Is anyone betting on negative interest rates?

[TechLead]

I am not betting on negative rates. I am betting on much more QE (money printing) though. Few years down the row that will cause inflation and massive losses to people who hold cash and cash equivalents. Esentially this would result in transfer of money from people who hold cash to people who hold for example equities or Gold.

We see this type of transfer of money today as well (Though not via inflation yet).

Therefore being invested in assets that can somewhat handle inflation makes sense to me.

 

[Out of Steam]

Not betting on negative interest rates, but I'm thinking that we would aggressively pay down our small mortgage, instead of refinancing, if interest rates drop further.

 

[pb4uski]

Yes, good point that I hadn't considered because we have no debt.... negative rates would make carryng any debt just plain crazy.

I would probably also consider lending to family that have debt... for example, lending to DD and she pays off her mortgage and then pays me mortgage payments instead... I can give her a better deal than she has now and I come out ahead to so it is a win-win.

 

[Amethyst]

Funny, I never thought it would work that way. I figured it just meant the bank would charge YOU to keep your money there, instead of in a safe or under the mattress.

For quite some time I have been really confused as to negative rates. Who would loan you $100 for $97 in return 1 year later ? Are you kidding me ? However, there is a reason, not sure how likely. If we were to enter a period of deflation, then that roll of TP you can buy today for $1 would say cost $0.95 next year. In that case that $97 return would increase my purchasing power. I am not looking for negative rates and don't like the idea but if you are expecting a period of deflation or trying to protect against it then perhaps a negative rate is not as bad as it sounds, for your particular situation. I think if we get to that place then we have many other problems but there is at least one reason to accept a negative rate.

Just ramblings of an old man, pay no attention.

 

[2177V]

I am skeptical of negative rates for the following reasons:

1. Negative interest rates will not make COVID19 go away. COVID19 is the root cause of the current problem with the US Economy.

2. Negative interest rates did not help the economy much in other countries. The benefit of negative interest rates is to force savers to spend their money or increase investment using negative interest rate loans. That is the theory but in practice, I have yet to observe this. This is because when the economy is bad....savers still do not spend and increased investments still do not occur.

3. Negative interest rates may cause money to flow out of the USA. Money is flowing into the USA because foreign investors rather have 0% or 1% in the USA than -1% in their home countries. If the USA also have negative interest rates, the foreign investors may move their money and invest into other countries that do not have negative interest rates.

4. Jerome Powell of the Fed is also making statements that negative interest rates are not being considered. Most economists do not want negative interest rates because the unknown risks to the US Economy. It is like taking medicine without knowing whether the medicine will work or not...and NOT knowing the side effects.

5. The Fed has other tools to stimulate the economy. I personally agree with the Fed in buying corporate bonds. This provides much needed capital to companies during the pandemic and the government gets their money back. This is better than a bailout which government do NOT get their money back. Other tools are QE, more federal stimulus checks, etc, etc. Why go to negative interest rates when there are other means to stimulate the economy?

 

[Amethyst]

Why would people spend their money? More likely, they'll stuff it in a safe. Probably see a rise in home invasion robberies.

You wanna see people spend their money? Hyperinflation will do that. Buy it today, before the price doubles!

I The benefit of negative interest rates is to force savers to spend their money ?

 

[2177V]

Why would people spend their money? More likely, they'll stuff it in a safe. Probably see a rise in home invasion robberies.

You wanna see people spend their money? Hyperinflation will do that. Buy it today, before the price doubles!

Good point about inflation. If the government allows inflation, that means the government's $3 trillion debt will be easier to manage.

For example, if a guy has a $250K mortgage and $80K annual income and we have inflation, his annual income will increase due to inflation while his $250K debt remains fixed and will be easier to pay off.

I worry that the government is thinking about letting inflation occur so it will be easier for the government to manage their rising COVID19 debt. Inflation hurt savers much more than people or the government who has a debt.

