Would you pay a bank to store your money in their laser-guarded vaults? Ideally not, but that’s the reality for some as negative interest rates have spread from Japan to take hold in Europe – and now lap the shores of the UK.
What are negative interest rates?
Negative interest rates mean that a central bank has cut one of its main interest rates below 0%. Instead of the central bank paying interest to commercial banks, the relationship is turned upside down and now those banks must pay a charge to keep their cash on deposit. The idea is to force commercial banks to loan out money and stimulate the wider economy instead of hoarding cash when a major recession looms.
When faced with negative rates, a bank is theoretically better off making even a 0% loan rather than losing money on cash stashed with the central bank.
Needless to say, negative interest rates are a bad sign – a desperate call for all-hands on the money pump when the economy looks like an extra from Dawn Of The Dead.
Negative interest rate policy (NIRP) has also been used by central banks to weaken demand for their currencies in a bid to protect their country’s export industries.
Countries with negative interest rates
Countries with negative interest rates include:
- Switzerland: -0.75% (SNB Policy Rate)
- Denmark: -0.6% (Nationalbanken CD rate)
- Eurozone countries: -0.5% (ECB Deposit Facility Rate)
- Japan: -0.1%
The Danes went below zero in 2012 (they hit a low of -0.75), the Eurozone in 2014, and Japan in 2016. The Swedish central bank rate also went negative in 2015 and dipped as low as -0.5%. But the Swedes had tunneled back up to zero by January 2020.
The main central bank interest rate in the UK is the Bank Of England’s Bank Rate (or Base Rate).
Bank Rate currently clings on to positive territory at 0.1%.
What do negative interest rates mean for savings accounts?
The great fear with negative rates is that you’ll have to pay your bank to park cash with them. That would erode the value of your savings as surely as water wears down soap. You could be better off stuffing your cash into the proverbial mattress.
And indeed this appears to have happened.
There are reports of German customers putting physical notes in home safes and bank vaults as an alternative to paying charges on deposits of more than €100,000. Physical storage spares customers the charge they’d incur if their money was lodged with the ECB.
Multiple Swiss banks also started charging high net worth customers a 0.75% fee on saving balances over two million Swiss Francs (CHF). That means it’d cost you 7,500 CHF per year for the pleasure of saving three million CHF in your account (tiny violins).
As you can imagine, business customers are hit by this, too. It’s hard for a law-abiding small business to make their cash magically disappear.
A case for cash? Negative interest rates would be easier to impose more widely on a cashless society because its citizens wouldn’t have the option to divert notes from the maw of a negative rate account to a box in their basement instead. Could the spectre of negative interest slow down the adoption of payment apps? At least we wouldn’t have to worry so much about grandad not being able to buy groceries because he never remembers to charge the smartphone he doesn’t know he has.
Imposing negative interest rates on wider swathes of society isn’t inevitable and is highly charged politically. The outcry in the UK would likely reverberate like the death of Alderaan if we’re ever stung for a percentage of our savings. And imagine the headlines the first time a pensioner’s biscuit tin was stolen – their life savings gone because of some banker’s negative interest rates.
It’s possible for central banks to shield consumers from the pain of sub-zero rates. For example, the ECB doesn’t charge on the first-tier of a bank’s deposits.
The local banking market also matters. Do banks rely on deposits as their chief source of funding? Is there a competitive market that empowers people to switch banks in a mad hunt for a few tenths of a percent of interest? If so banks could be reluctant to put off their customers with negative rates.
Even without negative rates in the UK, savings rates have been slashed as Bank Rate has sunk to just 0.1%.
It’s not hard to imagine a world in which savings earn nothing.
Negative interest rates: mortgages
What about mortgages? The dream is a bank would pay you to take its money, you’d buy a Scottish Castle, never pay a penny back, and the debt would melt like a snowman.
But that’s probably not going to happen.
There were some excitable reports that the Danish Jyske Bank had offered the world’s first negative interest rate mortgage. But the less exciting reality was that customers were still paying the bank after it had slapped on various fees.
A few lucky punters thought they’d hit the negative interest mortgage jackpot in the UK in 2009.
They were on two-year tracker mortgages that offered the Bank Rate minus a slice1. But the banks never did pop them a cheque in the post. Instead those blessed borrowers got a 0% interest rate for a short while – which is still free money. On a house!
After that fright, the banks tightened up the small print so that they will never pay you to borrow. Many inserted ‘collars’ that mean your mortgage rate won’t fall below a certain level.
