Negative interest rates are looking worse

by on February 12, 2016 at 1:03 am in Current Affairs, Economics | Permalink

And eurozone banks down 41% since ECB introduced negative interest rates, notes

That is from @RobinWigg.  The Japanese market has not responded positively either.

Of course negative interest rates, while intended as a form of stimulus, or currency depreciation, are also a tax on financial intermediation.  Negative interest rates, even if you agree with them in principle, are also a sign that more straightforward measures are politically impossible.

Here is Landon Thomas Jr. on negative rates in Sweden (NYT): “…many investors saw the rate cut as smacking of desperation and the latest sign that global central bankers are moving toward a round of competitive devaluations — also known as currency wars — as a way to stimulate their economies.”

Miles Kimball has written much in favor of negative rates, Izabella Kaminska against, if you wish to survey further opinions.  Here is Matt Rognlie.

I don’t see negative rates as the main problem today, but it’s getting harder to see them as a potential remedy.  They’re a sign that economies are trying to solve their core problems on the cheap.

Addendum: Here is Neil Irwin at NYT.

1 SD000 February 12, 2016 at 1:22 am

I’m personally still not ready to call it a miss. US stocks have also been hammered since the Fed’s rate *hike*. There’s decent evidence that negative rates are particularly bad for the financial sector, but overall I think there’s much more going on.

Look at the last 3 months for the Nikkei: the index started to plummet in early December, when a Fed rate hike started becoming an absolute certainty (would be interesting if someone could map likelihood of a rate hike to Nikkei performance in Nov – Dec of last year). Looking at the Nikkei performance, the BoJ rate cut was a minor *uptick* in an otherwise clear downtrend (same as EURJPY).

My favored explanation is, at first, the markets reacted extremely favorably to the rate cut, but as it became more clear that it was rather limited, the markets *returned to trend*.

2 Rob February 12, 2016 at 1:22 am

Perhaps this is a silly question, but why don’t the banks just pass on the negative rates to depositors?

3 Cliff February 12, 2016 at 1:27 am

Some do. In theory depositors would withdraw

4 Richard A. February 12, 2016 at 2:06 am

There is a way to get around that. Have the banks pay negative interest on excess reserve but pay positive interest on required reserves so that no net money leaves the banking system.

5 JC February 12, 2016 at 1:33 am

Capital flight.

6 Nesbitt February 12, 2016 at 10:05 am

Yes, capital-flight. Then capital-consumption (rather than investment), if negative rates became the norm. General impoverishment of society would be the end game.

Basic economics instructs that natural interest rates can NEVER he zero or negative, due to inherent human time preferences for consumption. An apple or Dollar in hand today is worth more than one 10 years from now.

Zero/Negative Interest Rates might be forcibly imposed by governments and central banks, but can not erase fundamental economics and human behavior. Such interest rates would always harm society, though small privileged segments of society may benefit temporarily.

Zero/Negative rates are a really, really dumb idea, but the Keynesians are always a reliable source of such outrageous conventional wisdom.

7 Daniel in VA February 12, 2016 at 10:53 am

Why should negative rates on deposits shift economic activity from investment to consumption?

Borrow at negative rates —-> Obvious but low yield investment like land reclamation or replacing steel with stainless steel (maybe renewable energy would be a good choice for these examples) —-> Free money!

It seems like rates and growth are both slow because everyone wants a “safe” investment (basically someone just handing you a return for being a saver), and not enough people are willing to have their money married to a long-term, real development project.

8 Yancey Ward February 12, 2016 at 11:03 am

Indeed. The investment return doesn’t even need to be positive since it is all “free” as you write.

9 derek February 12, 2016 at 1:13 pm

Exactly. If it doesn’t make sense, it doesn’t make sense no matter how many big words economists use to try to explain it away.

Essentially it is about a bunch of sovereign debt that is not worth as much as the sovereigns want, because if it isn’t worth as much then they won’t be able to float any new debt to meet next week’s payroll. The banking system is leveraged up their wazoo, dependent on central banks for their survival. The central banks are desperately trying to maintain their illusion of being a valid and sound lender of last resort.

