared to a bond.

One thing they don't mention as a cause is regulatory requirements to hold certain classes of sovereign debt or other "risk-free" securities, for instance as collateral.

Do the rules forbid holding cash? At least for capital adequacy, I was under the impression that cash, like own-country sovereign debt, is not risk discounted. Normally you'd prefer debt to cash, but if it has a negative nominal yield, I'd think you'd prefer the opposite.

Ditto for bonds as currency play, why not cash instead?

Frankly the only rational reason I can think of to buy a bond with a negative yield is if the loss is less than the carrying costs of cash. And while that's not free, it's hard to see that anywhere near 100 bps per year on large sums of money.

There is some costs associated with securing that amount of cash and then I guess you'd want to insure that money in case of theft. The insurer would then need to store a large amount in safe assets, which would then go into bonds.

I guess, maybe storage companies might move into this business but it's probably just safer and more convenient to buy a piece of paper.

The Swiss Franc, just to take an example, comes in denominations up to 1000 Franc ($1083 at current exchange rates).

According to this site: http://www.pagetutor.com/trillion/index.html $100M fits on a pallet stacked 3 feet high or so. With banknotes worth 10x as much, that'd be a billion Swiss francs.

It's hard to believe it is going to cost you 8.12 million francs to securely store that for two years, which is what you'll currently pay for the privilege of owning the two year Swiss bond.

Seriously, even dismissing the cost of the facility, how many people do you think are needed to guard what is basically a truckload of money...

I don't think 200k a month is nearly adequate. Those bonds are still expensive...

Remember a single fire could destroy that if you just stacked it on a pallet. I agree 8.12 million is probably too much, but even handling e.g. USD $1 billion costs a lot (you have to bring them from the central bank I suppose?). Even having a company that has enough capital and is trusted enough costs a lot of money.

I think the principle shouldn't be "Interest rates will never go below zero", but "Interest rates have a lower bound", which still stands I suppose.

Well then what is the lower bound? The standard way to prove inequalities that should exist in a free market is through showing arbitrage patterns. This way one can prove f.eg. that a call option should never be more expensive than the underlying security, or that a call plus a put is essentially a futures contract.

How do we show the lower bound on bond yield rate? Arbitrage executed through a company that employs exhaustive security measures allowing its clients to store pallets of cash? It still depends on time-varying factors, such as employee costs, utilities, the probability of a random natural disaster or the probability of a fire wrecking the entire building.

Yes, that lower bound is a function of all those things: security costs, labor costs, etc. They can be laboriously approximately quantified. But it surely exists: for example, it's inconceivable the rate to ever reach -30% because storing money will never get that expansive in normal conditions (please discount apocalyptic scenarios).

As any effort banks make to shift their zero risk assets to cash won't go unnoticed by the ECB, there's also the implied risk that any bank going to the effort of acquiring unusually large piles of cash to avoid negative interest on reserves, will be subject to other direct or indirect financial penalties.

I'd still expect banks' cash holdings to rise substantially at the margin, where that risk is pretty low, but its existence means it probably wouldn't economically rational for any bank to try to evade the interest on reserves even if their cost of holding cash was zero.

They did mention it:

> Pension funds, mutual funds, and other impersonal investment vehicles have rules and formulae they're supposed to be following. To the extent that those rules call for the holding of safe bonds, some bond-buying can simply happen on autopilot.

A lot of this is also frontrunning the central banks. The ECB has already indicated they will buy german bonds (which have negative yield). Rates can (and will) go even negative-er, so if you buy now and sell later, you still make a profit.

Thanks for changing the title, I always just err on the side of leaving it, even if it is absolutely terrible (as this one originally was).

On the actual topic, it's always interesting to see things go differently than economists expected. I fill an economist-ish role at work and it's kind of amazing to see the union of hand wavey-ness and certainty that pervades so much of the field. We drill down hard on data and stick with open source tools like Python as much as possible, but I definitely look around and see supposition treated as fact.

