Who is willing to pay someone to hold their money? And have the risk involved with a loan?? Makes no sense and can't work.
People will just hoard physical cash.
A simpler explanation is that there is an excess demand for safe assets like treasury bills and cash. And there's an excess demand for those assets because their yield is held above the market clearing level because interest rates can't break through the 0% price floor.
If the world is fearing deflation. 0% deposits are actually a positive yielding asset. The larger the deflation, the higher 0% deposits return and the larger the miss match between borrowers and lenders and other competing investments becomes.
Negative interest rates help fix that problem by removing the arbitrary price floor so markets can clear.
No. FRB: How much U.S. currency is in circulation?
How much U.S. currency is in circulation?
There was approximately $1.39 trillion in circulation as of September 30, 2015, of which $1.34 trillion was in Federal Reserve notes.
And the Fed says there are about $8T in total deposits, IIRC about 1/4th of that is in retail banks. So--no, we really can't all get our money in cash if we want it, becasue there aren't enough notes.
But we're part of a larger system. Once the other big currencies (euro, yen) go into negative rate territory, it induces big currency flows into the USD (because depositors can at least store their money in the world's most secure banks and not pay for the privilege). A stronger US currency kills our export business and it causes deflation and all the bad things that go with that ("don't buy today--wait for later when things will be cheaper"). So the idiocy of others drives us into the same crazy swamp.But...Here is the question I don't understand... By numerical data anyways, the economy is not that bad to do that drastic of measures is it?
Exactly! And the Japan Central bank is purchasing in excess of 100% of issuance,But we're part of a larger system. Once the other big currencies (euro, yen) go into negative rate territory, it induces big currency flows into the USD (because depositors can at least store their money in the world's most secure banks and not pay for the privilege). A stronger US currency kills our export business and it causes deflation and all the bad things that go with that ("don't buy today--wait for later when things will be cheaper"). So the idiocy of others drives us into the same crazy swamp.
But we're part of a larger system. Once the other big currencies (euro, yen) go into negative rate territory, it induces big currency flows into the USD (because depositors can at least store their money in the world's most secure banks and not pay for the privilege). A stronger US currency kills our export business and it causes deflation and all the bad things that go with that ("don't buy today--wait for later when things will be cheaper"). So the idiocy of others drives us into the same crazy swamp.
Negative interest rates? Time to deleverage. Paying off my rental mortgages is looking like a nice guaranteed return at this point. Don't let the bank take your money, pay off all debt with a rate higher than zero. Only have the minimum cash in the bank needed to get by, and buy a new mattress to hoard the cash on hand at home.
I agree your background basis and theory are correct. But...Here is the question I don't understand... By numerical data anyways, the economy is not that bad to do that drastic of measures is it?
Nope, the economy isn't that bad. And that's why the U.S. currently doesn't have negative nominal rates.
But here's the thing. We're ~7 years into economic recovery. Unemployment just ticked below 5%. The equity market as of a few months ago was making new highs. The Fed has been doing everything in its power to raise growth and stoke some inflation since 2007-8 . . .
And in the face of all that 10 year inflation expectations (measured as the difference between 10-yr treasury bonds and TIPS) are just 1.2% today. Let me say that again for emphasis. Bond investors are betting that U.S. inflation will average just 1.2% over the next decade even though the Fed is committed to a 2% inflation target.
Something ain't right.
And now, after 7 years, we're at what is typically the tail end of a normal economic expansion. What happens if the U.S. does tip into a "normal" recession in light of where we are at the peak of this expansion?
Is U.S. deflation so hard to imagine?
Might it not be wise to lay the groundwork for the tools that may be necessary if that should come to pass even if they're not needed at this precise moment?
The bond investors were betting in the early 80's inflation would be around 10% for 10 years and that didn't happen.I dont believe negative interest rates have ever proven to have been used before, so it would just be a "hope and pray" mission correct? Law of Unintended consequences may well come into play. We see what low interest rates did for debt fueled oil companies.
Yup, the bond market ain't God. And bond investors may well get their asses handed to them on this. It's just one indicator. Another indicator is trailing 12 month CPI at just 0.7% . . . with unemployment of 4.9%
So, like I said, something ain't right.
But I agree unintended consequences are a concern. Doing something that's never been done before is especially risky. Which is why the Fed will move slooooowly, if at all on this.
We're seeing a bit of fall out already with folks worrying about bank profitability because of slightly negative rates around the world. That seems to me to be nothing more than an adjustment issue, but we'll see.
I can't actually believe that having to pay 0.0025% on excess reserves is going to tank a business model that isn't already broken. Maybe banks could try the revolutionary concept of making some loans with that cash. Or if they can't do that, maybe they could stop paying better than treasury rates on CDs and time deposits. Or, if that doesn't do the trick, perhaps they could start charging folks for deposits. What are they sitting on piles of cash for anyway? If they can't do something with it, charge customers for the privilege of holding it and it will go somewhere else . . . which is all kind of the point.
As for oil company debt? Mmmm, I wouldn't lay that at the feet of the Fed. It's not like this is the first time we've seen commodity companies misjudge the cycle and go belly up. I kind of think that's what they're on earth to do.
But yeah, there will be unintended consequences. We learn, after all, by doing. But the prospect for unintended consequences never really goes away. Sometimes its easy to forget, doing nothing has risks too.
I guess what I was trying to imply is easy access to low interest rates can create bubbles and over extension of debt.
Yes it can and it certainly has. It's a fair observation, but what's to be done about it?
We all know that since the 1980's interest rates have been on a persistent downward trend. For a while, that seemed just like a return to normal after a period of high inflation.
But real rates have consistently declined during that time too. Each expansion results in lower peak interest rates and each recession in lower troughs. I know folks like to blame the Fed for all the world's ills, but it's pretty clear they're just following the market lower.
And now we've arrived at a point where the 10-year real interest rate during a period of full employment is only 0.5%. That will certainly inflate asset values which will have the ancillary effect of creating some bubbles too. I'm just not sure what the alternative is.
Well banks have vaults, so get the notes and put them in the vault, problem solved.
Who is willing to pay someone to hold their money? And have the risk involved with a loan?? Makes no sense and can't work.
People will just hoard physical cash.
Another thing that doesn't make sense about negative interest rates: The Fed is going pay banks to accept a zero interest loan? Or will the Fed give the banks the zero interest loan, then only expect most of it to be repaid, but not all of it
Mostly the Fed takes deposits from banks in the form of reserves. It would charge banks a fee for the privilege of holding those reserves at the Fed.
Lost me on this one. What benefit does the bank have for depositing with Feds for a fee....rather than just keeping the funds on their own books?
There is a cost of storing, holding, and more importantly, using physical currency. This involves the cost of renting, maintaining and securing storage facilities such as vaults as well as the cost of shipping currency around in a safe and timely manner. A recent ECB study estimated the private cost of cash payments to be 1.1% of GDP on average in the participating countries. The unit social cost was estimated at 2.3 cents per euro of transaction. This is substantially higher than the unit social cost of a credit transfer or other non-cash means of payments per euro of transaction.
Parishioners text tithes to their churches. Homeless street vendors carry mobile credit-card readers. Even the Abba Museum, despite being a shrine to the 1970s pop group that wrote “Money, Money, Money,” considers cash so last-century that it does not accept bills and coins.
Few places are tilting toward a cashless future as quickly as Sweden, which has become hooked on the convenience of paying by app and plastic.