So let’s figure out an acronym that can maintain the illusion for a little while longer.

Zero or negative rates mean that the money lent has no value. It is lent out below cost. If I had an apartment to rent and the only price I could rent it for is if I paid the renters to stay there, it means the apartment has no value. And if that was the case because of policy initiatives, such as the massive building of subsidized apartments where people are paid to live there, it really has no value.

I haven’t the faintest clue how this will fall apart, one would expect inflation as the money has no value anyways, but for some reason it isn’t happening. Any hint of deflation means an enormous amount of central bank printing.

I would look for secondary ‘unofficial’ markets to emerge, as is very common in highly controlled economies characterized by price fixing and intrusive government control. I’m surprised how many firms I deal with who are privately owned, not public equity, and how many more there are. These are real companies making things or providing services that keep the engine of the economy operating. I suspect the employment participation rate is about people working unofficially. What other signs?

I suspect we will learn quite a bit about how things actually work over the next few years, and see a significant diminishment of the stature of central banks. As well as Ferguson style tax collection where you are penalized for existing.

10 Brian Donohue February 12, 2016 at 1:43 pm

“Basic economics instructs that natural interest rates can NEVER he zero or negative…”

Until recently, I thought this was true. But your example of the apple shows that it is not always true. If I’m sitting on a depreciating asset, like an apple, I probably can’t sell it for anything a month from now.

One of the key uses for money is as a store of wealth. It’s better at this than apples. But it doesn’t need to be a perfect store of wealth, let alone an interest-bearing store of wealth, to outcompete alternatives that exist outside of the monetary system.

11 Boonton February 14, 2016 at 6:01 am

Negative interest rates are not ‘imposed by governments’. During the crash in 2008 Treasury bonds briefly went negative and that was because the market rushed to buy them which caused their price to rise enough to be negative. We may have had negative real interest rates for almost half a decade now. In human history most attempts to store wealth had negative interest rates. Buying a big safe to put your money in, for example, has a negative interest rate.

12 John February 12, 2016 at 1:47 am

The strangest thing about it is the fact that JPY is still appreciating.

I think it’s a little glib to just say “economies are trying to solve their core problems on the cheap”… (a) the central bank should be able to devalue and (b) it is surprising that this did not cause a devaluation. In order of descending likelihood, it must be less than markets were expecting, or it somehow signals less devaluation in the future, or (exotically but logically possible) it has had an even larger devaluing influence on the USD.

13 Mark Thorson February 12, 2016 at 2:06 am

Since the BOJ went negative, ECB will have to go even further negative. Why should I take money from ECB when I can get a better rate at BOJ?

14 Kevin February 12, 2016 at 2:32 am

If interest rates are negative, and that’s a bad thing, I don’t get why the government doesn’t just create more money by fiat and use that to pay off its debt. I thought that was a thing, in like Macro 101.

15 Daniel in VA February 12, 2016 at 8:15 am

I’ve been wondering why the system for money creation works the way it does, too. I’m not an economist, but it seems like it would be easy to target 2% inflation by automatically increasing the balance in the treasury as long as inflation 2%. Also, it would make for a more clear separation of revenue streams from money creation and debt which really need to be repaid.

16 Daniel in VA February 12, 2016 at 11:00 am

Edit to the last post: “automatically increasing the balance in the treasury as long as inflation is less than 2%, and not increasing it at all if inflation is greater than 2%.”

17 anon February 12, 2016 at 10:50 am

I think that “printing money” is wired shut in the collective consciousness. It is only invoked as an evil. It can never be seriously considered as a policy.

If this is connected to 1920’s hyperinflation, that is a long memory for such a primitive response.

18 JWatts February 12, 2016 at 6:38 pm

You don’t have to go to 1920. You can look at Venezuela currently.

“Venezuela Could Learn From Weimar Hyperinflation
With inflation at an annual average of 98.3 percent for 2015, and predictions that it could reach 720 percent this year, Venezuela may be about to join the ranks of countries that have experienced out-of-control price increases that cripple the economy.”

