Has the time come and passed for negative interest rates?

That is the topic of my latest Bloomberg column, here is one excerpt:

Step back and consider the cultural context. Germany is still scarred by the memories of two world wars, fascism, communism, deflation and hyperinflation: in general, huge instability. Since the end of World War II, however, personal savings and the banking system have been an oasis of predictability and a driver of growth. Many Germans treasure their frugality, perhaps excessively or irrationally, and it has become an important part of the narrative Germans tell themselves about the economic order they have built.

Now enter the ECB, in essence telling Germans (and others) that savings are a bad thing, to be taxed and penalized. The very word “negative,” as in “negative interest rate,” makes the policy hard to sell politically. The German word “Strafzinsen” refers to a penalty rate, but the root “Straf” also refers to punishment, and it was used effectively by Franz Kafka in his famous torture-laden short story “In the Penal Colony” (the German title is “In der Strafkolonie”). One German newspaper referred to the “final expropriation” of the German saver, noting that the ECB’s decision to deviate from its inflation target carries “grave consequences.”

More generally, a significant segment of the German population is upset or outraged by the policy. There is even a claim that the revenue from the negative interest payments will be used to finance other EU countries.

Most economists and central bankers view negative interest rates as an acceptable tool of macroeconomic management. Maybe so. But in an era when trust, including trust among nations, is much lower than previously thought, it probably isn’t a good idea to place a punishing new tax on the German national virtue of saving. Central bankers must also be sensitive to public relations.

I find it striking how many people are responding to this column by insisting that Merkel should do more fiscal stimulus.  She should (though I don’t find “stimulus” to be the most instructive word here), as I suggest in the piece, because the Germans have been letting their infrastructure run down for a good while now — internet speeds anybody?  But at the end of the day, I don’t think that spending will eliminate the basic macroeconomic problem facing the EU, nor is most of that spending likely to land on the doorstep of the countries which most need it (though Huawei may benefit a good deal).  There is also this:

So if a policy of negative interest rates is just a Band-Aid, it is one that should be ripped off. And if monetary policy is insufficiently expansionary, that is going to require an increase in the ECB’s inflation target, or a move to nominal GDP targeting, not a jerry-rigged tax on deposits.

There is also an argument that Germans are saving too much. But by some measures, they have a level of national wealth relatively low for their per capita income, in part because Germans are less likely to own their own homes. According to the OECD, Germany’s near neighbors Sweden, Denmark, the Netherlands, and Switzerland all save more in percentage terms than Germany does.

German savers: underrated.

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Well, at least this time it appears that the co-owners of this web site are actually working together on a topic, as compared to ignoring what the other writes.

Internet speeds in Germany are fast enough if prior can manage to be first to shoot an electronic spitwad at TC.

It remains entertaining how often Prof. Tabarrok is completely ignored by commenters here.

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"Internet speeds in Germany are fast enough if prior can manage to be first to shoot an electronic spitwad at TC."

No, that's primarily latency on a text based site like this.

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The laughably slow internet speeds are just one indication of the many things the Germans have neglected to invest in.
How about pretty much daily 30+ minute delays on inter-city trains, which serve as a major transportation artery in the country?
Not interested in train travel? What about the constant gridlock on the Autobahn anywhere near a city?
Housing construction - the price of renting an acceptable place in even some third-tier cities has skyrocketed to well over 50% of median income.
On paper it seems like Germany has education covered from Kindergarten onward except it’s so underfunded good luck actually finding a spot for your kid if you literally didn’t start apply when the pregnancy test came back positive (not a joke)!

Meanwhile of course high income tax rates continue.
Don’t be so flippant about the running down of infrastructure in Germany Tyler, it’s a lot more than 1998-level internet speeds.

"if monetary policy is insufficiently expansionary, that is going to require an increase in the ECB’s inflation target, or a move to nominal GDP targeting, not a jerry-rigged tax on deposits."

Tell that to the Germans! They made their bed at the ECB and now they have to sleep in it! You can't have ultra-low inflation and also good rates on bank deposits. Not gonna happen.

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'What about the constant gridlock on the Autobahn anywhere near a city?'

Which is very often caused by road construction - the German wide joke for at least the last 5 years is that Germany is a Baustelle (construction site).

'it’s a lot more than 1998-level internet speeds'

Right - except Telekom no longer supports landlines at all. That's right, you need to be connected to the Internet with a router to make a normal phone call, as all of the old infrastructure has been replaced. Just another part of that Baustelle joke, actually.

(Yes, roads are being pounded by thousands of trucks a day more than they were ever designed for in this region - however, since major roads carrying those trucks no longer go through towns, people seem happy enough with the shift around here.)

the German wide joke for at least the last 5 years is that Germany is a Baustelle

That joke sucks.

And yet it is reality in just about every part of Germany that I have visited in the last 5 years. Anecdotal, of course, but it is amusing - at least in this region - to see just how many roads are closed in sequence to be completely refurbished, causing traffic jams the entire time, obviously. Or, at least in the case of Karlsruhe, as part of the 'subway' construction.