The government has a debt problem and this can be addressed somewhat with inflation. Savers and retirees with IRA can be hurt by inflation. I do not think we will see hyper inflation because the party in power will be voted out of office. However, we may see some inflation. If the economy recovers and the FED don't raise interest rates quickly to fight inflation, then the government is evil.

 

[2177V]

Why would people spend their money? More likely, they'll stuff it in a safe. Probably see a rise in home invasion robberies.

You wanna see people spend their money? Hyperinflation will do that. Buy it today, before the price doubles!

FYI. If you google: "Does negative interest rates forces people to spend money?" Google stated the following.......

A negative interest rate means that the central bank (and perhaps private banks) will charge negative interest. ... This is intended to incentivize banks to lend money more freely and businesses and individuals to invest, lend, and spend money rather than pay a fee to keep it safe.

Academic.....since I do not believe USA will have negative interest rates based on my previous comment.

 

[street]

Interesting topic and have learned a lot. I would hope that it doesn't go negative mostly because I have never been in that water.

What I have followed here is that if it does equity and bonds funds would go up in price, right?

So, what why would they go up. Has there been any history or tracking of a country that has had negative interest?

 

[2177V]

Interesting topic and have learned a lot. I would hope that it doesn't go negative mostly because I have never been in that water.

What I have followed here is that if it does equity and bonds funds would go up in price, right?

So, what why would they go up. Has there been any history or tracking of a country that has had negative interest?

Countries with negative interest rates are Sweden, Swizerland, Spain, Denmark, Japan. The first four are relative small countries with relatively small economy compared to the USA so it may be apples to oranges comparison. Japan has a larger economy and here is a recent article:

https://www.reuters.com/article/us-...epening-negative-interest-rates-idUSKCN21Y029

I would not bet on equity and bond funds going up in price. If money from savings accounts in banks flows toward the equity and bond market, then equity and bond funds may go up. However, if money start to flow overseas because other countries have positive interest rates and their economy is more stable, then equity and bond funds may go down.

Investors do not like uncertainty. Negative interest rates will create some uncertainty. This may spook some investors. The market is based on fear versus greed. IMO fear may be more associated with negative interest rates. As I stated in a previous comment, there are other ways of stimulating the economy without the uncertainty of a negative interest rate.

I am more interested in yield curve control by Japan because the US Fed is looking into this. This means the Fed buys or sells treasury bonds to keep the treasury bonds within a certain interest rate and not allow the market alone drive the interest rates up or down by selling or buying.

A large portion of my portfolio are in long term treasuries and I want the interest rates to decline which will increase the value of my long term treasuries. To reduce the interest payments on the national debt, the USA would want low treasury interest rates. This is what the USA did in order to finance the enormous WW2 debt. If the interest rates go up, the Fed starts to buy treasuries to keep the interest rates down.

You will hear more about yield curve control by the Fed in the future.

 

[tenant13]

A large portion of my portfolio are in long term treasuries and I want the interest rates to decline which will increase the value of my long term treasuries.

That will be especially profitable right after rates decline (hopefully not but possibly into negative territory) - any bond held after that would just lose value over time.

US is in the unique situation of being able to print unlimited amount of the world's reserve currency. So our debt is kind of irrelevant: even if nobody else wants to buy US treasuries and finance it, Fed will. But that would definitely lead to domestic inflation - so far we've been able to export it. In which case we may actually see rates increasing...

 

[2177V]

That will be especially profitable right after rates decline (hopefully not but possibly into negative territory) - any bond held after that would just lose value over time.

US is in the unique situation of being able to print unlimited amount of the world's reserve currency. So our debt is kind of irrelevant: even if nobody else wants to buy US treasuries and finance it, Fed will. But that would definitely lead to domestic inflation - so far we've been able to export it. In which case we may actually see rates increasing...

Most of your comments are true. I hold mostly treasuries during a bear market. During a bull market, I hold mostly equities.

I do disagree with your comment that our debt is irrelevant. The reason why the dollar became the world's reserve currency is because the USA is a very stable country and the number 1 economy in the world.