19 Peter the Gehred February 12, 2016 at 6:06 am

Can the say “helicopter money”? Nominal GDP growth and targeting?

I knew they could. Good central banks. Scott Sumner is right: Central banking, especially monetary policy, is far too important a task to leave up to central bankers. Unleash the hive mind of the market.

20 rayward February 12, 2016 at 7:16 am

Owners of capital have spent the past several decades investing in productive capital not in the U.S. or Europe but in places like China where they are subject to very low (zero) tax rates and pay low wages, while investing in mostly speculative assets (financial assets and commercial real estate) and “safe” assets (government debt instruments) in the U.S. and Europe. How is that working out? Yesterday several Senators grilled Ms. Yellen over the slow pace of productivity growth in the U.S., Senator Corker lecturing her that the Fed has no influence over productivity growth, saying that the idea the Fed could influence productivity growth “a ridiculous notion”. “That’s our job”, said Senator Corker. In a perverse way the Senator was agreeing with Keynesians (calling Paul Krugman) about the limitations of monetary policy to stimulate investment and economic growth. No, I don’t believe the Senator wants to increase government spending; rather, he wants tax cuts for the owners of capital, perhaps a zero tax rate on capital (Senator Rubio’s campaign proposal). Owners of capital have spent the past several decades investing in productive capital not in the U.S. or Europe but in places like China where they are subject to very low (zero) tax rates and pay low wages, while investing in mostly speculative assets (financial assets and commercial real estate) and “safe” assets (government debt instruments) in the U.S. and Europe. How is that working out?

21 Heorogar February 12, 2016 at 8:19 am

Negative rates may be seen as taxes on depositors/investors, i.e., the suppliers of funds in the financial intermediation process. But, I thought higher taxes are not counter-expansionary.

In early 2009, when they set the federal funds rate target at zero to 25 basis points, they lost that (interest rate manipulation) arrow in the monetary policy “quiver.” And, the US became Japan.

So, negative rates seem to be the central bankers’ solution.

Somebody smarter than I needs to analyze the effects of (what?) seven years of savers realizing basically nothing in return for deposits and non-risk investments. Why aren’t they investing or spending?

Market participants have little confidence in their central planners. I see hubris among central bankers.

OTOH, There seems to be no floor on interest paid of funding, but lenders must earn spreads on lending, commercial banks once just enjoyed over 4% now about 3.2%. That measure is net interest margin (NIM). Negative rates may help resolves banks’ low NIM issues. NIM = ((total interest income – total interest expense) / average earning assets)). Recently, the yield curve flattened (yesterday the 10 year UST was down to 1.6%) causing more NIM pressure. Analysts are seeing loan yields (interest charged), on products like multi family (commercial real estate), at unduly low levels, say 3 1/4%.

OT, another problem, is funding loans with volatile, higher-cost borrowings, rather than stable, core deposits. This was a contributing factor in the financial crisis. In 2008, that money ran when assets values plummeted, at the time when banks most needed the funds. We know how that worked out.

22 Robert Frances February 12, 2016 at 9:31 am

“Why aren’t they investing or spending?”

I’d guess the lack of spending and investing is likely due to the increased disparity of wealth and income in the US, Japan and other developed economies. As income/wealth has concentrated to a smaller share of the population, rich people just can’t spend enough and they already have plenty of capital invested in stocks and bonds. The bottom 2/3 of the population is spending the majority of their income on rent and regressive taxes, so they’re not a source of economic growth.

I don’t think monetary policy will fix anything. Governments needs to slash taxes on working people and increase taxes on high-earners, or on wealth, and especially on passive income sources. Working people will spend the extra money on goods and services, creating jobs and growth in the process (assuming their rent didn’t do up by the same amount of the tax savings).

The Fed bashing seems mostly kabuki theater so the economic elites don’t have to respond to the real issue, which is the acute concentration of wealth and income among a smaller slice of the population.