Could you imagine "America is a construction site!" passing for a joke in the US?
Seems like Germany needs investment in humor. Maybe getting internet speeds up would help.

'Could you imagine "America is a construction site!" passing for a joke in the US?'

Interesting question. You have been steadily complaining about a lack of investment in German infrastructure, pointing to things like traffic jams, and when I point out, certainly in this region which covers the A5 and A8, that the basic reason for much of the problems is ongoing road work (replacing decades old bridges at Kreuz Karlsruhe, for example, or working on the Pforzheim bottleneck), something that has become a running joke. Which covers the problems driving in and around Karlsruhe (including the Rheinbrücke work) to a major degree.

Infrastructure does not merely need to be built, it needs to be replaced. Something that is ongoing in Germany (certainly everywhere I am familiar with here), even if it is not really being financed by debt. Expanding the A8 to three lanes has basically taken more than a decade (and is not finished yet), including taking out all the old bridges which could not accomodate a 3 lane width and replacing them - both road and rail.

We can go back and forth on this forever - East Germany has plenty of up to date infrastructure compared to the mess that existed in 1990, for example. And it too will predictably need to be worked on in the coming decades.

I see you've elided my comments about the DB, and your riposte to my observation that internet speeds in German make downloading a Youtube video take about 3 years was pretty weak tea (Telekom doesn't use landline - who cares the internet speeds are shit).
Not to mention massive lack of housing in major (and many non-major) cities and poor funding of apparently guaranteed social programs ("we have universal Kindergarten except no one can actually get a spot!").

'I see you've elided my comments about the DB'

Well, sure. But explaining about the Rastatt tunnel collapse, its effects on the Rheintalbahn route, and the fact that the local streetcar/S-Bahn network (Karlsruhe introduced the dual system - a streetcar that rolls through the city also uses the normal rail tracks to serve the towns that DB used to) that serves this entire region has no notable delays seemed a bit much. And till now, I have not noticed any particular problems with the ICE, certainly not between here and Frankfurt but that is a limited observation, particularly in light of the fact that you used inter-city (one assumes IC) trains, which do not get priority. And in all honesty - a number of the delays are due to suicide, which blocks the tracks for a couple of hours normally, but the Bahn really, really does not like talking about that German reality.

'who cares the internet speeds are shit'

I often wonder about this - you do know that this link lets anyone see what the maximum available Telekom (though not its various competitors) speed is - for where I live (a small town), this is the highest speed - 'MagentaZuhause ist mit bis zu 100 MBit/s im Download und bis zu 40 MBit/s im Upload verfügbar.' Of course that is up to, but the next lowest level is 50mbs down/10 mbs down using the exact same infrastructure, without hedging. The lowest offered speed, again without hedging, is 16mbs/1mbs https://www.telekom.de/zuhause/tarife-und-optionen/internet-und-dsl-tarife Yep, takes years to download anything. Admittedly, I didn't check every provider, because I don't care about the 2 cable companies to choose from, or the three other available ISPs either. But Unitymedia offers a paltry 400mps/20mps - hedged with up to, of course. Again, we can go back and forth on just how important watching TV is - most Germans seem happy enough with the quality of Tatort every Sunday night.

'Not to mention massive lack of housing'

Ah yes, the recurring Wohnungsnot, for at least the third time in my quarter of a century living here.

'we have universal Kindergarten except no one can actually get a spot!'

This is a subject heavily dependent on details like the Bundesland and what one expects. The contrast between a poorer Bundesland like Rheinland-Pfalz and a richer one like Baden-Württemberg is instructive - particularly because the Pfalz does such a better job, compared to the opposite side of the Rhine. There remains a lot of opposition (even today, though certainly less than a couple of decades ago) to mothers not staying home and taking care of their children in Baden-Württemberg. Of course, I can also remember the time before there was any guarantee of a place for a 3 year old in a kindergarten - and how politically divisive that guarantee was. People tend to forget how socially conservative at least southern Germany really is. Or how the much what is offered has expanded - in the Pfalz apparently, the guaranteed place starts with 2 year olds, a minimum of 7 hours a day with a meal - and no fees for parents at all. Parents in Baden-Württemberg can only dream of such things, in comparison. Wonder who complains more about not getting what they want or are promised, the Pfälzer or the Badener?

Nobody's reading that word salad.

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FRIDAY, NOVEMBER 21, 2008
"If interest rates fall below zero, the public would simply seek to transfer their savings into hoards of banknotes."
Brendan Brown in the FT confronts this buying of basically interest free bonds:
"As these looming losses approach, investors will shift from the bonds to stocks, spurring investment and new business and job growth, and I suppose there will be a kind of wealth effect as well."

The scheme proposed here for sharply negative interest rates promises much on both objectives."