Economics is full of false assumptions.

You want to say "full of false truths"...

why not both !

I can't shake the feeling we're going to see another black swan in '15 or '16. Maybe the epicenter will be Greece this time instead of Bear Stearns.

http://i.imgur.com/UyM0j2M.jpg

I'm curious to see what the Fed will do if we have a correction while interest rates are at zero. I suppose 0% + QE will become standard policy rather than a response to a crisis.

You might be right, but I don't know if that counts as black swan. Greece and euro troubles were mainstream headlines five years ago spring of 2010. Through out the years the situation has been evolving and nobody of course knows how it will unravel. I'm more surprised how slow the buildup is.

US Treasury yields went negative in 2008 ...

http://www.nytimes.com/2008/12/10/business/10markets.html

http://blogs.wsj.com/marketbeat/2008/12/09/three-month-bill-...

Right, but what's interesting right now is that EU corporate paper had a negative yield for a while there. That hasn't happened before.

Economists also thought stagflation was impossible before the USA in the late 70s.

They also thought the efficient-market hypothesis was true, until the financial crisis hit in 2008.

It's like the world is their laboratory, and they run experiments on all of us.

... except that we cannot bifurcate history into multiple different timelines and run parallel experiments to test different assumptions. This is why "experiments" in soft sciences like economics or psychology don't necessarily mean the same thing as experiments in a hard science like physics.

And also, interestingly, climate science, where they face a similar problem in having a single enormously complex system that they can't bifurcate and run experiments on. To be fair, even nutrition and digestion and neuroscience/psychology tend to be a pseudo-scientific shitshow, and we've 6 billion test subjects for those. Or even epidemiology, where we get endless statistical garbage about this or that factor leading to cancer. Cancer is a real physical process, triggered by real physical causes (carcinogens, genetics, etc.)... how about we put down the statistics textbook and focus on finding the empirical causes? But again we struggle to do that with 6 billion experimental test beds. So yeah, it is best to take anything like sociology/economics/planetary climate modelling with a big grain of salt, because the simple truth is that we're nowhere near achieving accurate modelling in subjects where we have six billion verification sets, let alone subjects where we have a handful (societies, economies) or one (Earth).

Most things are complex and it's quite usualy to not know exactly what will happen. What i don't like is the fact that they usually make their policies as if they understood the topic with absolute certainty. Economics is simply not hard science, and it's failing to admit it. And even if it was science, erring was a absolute normal part in process of science.

The "Black Monday" crash of 1987 was actually the turning point for the efficient market hypothesis. It basically launched the entire field of behavioral finance, as the market plummeted for essentially no reason.

What does the EMH have to do with the financial crisis?

Chairman Greenspan thought that banks would behave rationally, and that is a portion in EMH theory.

EMH claims that marked prices always reflect reality, so the housing bubble of 2000-2007 (with house prices rising at twice the rate as rents) whose bursting caused the financial crisis ought to be impossible.

Europe's economy is in a very bad place

Europe is most likely in the "Late Phase" of their recession...QE will pull up growth some....here's a macro view of the EU I did on my blog a couple of weeks back...would love any feedback.

www.theeconomicmachine.tumblr.com/post/108174705732

In your post, you wrote "France, Germany, Italy and Spain make up 74% of GDP in the EU, so essentially they drive the economy there." I think you mean the Eurozone, not the EU. You forgot about the UK, which is an EU member state.

you are correct...thanks for the catch! corrections made

It seems to me that there really is no hope for developed, advanced economies. There's not a lot to be done, other than high-level technological advancement, within these countries. The high-level tech generates little tax revenue and employs negligible amounts of human labor (actually it usually eliminates jobs). So any economic gains will just be from productivity improvement (via technology and regulatory reform) and selling goods and services to developing countries.

