What Effect Could a Negative Interest Rate Have Over an Economy?

[loyek590]

If I am SNB, I really don't want you buying Swiss Francs. And if I am USA and the exporters start bitching, pretty soon, I won't want you buying USD. If it's bad for the elderly savers it's their own fault for not being diversified. Only a dumbass trader puts all his eggs in one basket, yet many elderly put all their eggs in interest bearing accounts. Where were the financial advisors telling them that it looks safe, but it is actually very risky.?

 

[StarDust9182]

Heck, no. Prepayments would demolish your portfolio.

It's a strange strange world we live in master jack .....

http://www.zerohedge.com/news/2015-01-30/denmark-you-are-now-paid-take-out-mortgage

So why have a bank middleman .....

I can foresee bank competition saying we will pay you more that that bank. The government will not be able to compete since there is a limit to what they can pay more for without laying off officials. If the story is true ...... economics .... yah gotta love it!

 

[loyek590]

It's a strange strange world we live in master jack .....

http://www.zerohedge.com/news/2015-01-30/denmark-you-are-now-paid-take-out-mortgage

So why have a bank middleman .....

I can foresee bank competition saying we will pay you more that that bank. The government will not be able to compete since there is a limit to what they can pay more for without laying off officials. If the story is true ...... economics .... yah gotta love it!

well that's the idea of those in my camp. The fed won't do anything meaningful until they lose control of the bond market and their hand is forced.

 

[Himanshu rathee]

INTEREST rates are very low around the developed world; near-zero in nominal terms and negative in real terms. This is part of a deliberate policy by central banks to discourage saving and encourage borrowing. It has also been seen as a way of boosting the stockmarket and thus as creating a wealth effect for individuals, and boosting confidence.

How might low real rates boost the equity market? There are two theoretical explanations. The first relates to the fact that equities should be priced as the value of future cashflows, discounted to the current day by an interest rate.* Lower that discount rate and you raise the present value of shares. I have argued that this rationale is flawed; if rates are now because economic growth is slow (and it has been), then one needs to lower the estimate of future cashflows. The effects cancel each other out. The second reason is simple asset switching; low rates on bonds and cash make investors seek out the greater attractions of equities; this may well be the driving force behind 2013's equity rally.

 

[WeToddDid2]

Hello.

1. What effect would a negative interest rate have over an economy?

1. Is it positive of negative effect? In addition, what prompts a central bank to reduce their interest rate to negative (-)?

1. What do they hope to achieve by doing this?

1. What effect would this have on the fixed deposits or borrowed money in such countries?

For example, the interest rate in Switzerland is currently negative.


These are vital questions and answers would be appreciated.


Thank you.

Why is it vital?

 

[WeToddDid2]

well that's the idea of those in my camp. The fed won't do anything meaningful until they lose control of the bond market and their hand is forced.

I don't think it will be directly the bond market. The bond market will most likely not be the cause. Inflation will be the cause. Potentially higher yields will be the effect of potentially higher inflation.

As an aside, I don't understand why the FED did QE at all. A much more effective policy most likely would be just to state a max yield on the long end of the curve. For example, they could state that they do not want to the 10yrT to go north of say 3%. They can be standing there with a massive club waiting to smash any trader that dares to test the FED and trade bonds north of a 3% yield. The FED would most likely not have to purchase many Ts under this scenario. Therefore, the FED most likely would not have expand it's balance sheet as it has done and nobody would have to be scared of it's large balance sheet. The FED does something very similar with the short end of the curve all day everyday. That is what the FED does for a living on a daily basis. In other words, the FED manipulates the short end of the curve to achieve a yield that is close to its stated target rate.

 

[WeToddDid2]

Negative interest rates are a desperation play IMO since QE has failed and they need new ideas to keep the old game going. The intent is to save the banking system and deflate the bond bubble without an debt counter-party explosion ripping apart the world currency (AKA debt) exchange system. They don't print money, but they print debt. Debt requires service and service requires growth (real GDP not propaganda or talking heads) If growth falls below service requirements, bad things happen. Negative interest rates are an attempt to service larger debt amounts in an exponential growth monetary system.

No exponential growth can exist in the real world so the end could be quite catastrophic. It is not that banks won't loan, it is that they must have service for new loans and the quality of borrowers has fallen because of the damage done to the economy by not accepting little failures caused by excess debt creation. A bunch of little failures will add up to one big big big failure IMO.