Still, as with saving accounts, you can expect negative interest rates to push mortgage rates downwards. Which sounds great until we start fretting about potential unintended consequences:
- Reduced mortgage competition and choice because lending is less profitable for banks near-zero.
- House price inflation as happy borrowers go large in the face of historically low rates.
- House prices collapse if interest rates rebound and the once-happy borrowers go bust.
Negative interest rates: negative consequences
The concern has always been that once you start experimenting with NIRP psychedelics you can’t go back to the old normal.
It’s not hard to find authors of articles from the 1990s poking fun at Japanese zero rates like they were Chris Tarrant sneering at the gameshow Endurance.
And yet here we are, with near-zero rates abounding.
As sci-fi author William Gibson once said: “The future is already here – it’s just not evenly distributed.”
It’s easy to understand why central banks have slashed rates around the world.
Their first priority is to stop a biblical recession that would make even Friedrich Hayek blush.
But beyond that, the discourse is ablaze as to whether the habitual use of negative rates is good for anything apart from maiming banks, jeopardising pensions, and distorting markets.
Nobody knows for sure – the experiment is still coursing through our system – but here’s a potted tour of sub-zero anxieties:
Reverse psychology
Negative interest rates are widely seen as ‘weird’. They unsettle people and seemingly spooked some consumers and corporates in Japan because they believed that such extreme measures signalled that the Bank of Japan knew something awful was coming.
Hobbling the banking system
The Bank of England reportedly rejected negative rates during the Global Financial Crisis because it feared they would push tottering banks and building societies into bankruptcy. As if things weren’t bad enough.
Negative interest rates narrow bank profit margins, which could ironically reduce their capacity and willingness to lend.
One of the lessons of the financial crisis is that we like our banks to be safe and boring. You know – the kind of stuffy old prudentials that maintained massive cash buffers because they’d only lend you money if you were an earl or married to the bank manager’s daughter.
Another sub-zero misgiving then is that negative rates could erode the very cash buffers that are meant to safeguard the system in times of financial stress.
Stymied stimulus
If negative rates squeeze banks’ profit margins to the extent they rein in their lending to consumers and businesses, then would-be easy money policy has gone from stimulating growth to strangling it. Financial nerds call this the ‘reversal rate’. (Because what’s a bit more interest rate jargon when we’re having fun? Or a depression?)
Mis-selling scandals
It’s been a while since we’ve heard about our friendly local bank forcing its staff to adopt the kind of high-pressure sales tactics that belong in a boiler room.
Flog a loan, a structured bond, a credit card (would you like PPI with that?) – anything so long as the boss got his bonus.
But the rush to get money off the books in sub-zero Denmark has been blamed for banks pushing risky products onto unsuspecting customers. The regulator called in the police to investigate Danske Bank over the affair.
So much for hygge.
Delinquent debt
We won’t be paid to swipe our credit cards, buy a Tesla on HP, or to live in our dream house, but negative interest rates are at least meant to make it easier to get the loans to do such things. Reckless lending in NIRP world isn’t so much a moral hazard as a patriotic duty. But the risk of burying the system under a collapsing Jenga tower of bad debt is obvious.
Asset price bubbles
Another source of disquiet since the financial crisis is that easy money just flows straight through our fingers and into assets like equities.2 Instead of stimulating the real economy, the money might exacerbate income inequality, prop up zombie companies, and turn the stock market into a giant Ponzi scheme. Such accusations remain unproven but the dread is only amplified by negative interest rates.
Unfair on savers and pensioners
The effect of negative rates spills over onto savings, bonds, and annuities, with painful implications for those who rely on low-risk returns to maintain their standard of living.
The ECB had to change the rules to prevent Dutch pension funds cutting their payouts, for example, while Swedish insurers have apparently increased their exposure to equity markets in a titanic reach for yield.
Stretching for yield on a personal level is an obvious threat as retirees head into riskier asset classes in a bid for return – think junk bonds, emerging market debt, volatile risk factors, and, god forbid, leveraged products. The danger of people getting in over their heads and panicking if it goes wrong is clear and present.
Currency war
Most of the central banks who’ve gone negative have done so in part to devalue their currency and increase the competitiveness of their export industries. If other central banks choose to tit-for-tat then we could end up in a beggar-thy-neighbour spiral. That didn’t turn out so well in the 1930s.