It seems to me that the best thing these stagnating developed countries can do is band together and really push to open and develop Africa, the rest of Asia, India, etc. Adding a couple billion to the middle class is their only hope to sell more goods and services; their own birth rates are never coming back nor is immigration the answer as we've seen.

That's the question, right, how do we find growth?? And my thinking is that economic growth doesn't come from a rise in production, as most economists think. It comes from a rise in credit...basically people/governments wanting to buy what they really can't afford. This pushes up demand and prices and eventually production, and the economy grows. Until the debt service payments become unsustainable, you have defaults and the whole thing comes crashing down. That is why we have cycles.

But you're absolutely right, developed countries need to grow the middle class, and helping Africa, Asia and India get there will create billions of new customers. We've seen a run up in EM in the last decade, and a pull back recently. But the future is there, in Africa, Asia and India. That is where the majority of growth in the global economy is going to come from in the next 20-30 years.

I think we're largely in agreement about the economic analysis here. However, I do have to ask:

Why do developed countries need to grow the middle class, specifically?

This is not directed at you personally, by the way. It's something that you hear a lot, but that just sounds like hollow polit-speak.

Does it mean making the middle class more well-off? If so, why not actually do something for the lower class? And if the intended meaning is to lift people from the lower class to the middle class, then are people aware that this messages is self-defeating? (Somebody is always at the low end of the income or wealth scale...)

Why do developed countries need to grow the middle class? I think the idea is that we want them to grow the middle class so that there are more people with disposable income and expensive appetites to sell to. Because we can't really compete with developing countries for price on most consumer goods.

"Grow the middle class" definitely implies that people are moving from the lower class to the middle class, which IS doing something for the people in the lower class.

sorry, what I meant to say is that developed countries need to help grow/establish the middle class in emerging market countries.

My understanding of the situation (and to be honest, I am in no way an authority on this, and am most likely totally wrong), but population growth in developed countries is slowing, which is another way of saying that we are not producing more and more customers like we used to.

Companies need more and more people to buy their stuff so that they can grow and grow. So, if developed nations are not producing ever-larger numbers of consumers, companies have to look elsewhere.

Hence, enter emerging markets. However, and this may be totally biased or completely wrong, but from what I've read and seen, a large portion of the populations in those emerging economies do not have much disposable income and thus do not make very good consumers.

But if the economies in those countries improve, that will create better paying jobs, low income earners will rise and become middle-class earners, and become better consumers. And you will see overall economic growth, as new businesses are started, tax revenues increase, governments are able to spend more, credit levels are increased, etc.

At least, that's why I think need to grow the middle class in EM.

Well, it's silly to expect even 2% GDP growth over extended period of time: in just 300 years, it would give us almost 400-fold growth. Increasing everyone's purchasing power 400 times would certainly look like singularity.

Depending on how you calculate purchasing power, it did go up by that (and more) in the last 300 years.

Could you point me to any source where it is calculated? This seems especially suspicious, since high speed growth started only 200 years ago (in 18th century the average per capita growth in Europe was 0.1%), in 19th century the average growth was about 1%, and in 20th it reached 1.9%. This gives around 20-fold growth, which is hardly similar to 400-fold one.

For source, see http://piketty.pse.ens.fr/files/capital21c/en/pdf/T2.5.pdf

Could you point me to any source where it is calculated?

Here's one to play with http://www.measuringworth.com/ppoweruk/

I don't need it though. I have something in my hand right now that I could have sold for literally a million times as much only 60 years ago.

I can buy enough food for a year on a single weeks wages. Compare and contrast to an indentured peasant who worries if he's going to starve this year.

I can travel to the other side of the planet and come back. This is something I can purchase on about a week's wages. The cost to someone three hundred years ago to doing this was so much higher, and given that I can get there and back in less than 48 hours, it doesn't even begin to compare. My purchasing power (i.e. the things I can buy), compared to someone like me three hundred years ago, is so, so, so much more than a measly 400 times theirs.