A profit comes because of the spread on debt service to costs so capitalism can't work. A loan service is the spread on savers vs banks. Get rid of all the savers/investors and there is a problem. The solution so far has been to get the rich to save more and whack the workers. Ironic in a socialist solution to a super big debt problem - let's all share the debt. You should service a little more than me though since I am poor. Watch Europe closely to see how it succeeds.

"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children wake up homeless on the continent their Fathers conquered...I believe that banking institutions are more dangerous to our liberties than standing armies... The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." - Thomas Jefferson

"An oligarchy is said to be that in which the few and the wealthy, and a democracy that in which the many and the poor are the rulers," - Aristotle

http://faculty.frostburg.edu/phil/forum/PlatoRep.htm

I was starting to agree with what you stated above and then you totally lost me.

Negative interest rates are a desperation play IMO since QE has failed and they need new ideas to keep the old game going.

Agreed.

The intent is to save the banking system and deflate the bond bubble without an

They are trying to inflate not deflate.

A profit comes because of the spread on debt service to costs so capitalism can't work.

The way that the monetary system is currently designed and capitalism are not the same thing. For example, there was still capitalism during the civil war and the US issued green backs a very different monetary system than we have now. Also, if I remember correctly, the USD was once backed by gold. Again, a very different monetary system and there was still capitalism.

"An oligarchy is said to be that in which the few and the wealthy, and a democracy that in which the many and the poor are the rulers," - Aristotle

Can you provide me a historical example in which any form of government with a sizable population did not end up as an oligarchy or dictatorship? The polar opposite of capitalism is communism. All communist countries have been oligarchies or dictatorships. For example, USSR, China, North Korea, Cuba, etc. Do you prefer a dictatorship to an oligarchy?

Do you know why democracies end up as oligarchies? It is because human beings are competitive. That is it. The only way a democracy doesn't end up as an oligarchy is if human cease to be competitive or humans cease to be part of the equation. A great case study is unions in the United States. Aren't they examples of smaller entities attempting their own form of socialism? Are they not essentially oligarchies? They have leaders that stay in power until they decide to retire normally and they get paid significantly more than the laborers in the union. Also, the unions demand that the laborers essentially pay taxes to the unions. Why is there such income equity within the unions within the US?

Do you know why communist countries end up being dictatorships? It is because humans are competitive. That is it.

 

[WeToddDid2]

Some labor union examples:

There can be riches in standing up for the working class: The Boilermakers union president earned $506,000, plus hundreds of thousands of dollars more for travel expenses, while the Laborers union president made $441,000. The Transportation Communications Union leader made $300,000, bumped up to $750,000 with business expenses.

How much do the laborers in the Boilermakers' union get paid in total compensation on average? Is it anywhere close to $506,000.

How much do the laborers in the Laborers union get paid in total compensation on average? Is it anywhere close to $441,000.

How much do the laborers in the Transportation Communications union get paid in total compensation on average? Is it anywhere close to $750,000.

http://www.washingtontimes.com/news...osses-salaries-put-big-in-big-labor/?page=all

There you go. There are examples of oligarchies within essentially socialist democracies.

 

[WeToddDid2]

StarDust9182,

Now let me ask you, are you competitive?

 

[loyek590]

I don't think it will be directly the bond market. The bond market will most likely not be the cause. Inflation will be the cause. Potentially higher yields will be the effect of potentially higher inflation.

As an aside, I don't understand why the FED did QE at all. A much more effective policy most likely would be just to state a max yield on the long end of the curve. For example, they could state that they do not want to the 10yrT to go north of say 3%. They can be standing there with a massive club waiting to smash any trader that dares to test the FED and trade bonds north of a 3% yield. The FED would most likely not have to purchase many Ts under this scenario. Therefore, the FED most likely would not have expand it's balance sheet as it has done and nobody would have to be scared of it's large balance sheet. The FED does something very similar with the short end of the curve all day everyday. That is what the FED does for a living on a daily basis. In other words, the FED manipulates the short end of the curve to achieve a yield that is close to its stated target rate.

yeah, the SNB tried price fixing with their currency. Worked really well for a couple of years. When they finally got tired of sticking their fingers in the holes in the dyke, the whole thing broke. Probably no comparision to a little country with a little itty bitty currency, because they don't have a trillion dollars sitting around in the form of paper and ink.

oh well, I can't really speak knowledgably on money, because I still think of it as something that is real.