Does it even work?
The general narrative is that negative interest rates seem to work in the short-term to ward off deflation and stimulate the economy.
But many argue that sub-zero is addictive and doesn’t facilitate recovery in the long-term.
Only Denmark popped its head back above the zero bound for a few months in 2014 before going back under. Sweden made it back to zero in the first few months of 2020 and then the coronavirus hit.
Negative interest rates: UK
Most of the dangers listed above were contaminating our financial system long before NIRP. I make no claim to know whether they are really exacerbated by negative interest rates.
Perhaps there wasn’t much choice anyway, but everything I’ve read on the subject suggests you wouldn’t want to start from here.
So do we face the same negative rate future in the UK?
All we have to go on are the gnomic utterances of Bank of England officials. Former governor Mark Carney took sub-zero rates off the table, only for new guv Andrew Bailey to put them firmly back on the table again.
Bailey didn’t sound keen though when he told MPs:
We do not rule things out, as a matter of principle. That would be a foolish thing to do. But that doesn’t mean we rule things in either.
An alternative to negative interest rates is a Keynesian fiscal stimulus that spurs the economy through massive government spending. That looks like it’s actually happening, given borrowing is being thrown into overdrive courtesy of that arch-Keynesian Boris Johnson.
Truly we live in Bizarro World.
Negative interest rates: bonds and real yields
The negative interest rates imposed by your smiley bazooka-wielding central bank are not the same as the infamous negative bond yields reported in the financial press.
Bonds inflict a negative yield when their asking price outweighs any remaining interest payments, so that investors suffer a loss on the bond if they hold it to maturity.
Negative real yields occur when inflation is higher than nominal interest rates. For example, a 2% cash deposit pays a real yield of minus 1%, if inflation is 3%. The UK is no stranger to this.
Negative interest rates: key takeaways
- Negative interest rates happen when a central bank lowers one of its main interest rates (often the deposit rate) below zero.
- It’s an extreme monetary policy designed to force commercial banks to make cheap loans in order to avoid paying to deposit money at the central bank.
- Negative interest rates are believed to ward off deflation in the short term and to stimulate the economy. There may be negative side-effects in the long term.
Take it steady,
The Accumulator
- A discount of -1.01% was offered by Cheltenham & Gloucester at the peak of the 2007 mortgage madness [↩]
- Note from The Investor: Much QE money never actually goes into the real economy to touch our grubby hands at all, but nevertheless by flattening the yield curve it does drive investors into riskier assets – such as shares – which amounts to the same thing. [↩]
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> For example, a 2% cash deposit pays a real yield of 1%, if inflation is 3%.
Shouldn’t that be -1%?
About mortgages with negative interest rates, although this never reached the English speaking press (AFAIK), in Portugal there are plenty of people currently paying negative interest rates. Let me explain. 🙂
Mortgages in Portugal are usually variable, composed of Euribor (either 3, 6 or 12 months) plus a fixed spread for the entire life of the contract. Before the financial crisis, the competition for mortgages was so large that those spreads became very tiny, like 0.15% tiny. While not everyone got those very low spreads, a middle class couple with 2 people working in middle income jobs was likely to get such spreads or very something close to that.
Fast forward a few years, Euribor enters negative territory! First the 3 months rate, then the 6 and 12 as well. And all mortage contracts signed pre-financial crisis didn’t have a floor for a minimum interest rate! (they now all do)
At first the banks refused to go below zero, and the central bank sided with them (basically saying: “customers are right, but banks are a mess as they are, so we are siding with them”). But eventually the Parliament shifted left-wing in 2015 and approved a law saying that if the mortgage contract doesn’t mention a floor for the interest rate, banks have to apply a negative rate. So, plenty of people that were lucky to sign a contract in 2006-2008 (or thereabouts) are now paying negative interest rates.
@Alistair — Oops, thanks, we lost the minus sign in editing somewhere. I’ve replaced with the word “minus” to be clear! 🙂
“Would you pay a bank to store your money in their laser-guarded vaults? Ideally not, but that’s the reality for some as negative interest rates have spread from Japan to take hold in Europe – and now lap the shores of the UK.”
That’s a very bad analogy. If the banks were keeping your money in a safe then it would be right to pay them a storage fee and you can already do that. However when you deposit money in a bank you are actually LENDING your money to the bank. The money is no longer yours. The bank simply has a liability to pay you back on demand.