The trend of compounded growth since 1820 has been 4%, really until some time from the 1990s to now. Many suspect the natural rate of growth still to be 4% but somehow, our policy or behavior suppresses it.

The transition to the lower rate of growth is a lot covered by Tyler Cowen under the rubric " The Great Stagnation".

We're roughly 2096 ( exp(1.04,195) ) times wealthier on aggregate than in 1820. This happens very slowly. Since 1960, the ratio is 8.6:1 - you and I are 8.6 times as wealthy as the people most like us from 1960.

Megan McArdle talks about the "Little House On The Prairie" Ingalls family not being able to afford a modest tin cup for the third daughter for a long time - apparently something noted in the books. Yet they were "middle class" by the standards of the times.

Everywhere I look, I see possibilities for massive efficiency improvements, but there just aren't enough resources to do anything but a half assed job.

Most of it is just design. A big portion is software.

Let's take an example.

Say, if the public transportation could be improved not with brute force, but with more elegance, comfort and intelligence, then massive savings could be realized.

My country doesn't manufacture appreciable amounts of automobiles. It also doesn't produce oil. Few developed countries produce oil.

So using cars for transportation leaks out large amounts of capital.

We have trams in my city, but the network of tracks is so old and unsophisticated that the trams must drive extremely slowly in many places, to avoid slamming intersections or curves. Some foreign tram models break constantly.

This doesn't only have the effect of making you sit in the tram longer from A to B, it also means that for a fixed amount of trams and drivers, they will pass the stops less frequently, meaning you have to wait longer before you can even get on board, and the throughput capacity of the lines is less too.

And the ride is quite noisy, bumpy and can feel stressful. But the views are beautiful, and it doesn't generate exhaust. It feels like a natural part of the city. If a tram rolls by, it doesn't make an aggressive sound like a thundering bus, it rolls with a gentle rumble, sometimes ringing bells.

So you could improve the functionality of the city by fixing a lot of these problems.

Some other parts of infrastructure have even regressed. Siemens was supposed to automate the subway system. They managed to just make the arrival time displays at the stations unreliable (that had been working just fine, probably since the metro started around 1982) and waste millions before the city board finally mustered enough courage to fire them.

So we have a huge amount of medium and even very low level technological advancement ahead of us, with large payoffs. Rankine documented spiral curves for tracks in 1862.

And don't get me started on healthcare IT.

That would mean moving from a Status Economy to a Productive Economy.

Without intelligent oversight, all economies - capitalist, communist, socialist, democratic, fascist, you name it - tend towards status production and social differentiation as a primary product.

Sometimes useful stuff falls out in the way of invention and innovation, but more often it doesn't. Even when it looks useful it's likely to be driven by fetishised status display as a primary goal, and not by high-velocity deep innovation.

Status economies are fundamentally wasteful and non-productive in any practical sense, because most resources are hoarded by a tiny minority of high-status individuals.

You only get real growth when resources - including innovation and intelligence - are dispersed and farmed strategically.

This has happened occasionally in the past, and I'd like to think it could happen again.

But it's not happening now, and any path from the current system to a productive one is going to be difficult and messy.

In a status economy, basic needs are rationed to maintain and expand status differentials. So public infrastructure takes a beating, because 'the public' - by definition - are not high status, and must always be denied easy access to quality resources.

I think that's possible to a limited extent, but it's also kind of tangential to what I tried to say.

The parent's thesis was that technology gains in productivity are small.

I work in logistics and there adding some intelligence to a supply chain saves millions relatively quickly. It happens to be ecological as well, as spoilage is reduced.

So clearly there were a lot of gains to be had. In my opinion we operate on quite rudimentary levels in many areas of life and business. We're not limited by currently known physics. We're struck down by organizational inefficiencies and lack of brain resources.

At some point the inter-city council allowed getting into the busiest bus line not just from the front door but through any door. Great, we got a free speedup! It took years to drive that through the councils, maybe because it was a new idea (new idea here).

