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Old 03-27-2016, 10:41 AM   #21
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Al In Ohio: I didn't hear about a rate increase in the last month by the fed. sorry I missed that. could you post an url for that article? And you are right not everyone is talking about it, I just read a couple of articles on the internet at Yahoo. finance. thanks

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The fed raised short term rates by .25% in December, but has not changed since then.
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Old 03-27-2016, 04:08 PM   #22
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The fed raised short term rates by .25% in December, but has not changed since then.
If you watch CD rates, you would know that .25% raising did not change anything in CD market. It states a lot for now.
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Old 03-27-2016, 04:23 PM   #23
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Even if that's true, raising loan prices still makes no sense.

Why?

Because charging higher interest on loans will decrease the demand for loans. Banks will loan less and have even higher excess reserves on which they're paying interest. Raising borrowing costs doesn't fix the problem. It makes it worse.

The proper and I believe the only rational long-term response for banks is not to charge borrowers more. It's to charge depositors.

Raising long-term loan rates in response to negative interest rates on deposits makes no sense.
If you look at my first post you will see that I said they could raise rates on loans or raise fees.... but retail customers will walk if their fees go higher... it has been proven many times.... and you cannot charge them a negative interest rate (well, you could, but it is also like charging them a fee)... so the easiest place to get it back is in the loans.... probably the retail loans more than corp.... but I would bet that corp rates would also go up...

Also, the bank would have to eat some of the cost as a cost of doing business... that is just simple economics...


Since we are not in negative rates here in the US, I cannot ask what actually happens to some people I know...


But, I can tell you that banks pass on some of this cost to corp client... I know that when the crisis hit there was some special fee that was charged to banks for their deposits and it got passed to the company I worked for.... I argued long and hard on that fee as it had never showed up on our analysis, but got nowhere... also, our compensating balances got such little interest our out of pocket fees jumped on our normal transactions...



Edit to add... just remembered way back when (in the 80s) when I was doing some of the rate calculations for a bank... we had a loan category called composite or something like that... it was based on the banks cost of funding. I had to calculate the total cost of funding to the bank and pass it to all the lending depts so they knew what they had to get just to break even... it would have included all reserves set asides and even a negative rate, which when you come down to it is basically a reserve requirement....
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Old 03-27-2016, 04:28 PM   #24
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I think this article is more accurate description of what is going on at major economies currency war:
Secret meeting at G20 to take down dollar - Business Insider
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Old 03-27-2016, 06:04 PM   #25
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but retail customers will walk if their fees go higher... it has been proven many times....
But isn't that part of the point?

The whole reason banks are paying negative interest is because they have excess reserves. Said another way, they have too many deposits.

So if you're a bank and you raise fees on deposits when the Central Bank is charging you interest on your excess reserves one of two good things happens: 1) You earn back that negative interest in added fees or 2) you lose deposits which then reduces your excess reserves and that reduces the amount of interest you pay on those reserves.

When you raise rates on loan customers, you risk losing them too. Only it's a double whammy because not only do you lose their spread income but the lost loan principal also frees up reserves that get charged interest. You lose twice by trying to pass through negative interest to your loan customers.
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Old 03-27-2016, 06:16 PM   #26
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I had to calculate the total cost of funding to the bank and pass it to all the lending depts so they knew what they had to get just to break even... it would have included all reserves set asides and even a negative rate, which when you come down to it is basically a reserve requirement....
I doubt any bank is allocating ECB interest the way you suggest.

The ECB is charging member banks who deposit money with the ECB interest on those deposits. If the banks lend that money out, instead of depositing it with the ECB, they don't pay that interest.

So interest paid to the ECB is not a cost of loaning money. It is a cost of not loaning money. Which makes it the opposite of a reserve requirement.
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Old 03-27-2016, 10:02 PM   #27
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I doubt any bank is allocating ECB interest the way you suggest.

The ECB is charging member banks who deposit money with the ECB interest on those deposits. If the banks lend that money out, instead of depositing it with the ECB, they don't pay that interest.

So interest paid to the ECB is not a cost of loaning money. It is a cost of not loaning money. Which makes it the opposite of a reserve requirement.

My bad choice of words.... back when I was doing the calc the amount set aside for reserves was pretty big... AFAIK, there are no required reserves set aside for deposit now... I had to adjust the deposit base by the level of reserves to calculate a composite rate for the bank...

All I was trying to point out is that if you are now paying to keep deposits there that is just another cost that you have to factor in to your composite rate calculation...

Also, unless your bank has a lot of brokered deposits it is not as easy as you would think to shed deposits... not without pissing off a good part of your customer base and that is something a bank does not want to do.... they are thinking this is a short term issue and the cost of acquiring a customer can be high... you do not want to run them off...
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Old 03-27-2016, 10:28 PM   #28
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I think pick, shovel, strong box, and gun sales will increase.
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what will negative interest rates do?
Old 03-27-2016, 10:55 PM   #29
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what will negative interest rates do?

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If you watch CD rates, you would know that .25% raising did not change anything in CD market. It states a lot for now.

It did where I am. One bank advertised for 2.0% over 60 months (double what it had been for quite some time), then other banks followed suit. Granted it wasn't an immediate reaction, it took about 4-6 weeks for banks where I am to react.

And the Fed has announced they will incrementally raise the rate again in the next few weeks when they convene again.

I listen to the financial market news on NPR on my drive home from w*rk. Not sure if I will be on top of this as much daily when my drive home ceases after FIRE!