>Their first priority is to stop a biblical recession that would make even Friedrich Hayek blush.
Putting aside the current situation I have wondered for a while whether we try too hard to avoid recessions. Whether by putting off the inevitable we end up with a much bigger problem when reality rolls in.
At the core of the debate is uncertainty about whether negative interest rates would actually generate the desired expansionary effects on the economy.
Most central banks attempt to achieve their mandate for price stability – constraining inflation around a target level or in a range – by controlling the price of money (but not the quantity) via changes in the short-term policy rate.The problem is that it’s not actually short-term nominal interest rates that impact investment and consumption. In reality, it’s real term rates ( (i.e. longer term borowing/lending) that impact investment and consumption.
As a result, the impact of changes in nominal interest rates—and, thus, the potential effects of negative interest rates—depend heavily on future inflation expectations since this will drive the value of term real rates. Hence why central banks care more about inflation expectations than current (spot) inflation.
The problem is that there is very little hard evidence to suggest that negative rates actually raise inflation expectations. When both the ECB and BoJ first introduced negative rates, inflation expectations went sideway or fell. Only in Sweden has there been much evidence that inflation expectations rose after NIRP was introduced. In fact, if a recession is caused by an expectations-driven liquidity trap, it’s been postulated that negative interest rates decrease inflation expectations and are almost certainly contractionary.
This is the reason why both the Fed and BoE are somewhat hesitant about pursung NIRP (the Fed also wanted to be sure it was legal to go negative). They fear it could make it worse or achieve nothing, while also creating unpleasant side-effects downstream.
Against that there is the basic issue that the efficacy of other unconventional measures (QE, yield curve twisting, yield curve control, credit easing, helicopter money etc) is not clear either and they also have side-effects.
@ Rui N, mortgages are hard to understand at the best of times, but I think got your point.
Where I’m not sure I understood in your example is that you seem to be saying the govt. helped normal people instead of doing the right thing for the banks and big business in general. We have been brainwashed into believing that it is not possible to live that way. 🙂
Once upon a time I pretended to understand Economics. After all I had passed the Economics components of my degree and MBA. Now I wish to announce that I am totally and utterly confused! I am off to rebalance my diversified portfolio again and hope that it manages to cope with whatever comes it’s way including deflation and inflation. Both seem to be forecast in equal measure.
I’m also going to examine my long-standing mortgage contract one more time.
@FI Warrior, well the first government did not care, they let the decision of the Bank of Portugal stand. It took several years and a change in government until the contracts started to be enforced through an act of parliament. This should have been settled in the courts, as it was quite clear for everyone that the contracts did not a floor for interest rates; but probably it wasn’t worth for any individual to sue a bank to enforce the contract.
The real downside of negative rates, that we have had for 10 years in real terms, are societal. It, alongside QE, have caused huge asset price inflation, effectively redistributing wealth from the middle (those who exchange labour for salary – or people with jobs in layman’s terms) to the already wealthy…those with assets.
It wasn’t long ago the return on labour could could provide assets. Now that is difficult. Try buying a house in London on a salary. Even a 100k salary alone is not enough to finance a normal house and also means taking on a huge amount of risk (debt).
This will cause serious social problems. If people see no future for themselves it’s a big problem for everyone.
@ Andy, I think you’re right. So it will be interesting to see what happens in 1st-world countries when this socio-economic reset which will be conveniently blamed on a virus, (vs years of financial manipulation) makes it clear that pensions, savings and income from employment or investment are going to evaporate for all but the elite. Will we implode like the US given we follow them in everything?
It’s hard not to believe that the learned ignoramuses that are running the ship do not really have much idea what is going on
We seem to have seriously damaged our economy and people’s lives especially children for the sake of giving us old codgers a few extra years-I and my wife are 74
Not a clever thing to do -never been done before in world wars/flu out breaks/BSE etc
I don’t think there will be a happy ending -I just hope it doesn’t cause a deep recession with riots and protests and toppling of statues!
xxd09
Financially speaking there is not much difference between inflation 2%/deposit rate 1% and inflation 0%/deposit rate -1%, but psychologically there is a huge difference. What would happen to premium bonds? Negative prizes ;)?
Politically awful for the government. I suspect they might legislate to force banks to pay interest on small retail deposits, say up to the FSCS limit, which would force banks into being more punitive with larger depositors.
We hold quite a lot of cash at NS&I and scattered around various banks. If deposit rates did become negative it probably would spur me into doing something else with the money. I am not sure what though at present.