23 Cliff February 12, 2016 at 11:07 am

The U.S. has a far more progressive tax system than Europe

24 mpowell February 12, 2016 at 1:15 pm

You prescribe a political solution to monetary problem. There are plenty of ways for the monetary system to absorb the extra stored wealth of the wealthy. Just have the fed retire treasury debt. Certainly no more risky than further increasing the already very high marginal rates in the US.

25 Brian Donohue February 12, 2016 at 9:06 am

We’ve had negative real rates for years now.

26 anon February 12, 2016 at 10:58 am

A balanced portfolio had positive real returns until 2015. To answer another question from above, about why folk are not spending or investing, there is a negative wealth effect.

27 zzz February 12, 2016 at 9:38 am

The obvious question I will ask is
“How do I profit from this.”

Buy US 10yr govt bonds ?
Buy collectible gold and jewellery? They were not confiscated last time in the 1930.

Husband :Honey I got this gold necklace for Valentines.
Wife: NO! really you just wanted to hedge against negative rates.

28 JP Koning February 12, 2016 at 10:56 am

“Of course negative interest rates, while intended as a form of stimulus, or currency depreciation, are also a tax on financial intermediation.”

Tyler, *any* rate cut whether it is implemented in positive rate territory or negative rate territory is a tax on financial intermediation.

If I’m a bank earning 3.5% a year on $10,000 in balances at the Fed for a total of $35/year, and the Fed reduces rates to 3%, I’m now earning just $30/year. I’ve been taxed.

There’s no difference between negative rate land and positive rate land.

29 Rick Hull February 12, 2016 at 4:38 pm

Stocks vs flows. This misdirection is getting tiresome.

A rate cut cuts the flow. A negative rate cuts the stock.

We should not be arguing over this.

30 Skynet February 12, 2016 at 12:28 pm

As long as you think like a computer, or some moronic economic model.

31 Bryan Willman February 12, 2016 at 1:09 pm

conjecture- stimulus and even inflation caused by injecting money *into the banking system* is too slow and weak to be useful.

notice: even though the Fed increases money supply very dramatically during the crises (they basically put both feet on the gas pedal) it had little effect? why? well, one reason is huge sums of money being held as excess reserves.

possible solution – create stimulus by simply handing out money directly to citizens – and in particular, to the “lower 2/3”. as in every citizen (or every taxpayer) gets some cash from the fed, like, every quarter. how much varies, you can’t plan on it. but it’s also immune to all taxes. so spend it! (now if what everybody does is stash it in a savings account you are back to square zero.)

32 jorgensen February 12, 2016 at 1:55 pm

“I don’t see negative rates as the main problem today, but it’s getting harder to see them as a potential remedy. They’re a sign that economies are trying to solve their core problems on the cheap.”

The Central banks are shying away from identifying the core problems and could not do anything about them even if they could publicly identify them. Excessive Chinese savings and large amounts of wealth being transferred to tax havens both put a drag on the global economy but the central banks are powerless to address those mechanisms.

Monetary policy works primarily through the housing market. Sweden implemented NIRP and now they are freaking that their housing market is exploding. What the heck did they think would happen? They probably need to loosen zoning restrictions to let expansive monetary policy work the way it is supposed to.

33 J_12 February 12, 2016 at 2:20 pm

Negative rates aren’t inherently evil, but they are an extreme measure. If negative rates are thought of as a tax on financial institutions which do not put their capital to work in risk assets, then we can expect them to achieve 2 things. First, more capital will flow into risk assets. Second, banks will have an incentive to find creative solutions about how to sit on capital without paying negative short rates.

Neither of these is necessarily desirable, but we should not fault the Fed for failing to fix a problem that it was not designed to fix. The Fed sets the price of money. It is able to influence the supply and demand of money/credit, but it is not able to influence what economic actors do with their money.

Fiscal policy, tax policy, and regulation are needed if we want the government to change how, as opposed to how much, people are spending/investing.

34 Lord February 12, 2016 at 2:43 pm

More a tax on the failure to intermediate.

35 Randall Parker February 14, 2016 at 2:17 pm

Tyler, what do you have in mind when you refer to “more straightforward measures”?

Government could run a deficit and have central bank buy the bonds.

Government could slash assorted regulatory barriers.


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