Now, the distribution of those savings made is another matter. And some changes are perhaps more politically charged than others, true.

Recent history has already proved you right in many of the things you are saying. If you look at investments into healthcare, education, and urbanization, they tend to have a large and easy to quantify payoff. You can see this in the 1900-1950s in the US and the same thing in many countries. Running clean water and sanitary plumbing, electricity, affordable cars, and telecommunications have made significant impacts on economies (and don't forget adding women to the workforce, which implies training/education).

These sorts of inefficiencies can only be remedied by transparency about data. This is a direct threat to cronyism which is hard coded into governments across the world.

This might sound stupid (and it might be), but wouldn't space exploration go a long way in helping advanced economies having something to do and growth to?

If advanced economies were to increase science and space tech research, they would practically have a limitless "market" from where to obtain wealth and productivity, no?

It's a serious question. Wouldn't this help stagnated economies start the engines again? I mean, if nowadays a lot of people are trying to catch the next startup lottery, betting on things that would seem a bit superficial compared to, say, building a moon base or even a mars one, why wouldn't these same people that control vast amounts of wealth, put it to work on something that will most likely return something of value, and probably something more than just a startup lottery winner would (in the long term)?.

What am I not seeing/considering here? is human greed that badly focused/directed that they won't see this opportunity? I know rocket science is literally... rocket science, so very very hard. But it seems like companies in this area are moving forward by leaps and bounds with comparatively little money (vs say the amount of money being traded in forex every day, or similar).

What is the nature of this blind spot?

There is nothing to do in space. Mining asteroids is the only economically useful thing that might qualify, but that's still way not worth it compared to just digging things out of the ground here on earth. When people bet on startups, they're betting that the startup will create enormous value by doing something very useful. Not just supporting a jobs program.

"Europe will pull out of this, but maybe not for a year or two, at which time the US might be heading back into a recession, which might pull Europe along with it."

What is your reasoning for the US going back into recession?

well, I think right now the US is in the middle of a short term debt cycle, where assets are going to return around 3% and things seem somewhat quiet...it reminds me of the late 90s, just before the dotcom boom...a quiet few years, however, things never stay this way...we have seen an inflation of the stock market, but most American's aren't feeling that...credit growth has been somewhat tepid, and what I think is going to happen is we are going to get into something similiar to another "dotcom" boom, with a ton of IPOs, money flooding into our stock market from all over the world as investor chase returns, the stock market will probably go higher in 2015, and people will eventually feel really good about the economy, and they will push up credit levels. We're not seeing any growth in wages, so eventually the credit levels will get too steep and defaults will occur, and the cycle will turn down.

That is just the nature of the beast....things go up and then they come right back down. Its bound to happen sooner or later, and I think maybe in 2016-2017.

But I'm most likely 100% wrong...most economic forecasts are...what do you think?

Not nearly as bad as it was 3000 years ago. Back then the European economy was in such a bad shape people couldn't even afford to buy toilet paper.

I'm not sure this article gets the definition of the zero lower bound right (though I'd love to be corrected if it does.) As I understood it, the ZLB only applies to central bank lending rates to other banks, which if they become negative the other banks only have the incentive to hoard cash.

Could someone buy one of these negative bonds in hopes to short sell it? I barely understand shorting, but it seems like this would be an opportunity (I realize shorting is always risky).

Shorting means borrowing the asset from someone else and selling it, not buying then selling.

I'd guess shorting isn't allowed but could be wrong. It certainly should be allowed.

There are secondary markets for most bonds so yes, you can short them. However most traders would do this through derivatives such as bond futures or ETFs.

Most traders would pick the optimal instrument to express their view which could end up being bond futures or ETFs but not always.

Certain corporate baonds have as well. Notably, Nestle's are negative.

Oh, so you read the article? First paragraph...

Reply on news.ycombinator.com