> doing something else with the money. I am not sure what though at present.
That is the conundrum at the moment. And if the money is in £, well, ND Brexit….
@naeclue:
“…. into doing something else with the money. I am not sure what though at present”
In due course please do check back in and share any thoughts you may have on this topic, as I am equally perplexed.
Just have to get creative. We have a flexible mortgage with the rate fixed at BOE base + 0.5%. When rates dropped to 0.1% we draw it down and lent it to the kids. It is currently sitting in their NS&I accounts – we let them keep the interest. If retail deposit rates went negative I guess one possibility would be to encourage 2 of our kids who currently don’t own their own homes to buy and we could lend them some cash at zero rate.
Apart from property most of our money is sitting in global equities, so I really don’t want any more foreign currency exposure. GBP it has to be for the cash. Quite a bit of the cash will go over the next few years anyway as we have some more house refurbishment to do and are intending to buy a new boat.
@Naeclue – Base rate + 0.5%, nice work! Is that lifetime?
@ Rui – I haven’t ever heard that story about Portuguese mortgages. Thank you for sharing. I’m impressed you finally did get a government that enforced the contracts. Must be quite a feeling to be a homeowner and know that the mortgage is paying itself.
I recall thinking the unsolicited offer from woolwich to change my mortgage to lifetime BEBR + 0.19% was a good thing in 2006/7. Every now and then they give me a call to try and persuade me of some better offer. I’ve yet to see one.
My aversion to debt hasn’t stopped me over paying. Sometimes we are our own worst enemy.
Thankfully it also comes with a HELOC up to the original mortgage value which comes in very handy during times such as these.
One of my more fortunate, albeit entirely accidental, financial decisions.
@TA, base rate + 0.5% for the life of the mortgage. Interest only and with an offset account that is free to drawdown and repay at any time. I remortgaged in 2004, at the start of the period when banks started making crazy offers like this.
The bank also provided me with a 2 year interest free credit card with a zero balance transfer fee. You can probably guess what I did. I did the same trick with loads of other interest free credit cards until the music stopped with the GFC. An utterly bizarre time. The banks just did not care how many other credit cards you had and how much you were borrowing. The only hassles were in turning down/avoiding the heavy selling of PPI and making sure you transferred a balance to a new card just before the interest free period expired.
My only regrets are not extending my mortgage at the time, an extra 50k would not have been a problem, and going for only a 20 year term when they were happy to offer up to 30 years. I have to repay in just over 4 years and cannot imagine getting anything like this deal again. I will see what is on offer, but I suspect I will just repay the mortgage.
Who says there is no such thing as a free lunch?
My mortgage rate is base +0.49. It’s a life time tracker from Santander. At the time it wasn’t that great a deal. It could easily get a 2 year deal below base.
I just got fed up with remortgaging every 2 years so just went with that.
The only problem is it’s not interest only, so with only 9 years to go the repayments are getting to big for me to draw down any money now.
If I remember correctly if base rates go negative, the lowest the mortgage rate can go is .01%
Like others I just got lucky.
@Jaygti, mine is Santander as well, but interest only. Like you I found moving the mortgage every few years tedious, but you had to do it as moving on to standard variable rate at the end of the discount period was typically a significant hike. Lifetime tracker rates became cheaper after I got mine, I think down to something like base + 0.2%, but I just stuck with Santander because I valued the offset facility. After the GFC mortgage deals were never as good again, which is why I never switched.
I am not sure what happens to my mortgage if base rates go negative, but I am sure I read somewhere that some people on discount deals did go to negative mortgage rates for a while and did get payments from their bank/building society until their discount period ended, so I don’t think I would rule out getting payments for having a mortgage at a negative rate. It just depends on the terms and conditions.
Just checked my mortgage terms and conditions. I pay something called a TRACKING RATE, defined as base rate + TRACKING DIFFERENTIAL (0.5%). Base rate at the time of the offer was 4.75%, so I initially paid 5.25%. There is a clause that says the TRACKING RATE at all times is subject to a minimum rate of interest of 0.0001%, so my mortgage cannot go negative.
Zero or negative rate world seems like a trap for first time home buyers: hell of a gamble that asset prices aren’t going to snap back. 10 years on from the GFC, is the rubber band still stretched or has it broken? Generation that delayed home ownership have a lot to lose, but also cannot wait forever for the old normal to return.