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Old 03-28-2016, 12:48 AM   #30
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James Grant Interview Part II (Page 1)

James Grant: negative interest rates are not only a tax on saving, it is the destruction of saving.
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Old 03-28-2016, 05:42 AM   #31
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James Grant: negative interest rates are not only a tax on saving, it is the destruction of saving.
Pretty much. If a near-zero interest rate policy since 2009 has been "the War on Savers", negative interest rates would be dropping the atomic bomb on them.
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Old 03-28-2016, 06:59 AM   #32
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James Grant Interview Part II (Page 1)

James Grant: negative interest rates are not only a tax on saving, it is the destruction of saving.

As is inflation.

And right now the world has too much money lying around idle. A tax on cash savings in the absence of inflation is exactly what is called for.
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Old 03-28-2016, 07:20 AM   #33
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And right now the world has too much money lying around idle. A tax on cash savings in the absence of inflation is exactly what is called for.
Negative interest rates indicate there is a surplus of savings. What the world needs is higher aggregate demand. A tax on savings will not lead to that. What is really needed is not easily achieved using monetary policy.
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Old 03-28-2016, 07:40 AM   #34
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Negative interest rates indicate there is a surplus of savings. What the world needs is higher aggregate demand. A tax on savings will not lead to that. What is really needed is not easily achieved using monetary policy.
Monetary policy is the preferred policy approach to keeping AD and AS matched at low rates of inflation. That's what happens in every recession (the Fed cuts rates) and in every expansion (the Fed raises rates).

The big difference now is that rates have hit a 0% floor which keeps them higher than they otherwise would be. So negative rates are indeed called for.

But here's the question: Europe is currently battling both high unemployment and negative inflation. If the ECB's deposit rate were currently 2%, would anyone question whether the central bank should cut rates?

The zero lower bound creates practical problems for continued monetary easing. Not conceptual ones.
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Old 03-28-2016, 01:28 PM   #35
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Monetary policy is the preferred policy approach to keeping AD and AS matched at low rates of inflation. That's what happens in every recession (the Fed cuts rates) and in every expansion (the Fed raises rates).

The big difference now is that rates have hit a 0% floor which keeps them higher than they otherwise would be. So negative rates are indeed called for.

But here's the question: Europe is currently battling both high unemployment and negative inflation. If the ECB's deposit rate were currently 2%, would anyone question whether the central bank should cut rates?

The zero lower bound creates practical problems for continued monetary easing. Not conceptual ones.
Monetary policy is not the preferred option to stimulate demand, which is why negative interest rates are not generating the desired economic growth. Other policies are more direct and can have greater impact, but they are not the responsibility of the Central Bank. In other words, the Central Bank is doing what it can, not what should be done.

This is not really the thread topic, so to try an get back on topic, my response to the OP question: To consumers, negative interest rates will lower the cost of borrowing even more. To savers, it will lower the future return on fixed income. For institutions, it will make it more difficult and costly to hold large amounts of liquidity over time. Finally, and most importantly, for the economy it will most assuredly lead to a mis-allocation of capital, if it hasn't already done so.
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Old 03-31-2016, 10:05 AM   #36
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Bill Gross: Central Banks Are ‘Running Out of Time’ - Barron's

Bill Gross is also quite skeptical of the outcome of the negative rate experiment.
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Old 03-31-2016, 10:19 AM   #37
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Negative interest rates make me think of a farmer's well that's gradually dropping in water level during the dry season, as the water table drops. Finally the water table is at the bottom of the well, and the bucket comes up empty. A few weeks later the water table is 2 feet below the bottom of the well, and the farmer pulls up the bucket to find it still empty.

The farmer says "Darn, this well is still dry". But his cityslicker friend corrects him with "No, no, Earl, it's negative 2 feet full".
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Old 03-31-2016, 10:24 AM   #38
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Bill Gross: Central Banks Are ‘Running Out of Time’ - Barron's

Bill Gross is also quite skeptical of the outcome of the negative rate experiment.
Can you post an excerpt for those of us who don't subscribe to Barron's?

Until then, I'll just note that Mr. Gross hasn't been the best at forecasting the impact of monetary policy during these "through the looking glass" times.

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The first inklings of trouble at Pimco began when Gross made a wrong-way bet in February 2011 based on the Federal Reserves program of quantitative easing. QE was expected by many to cause faster inflation, sending rates higher and adding to the federal budget deficit. In anticipation, Gross eliminated holdings of U.S. Treasuries.

While his view wasn't that exceptional, his decision was. Getting out of U.S. Treasuries was big, bold and, as it turned out, bad. At the time, 10-year Treasuries were yielding 3.48 percent. They soon fell to less than 3 percent, as bonds continued their epic 30-plus-year rally. Today, they yield less than 2 percent.
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Old 04-04-2016, 09:10 AM   #39
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So in Switzerland we have an answer to the question "What will central bank negative interest rates do?"

They'll drive other rates negative too:

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Reid points to Switzerland, where AA [rated] Swiss corporate yields are negative out to 10 years, which shouldn’t be a surprise given that 2-, 5- and 10-year Swiss government yields were at -1.085%, -0.78% and -0.31%, respectively.
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Old 04-04-2016, 01:44 PM   #40
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Isn't that picture dominated by very few companies like Nestle and Novartis?

Those are AAA companies, of which many have negative yields worldwide.

[Edit] Correction: Not quite, but close in rest of Europe http://www.bloomberg.com/news/articl...-on-qe-outlook
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