However, if the US starts printing money like hell, the foreign exchange rates will change so that foreign goods will cost more US dollars which is inflationary. There is also a possibility that other countries will abandon the US dollar and make the Chinese Yuan their reserve currency.

This can happen if the US becomes irresponsible in handling the US economy. Other countries may then find that the Chinese Yuan is a more stable currency. If you represent a foreign country and you see that the US is printing trillions and trillion of dollars, would you have confidence in holding the US dollar in your foreign bank which may decrease in value?

 

[tenant13]

Most of your comments are true. I hold mostly treasuries during a bear market. During a bull market, I hold mostly equities.

I do disagree with your comment that our debt is irrelevant. The reason why the dollar became the world's reserve currency is because the USA is a very stable country and the number 1 economy in the world.

However, if the US starts printing money like hell, the foreign exchange rates will change so that foreign goods will cost more US dollars which is inflationary. There is also a possibility that other countries will abandon the US dollar and make the Chinese Yuan their reserve currency.

This can happen if the US becomes irresponsible in handling the US economy. Other countries may then find that the Chinese Yuan is a more stable currency. If you represent a foreign country and you see that the US is printing trillions and trillion of dollars, would you have confidence in holding the US dollar in your foreign bank which may decrease in value?

I totally agree about your debt comment: $ position in the world is guaranteed by the US position on the world scene. We do have madly oversized military to back that position up but there are limits to what it can achieve when it comes to the international faith in US economy or leadership. Both are fairly strained imo. Will that lead to other currencies taking over? Eventually. Yuan - and its upcoming digital incarnation - seems like a good candidate (I don't see Euro going anywhere) but I'm not as bullish on Chinase economy as a lot of other people. Their demographic policies for years forcing families to have only one child is biting them in the ass now: as their economy grows and matures, their consumer base ages and shrinks. And reversing those demographic trends is extremely hard. If they lose their position as the manufacturer of the world due to COVID related deglobalization push, they have very few options to grow. I think China needs US much more than we need China.

I look at cryptocurrencies as viable alternatives but not until they stabilize and get accepted as means of direct exchange. because going between cryptos and FIAT is a joke. Current regulations treat them as property and that's not helpful - imagine your every grocery or coffee shop transaction being treated (and taxed) as equity sell/purchase. You'd have to keep track of everything in order to get taxed properly. There are hybrid approaches to transacting with cryptos like the prepaid Visa debit card from crypto.com. You fill it up and spend with FIAT but get rewarded with MCO - not unlike airline miles or points except that MCO is traded on the exchanges and can grow (or decline) in value - like equity.

But I think we got to the point where some of the more established cryptos are seen as long term storage of value (volatility 'n all) - if USD weakens, their position will strengthen. That's when it will get interesting: it would be in US interest to outright ban them but given how decentralized they are it may simply be impossible...if you don't need FIAT or banking system to transact a ban will be toothless.

 

[street]

vchan2177 >>> thank you for that information. It will be interesting to see what happens if going negative. Not sure I want to find out thou.

 

[TechLead]

However, if the US starts printing money like hell, the foreign exchange rates will change so that foreign goods will cost more US dollars which is inflationary. There is also a possibility that other countries will abandon the US dollar and make the Chinese Yuan their reserve currency.

US already prints money like hell. This is how Fed backstops markets.

So you are saying it may be wise to own International ETFs since those are effected by currency exchange rates?
IE: VXUS, VGK, VWO

 

[Markola]

I respect everyone’s knowledge but I think the lack of consensus best makes the case for indexing, for my own money. The Vanguard total U.S. bond index is up 8.96% for 2020. There is a dynamic called the “flight to safety” and it is global. The index fund already contains long term bonds in proportion, helping its yield now and in case we go negative. The total international bond index is up 4.04%, which beats a sharp stick.

I’m a Boglehead so I don’t bet and prefer to buy the casino.