Negative interest rates are an unambiguous sign of a dysfunctional economy.
‘Rather than a rapid collapse, the UK has opted for a slow motion train wreck. Workers have chosen lower wages and worsening work conditions in preference to mass unemployment; while government has chosen to destroy public infrastructure and services rather than engage in new borrowing that can only be repaid at the cost of the devaluation of the currency. Both of these actions serve to suck currency out of the economy – as witnessed in the economic holocaust that is unfolding in the retail sector – trapping the UK into a downward spiral of decline.’*
*taken from this article: https://consciousnessofsheep.co.uk/2018/07/06/what-productivity-puzzle/
@FI Warrior if we’re going to go down the apocalyptic exuberance rathole we really ought to hat-tip Tullett Prebon’s Tim Morgan 2012 report Thinking the unthinkable (PDF) with the strapline “might there be no way out for Britain” 😉
@Ermine, thanks for that, I’ll enjoy reading it. The linked website in my comment above repeatedly references Tim’s work and surplus energy. I have read Tim’s site for years too and seeing the economy through the energy system lens was a revelation, everything came into focus and started to make sense when I stumbled on it.
FI Warrior / Ermine – thanks for circulating, I always feel quite wary of such prognosis. Very often they seem accompanied by a link to buy my book and read the ten things you must do to avoid financial disaster. There have long been such portents of doom including those who suggested we would be unable to feed ourselves and that peak energy had been reached in the 1980’s. I remain an optimist given human kind’s historic ability to innovate and with respect to energy, for example, it does feel as if the human race is edging closer to utilising that big ball of heat in the sky to provide our energy needs – finumus post on this was instructive as are others. That would render such arguments more invalid than not I feel. Imagine if you could leave the lights / heating on all day with close to zero charge beyond maintenance of the grid. The Tullet report talked a lot about the amount of debt (which of course has risen substantially) – but I feel it is more relevant to talk about affordability of debt and right now, UK debt is highly affordable.
That said, one can be an optimist but still retain a healthy degree of cautiousness and recognition that you may be collateral damage in any tail event. It feel’s as if tail risks are rising in the UK. At some point in the western world, interest rates could rise substantially (hence why this is not off topic to this article) – and if that ever happened, the economic fall out would seem to be enormous. Imagine today, if rates everywhere were 5% – I don’t see that for decades and haven’t done since 2008 but I’m not stupid enough to believe I know. Debt is deflationary, the US owes $24 trillion last time I looked – that isn’t getting paid back. Negative interest rates are causing societal problems for sure – anyway looked at annuity rates recently. Negative rates allow zombie companies to continue, they increase leverage making the economic system more fragile not less, the bond bull market has pumped up asset prices as most people recognise….tail risks are rising.
But Japan would seem to show that a country can operate with high levels of debt assuming rates stay low. And the UK can borrow at low rates crucially for a long period of time. So my betting fwiw (nothing) is if there is a day of reckoning it is a long time in the future and we’ll eventually figure a way out through perhaps lowering energy costs.
How to invest…same as before, just have a weather eye on the fact that nominal returns are unlikely to be as high as they were previously and have some assets to cover off those tail risk events
@ Seeking Fire:
“… and have some assets to cover off those tail risk events”
Do you have any thoughts other than some combination of : gifts/legacy; property; equities; foreign currency; and [ideally, well timed] discretionary consumption tailored to your own circumstances as suggested by Naeclue above?
@Seeking Fire:
Apologies, but I should have included debt (ideally cheap or even negative) and cash in my summary of Naeclue’s thoughts above
I get the feeling that QE is the preferred lever now, can be scaled up or down without much political blowback, although ultimately QE would cause discordance between gilt yield and base rate. QE has avoided things becoming as negative.
