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Understanding negative interest rates
Old 04-27-2015, 04:33 PM   #1
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Understanding negative interest rates

Don't look here for help, but think it may be in your best interest to undertand what negative interest rates may mean for the financial markets and the world economy.
Many think that it just means that savings accounts won't be making as much as they have in the past.
Or, maybe it could it be an opportunity to take on some debt at very reasonable rates.
Others believe that it's much ado about nothing.

But maybe it's more than that. And if so...

Looking for insight...
important?
nothing to worry about?
could have big impact on markets?
more wild eyed rabble rousing?
Oh Hmmm... ?

But if it's unimportant, why would there ever be negative interest rate.

Your opinion?
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Understanding negative interest rates
Old 04-27-2015, 08:41 PM   #2
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Understanding negative interest rates

http://www.bloombergview.com/quickta...interest-rates

Above may help you understand.

Seems to say negative rates are dangerous and untested, reeking of desperation to avoid deflation.

But don't worry, be happy.


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Old 04-27-2015, 09:26 PM   #3
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The one real implication is on US rates. Our Fed may want to increase rates but they worry about the dollar getting too strong. As soon as rates rise money flows in volume and the dollar strengthens hurting US exports. If you told us 10 years ago there would be negative rates no one would have believed.


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Old 04-28-2015, 08:34 AM   #4
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I hate to say this, but I think we are headed for a Mad Max scenario due to deflation. Just a matter of when. Hopefully I will no longer be around when it all hits the fan.
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Old 04-28-2015, 01:01 PM   #5
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I hate to say this, but I think we are headed for a Mad Max scenario due to deflation. Just a matter of when. Hopefully I will no longer be around when it all hits the fan.
Sell stocks and bonds; Buy gasoline and stuff with lots of spiky bits?

I believe there are some types of playground equipment that can be converted to a ThunderDome. Could be handy.
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Old 04-28-2015, 02:10 PM   #6
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Some thoughts on a cashless society.

The “War on Cash” in 10 Spine-Chilling Quotes | Wolf Street

lead in...m
Quote:
The war on cash is escalating. As Mises’ Jo Salerno reports, the latest combatant to join the fray is JP Morgan Chase, the largest bank in the U.S., which recently enacted a policy restricting the use of cash in selected arkets; bans cash payments for credit cards, mortgages, and auto loans; and disallows the storage of “any cash or coins” in safe deposit boxes. In other words, the war has moved on from one of words to actions.

Here are ten quotes that should chill the spine of any individual who cherishes his or her freedom and anonymity:
...what others have said.
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Old 04-29-2015, 03:31 AM   #7
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I better start spending some of that cash in my mattress.


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Old 04-29-2015, 05:31 AM   #8
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Few random thoughts here:

Deflation is easier to solve than inflation. Reason it is taking so long seems to be fears to "overshoot" back into high inflation numbers. For the US specifically the Eurozone deflation & devaluation recently threw a small wrench in getting inflation back up to desired levels. Hard to have decent inflation when your currency goes up by 20% in a few months.

Mild deflation isn't so bad though I believe. It means things are getting cheaper, which actually is a sign of progress. I think much of the persistent deflation are technological effects: things are getting cheaper faster than ever before. It will hamper labor negotiations (psychological resistance to nominal salary cuts). Other than that, I don't see the problem. Stability is more important (low deflation / inflation rates).

Negative interest rates I'm also not too worried about. At retail level it won't happen, and at corporate level there is no alternative (can't convert much of it to cash in hand). It's just like negative real interest rates, we've had those before plenty of times.

If it does happen at retail level, some instability could follow. The more people convert to cash, the lower the money supply in circulation. This leads to more deflation if I remember correctly. So we can have a small negative spiral there. But as the cash portion is so small in the total monetary base, we'll run out of dollar bills before any major effect is seen. Pretty sure the government will intervene.

Most likely solution is increasing the fixed charges to holding a bank account. That gives a de facto negative interest rate, but you can't get rid of it unless one goes totally unbanked. Tough to do.

In other words: I'm not too worried, and fail to see any significant issues with negative interest rates.

Except maybe pension funds and savers who refuse to go equities, they are having a tougher time right now to meet obligations and savings targets.
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Understanding negative interest rates
Old 04-30-2015, 02:17 PM   #9
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Understanding negative interest rates

http://www.cnbc.com/id/102566526

Here's a Bloomberg article 4/16/15 when the German bund index went negative for the first time. USTsy index was 1.3%.

France, and even Spain, gov sold negative yield secs.

Previous poster made interesting point, "real" rate.


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Old 04-30-2015, 03:02 PM   #10
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Negative rates are the "unstated" mechanism by which Central Banks are waging beggar-thy-neighbor competitive currency devaluations.
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Old 04-30-2015, 03:05 PM   #11
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In other words: I'm not too worried, and fail to see any significant issues with negative interest rates.

Except maybe pension funds and savers who refuse to go equities, they are having a tougher time right now to meet obligations and savings targets.
Negative interest rates are a sole manifestation of Central Bank manipulation and are a significant distortion in the capital allocation process and IMHO are therefore very worrisome.
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Old 04-30-2015, 03:30 PM   #12
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Quote:
Originally Posted by Totoro View Post
Few random thoughts here:

Deflation is easier to solve than inflation. Reason it is taking so long seems to be fears to "overshoot" back into high inflation numbers. For the US specifically the Eurozone deflation & devaluation recently threw a small wrench in getting inflation back up to desired levels. Hard to have decent inflation when your currency goes up by 20% in a few months.

Mild deflation isn't so bad though I believe. It means things are getting cheaper, which actually is a sign of progress. I think much of the persistent deflation are technological effects: things are getting cheaper faster than ever before. It will hamper labor negotiations (psychological resistance to nominal salary cuts). Other than that, I don't see the problem. Stability is more important (low deflation / inflation rates).

Negative interest rates I'm also not too worried about. At retail level it won't happen, and at corporate level there is no alternative (can't convert much of it to cash in hand). It's just like negative real interest rates, we've had those before plenty of times.

If it does happen at retail level, some instability could follow. The more people convert to cash, the lower the money supply in circulation. This leads to more deflation if I remember correctly. So we can have a small negative spiral there. But as the cash portion is so small in the total monetary base, we'll run out of dollar bills before any major effect is seen. Pretty sure the government will intervene.

Most likely solution is increasing the fixed charges to holding a bank account. That gives a de facto negative interest rate, but you can't get rid of it unless one goes totally unbanked. Tough to do.

In other words: I'm not too worried, and fail to see any significant issues with negative interest rates.

Except maybe pension funds and savers who refuse to go equities, they are having a tougher time right now to meet obligations and savings targets.

Deflation caused by technology advancement is increased productivity which adds to the GDP. Economic deflation can be worse than just inflation because as prices decrease, people hold on to their money waiting for prices to go down further, causing an economic slowdown, costing jobs and even less spending. Taxes taken in by governments are reduced forcing either reduced government spending or more deficit spending. After a deflationary period where governments try to spend their way out of it, there is higher risk of hyperinflation. I believe economists do worry about deflation more than inflation.
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