For savers I imagine you could have “positive rate for a fixed monthly fee” to make it palatable, you could also have government paying the fees if it got political, but that would defeat the point. Ultimately our banks provide us with an important service and if all your options charged a fee, even up to say £50 a month, we’d pay, as long as it was more convenient than paying your bills in cash (like you say, if you could)
A cashless society would mean the homeless, who have no identity documents because they have no address and therefore have no bank account – would be totally excluded. I think the homeless should at least be given a letterbox as an address to set up an account and then recieve benefits or get ID to get a rental or job
Negative rates are not such a problem in real terms – it could even be positive in real terms during deflation! Likewise negative growth might actually be positive in real terms in deflation (ie increased buying power) – maybe deflation isnt so bad
A problem of low/negative rates too is that if annuities get expensive, people SAVE MORE to buy them! These be unchartered waters
Al Cam – not really beyond
– owning your own home outright – seems to hedge you against a lot of negative scenarios – have some debt – seems to hedge you against inflation
– own some physical gold – seems to hedge you against govt confiscation, unexpected inflation
– have some liquidity to offset deflation
noting there are some contradictions / downsides to all of the above of course
Monevator posted an excellent link a month or so ago, which I like
https://www.forbes.com/sites/wadepfau/2020/03/04/inflation-deflation-confiscation-devastation-the-four-risk-horsemen/
It feels as if QE will continue to be the name of the game and I’m purely guessing societies will / may increasingly move to MMT over time once people realise negative interest rates won’t fix the problem (not that I think MMT necessarily will either)
@Seeking Fire:
Thanks for the response.
I am reasonably familiar with Bernstein’s ideas of shallow and deep risk. Deep risks being: inflation, deflation, confiscation, and devastation. IIRC, he conceded that there is not much you can do to protect against confiscation and devastation “beyond [having] an interstellar spacecraft”. But practically, he suggests owning a few gold coins and giving more consideration to overseas property.
The only other mitigations Bernstein mentions that are not mentioned above are: index linked govt bonds, and long-dated bonds – both of which have been discussed recently at Monevator.
Even though I understand the concept of debt as a hedge against inflation, personally, I really struggle with this concept.
Interesting times ahead.
NIRP is insanity, even in its own terms. It is aimed at making it even worse for a fictional, neo-Keynesian ‘homo economicus’ to hold cash than to spend or invest it; and more attractive to take on greater debt.
That assumes people are hording cash. FFS, who is doing that?!? Everyone and nearly every government is swimming in debt! And if a few big firms or wealthy people are holding cash rather than spending maybe there are good reasons. Like they have what they need….. or are afraid to invest because we have had emergency interest rates for 12 years and utterly uncertain politics, so who is going to expand another 50 shops or offices or whatever in that climate?
Could it be even, maybe, possibly that more and more debt is itself deflationary? Because to keep paying your crazy student debt / credit card / mortgage you have to accept stagnant wages? Because the more you spend on servicing debt the less you have to spend on goods and services? Because it forces up house prices, so people have to save more and more as a deposit, or spend more and more on dead-money rent?
This isn’t true. If anything, we have a global savings glut IMHO. It is one reason the Fed has to keep rates so low (to be in-line with market rates) and the US able to slowly sell-off the family silver (because the savings glut still wants to hold safe US assets, which is basically Treasuries).
Who is on the other side of all this debt? Up until recently, savers! That’s increasingly less true as Central Banks have got involved in running up their balance sheets and (in)directly financing fiscal spending, but overall I believe it’s still the case.
Money is so abundant it’s cheap, nobody really needs it, and rates are low accordingly (except for instance high-yield debt, due to default/recession fears).
I grant there’s a distribution problem though. To that extent, NIRP could perhaps be argued to be a progressive tax on the wealthy, as most people wouldn’t have much to lose (not having much if any savings, as you state) whereas for those that do it could be a significant tithe on their cash reserves, assuming (big if) they couldn’t dodge them.
p.s. Oops, I made the same mistake as (IMHO) you did when I wrote “nobody really needs it.” What I mean is “those that are able to get it and use it don’t really need it.” Think very rich people, large tech firms, banks, arguably countries with big surpluses although I don’t know what they’d use it for if they won’t spend what they already have (/can raise) (e.g. Germany).
AL-Cam – Yes, I hold $TIPS as I’ve probably bored people with. In God we trust, all others buy $. I hold it in case we make a pigs ear of you know what, which we may or may not and inflation does make a surprise return.
The Austrian – I also agree with TI that there seems to be surplus of savings hence the ability for interest rates to be zero, which is being distorted by QE as well as a belief in deflation. Of course this could change. There seems to be a surplus in global labour that is reducing inflation, technology is deflating costs and contrary to some views, energy could possibly confound us all and become extremely cheap, which would also be deflationary. I also agree interest rates being low could be having the opposite effect to what was intended. I feel one implication of NIRP is the financial system becomes increasingly sensitive to any hint of rate rises, which in itself I feel will increase pressure for rates to stay low to negative.
If’s and but’s but never certainties.
Jay – did you take yours out in 2008.