My comment then...So, basically, if investors do shift from bonds to stocks ( Or buy corporate bonds, I suppose )

1) Businesses will borrow ( Spending on capital goods, building things )

2) Creating jobs

3) People will spend more

4) The economy will grow

What's with the Golden Egg? It's been used now by McTeer, Becker, and Brown.

Will this work? I have to admit to liking it, because it involves using incentives to refocus the look of risk to the investor. And I believe that combating fear and aversion to risk is the main problem facing us."

So, from silly to idea to having its uses. Great. However, this was meant to combat a Deflationary Spiral. It seems a bit overkill as a general tool. So, I agree with Prof Cowen prescriptions for other tools which can be used. I wonder whatever happened to that goose that laid the golden egg.

So, a bit more of an overview, starting in 2014, with a few numbers attached - 'European banks have transferred 21.4 billion euros ($24.2 billion) in revenues to the European Central Bank (ECB) in the five years since negative interest rates were introduced.

The ECB introduced negative interest rates on June 11 2014, lowering its deposit rate to -0.1% in a bid to stimulate the economy, and negative interest rates are currently at -0.4% on central bank deposits for 17 eurozone countries.

The negative rates were intended to discourage banks from parking cash with the ECB rather than lending it out or investing it.

European banks paid a record 7.5 billion euros on their surplus deposits in 2018 alone, amounting to 21 million euros being paid to the ECB daily, according to a report from open banking platform Deposit Solutions.

German banks account for a third (33%) of all eurozone deposit charges from 2016 to 2018, with French banks accounting for a further 24% and Dutch banks paying 13% of total charges.' https://www.cnbc.com/2019/06/10/european-banks-have-paid-over-20-billion-euros-to-the-ecb-since-negative-interest-rates.html

That this web site is now noticing a 5 year old policy is actually interesting in its way. Almost as if someone is desperate to avoid actually talking about what is going in the U.S. or the looming trade war or the likely effects of a hard Brexit.

Interesting. Thanks.

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The usual reason for lowering interest rates is recession. It seems the ECB is going to need a bigger negative interest rate.

In the US, The Fed pays interest of 2.10% on member banks' (required and excess) reserves.

Also, The Fed pays a large portion of its net income to the US Treasury. In 2017, it was approximately $80 billion.

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German savings is clearly correctly rated. The entire German public bond rates all the way up to the 30 year is negative. The ECB doesn't control this, the market does. Saving is a personal virtue but markets don't care about your virtue signaling. If you want positive returns you must work to find them. From a quick glance at the terminal, the same advice applies to Japan and France.

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Make me head of the ECB and in five minutes I will have long bond yields back up to positive, at any rate you care to mention. I will announce a money printing plan that won’t stop until they reach the target rate. The money will be use back for the Brexit bill.

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'I will announce a money printing plan that won’t stop until they reach the target rate.'

At which point you will be replaced in less than 5 minutes.

The beauty of the evening
on the peak of Mount Hira
Is best seen after the snows have fallen
and the flowers are fully blown

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I suspect the lack of infrastructure spending is related to Germany now being TERRIBLE at building infrastructure. The Berlin Airport is the most obvious example, but across the country, projects are plagued by delays and almost always go way over budget. Every city has numerous local examples. People now associate infrastructure spending with chunks of the city simply being shut down for years.

'People now associate infrastructure spending with chunks of the city simply being shut down for years.'

Yep. And just wait until you hear all the details about Stuttgart 21, where the Bahn lied about costs, and Baden-Württemberg has been explicit in saying that those cost overruns are not going to be covered by any money from here. Period. To be honest, the Bahn was likely relying on its cozy connections to the party that was in power for 50 years here, but that changed - and it is never has been hard to get a Schwab to say no to spending money.

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Here is what Tabarrok wrote yesterday about negative interest rates (negative yield cure): "The global savings glut which drives asset prices higher and makes them more volatile is very much still with us." Read that sentence again, and ask yourself whether one would have ever guessed that one would read it here at this blog. Now read Cowen's essay. Are Tabarrok and Cowen on the same page? On the same planet?

Yesterday, I commented that Cowen has two prescriptions for negative interests rates in Germany: monetary stimulus and fiscal stimulus. More monetary stimulus? What, lower interest rates that are already negative. That leaves fiscal stimulus, China's solution to the savings glut. Today, Cowen has retreated, writing that he didn't really mean what he wrote at Bloomberg, that he only meant to suggest Germany fix the roads.

"The global savings glut which drives asset prices higher and makes them more volatile is very much still with us." Read it again. And again. Closely. America's answer to the savings glut was, first, to be the world's consumer. And consume we did. Until even America couldn't consume enough. America's current answer to the savings glut is to juice up asset prices, to give the illusion of wealth so that savings matches investment. Can the Fed juice asset prices in perpetuity? Or, as Tabarrok and history inform us, juicing asset prices leads to volatility, and volatility leads to financial crisis. If there is another financial crisis, what can the Fed do to juice asset prices and stop the collapse of asset prices, and then re-inflate asset prices?

Finally, I reminded readers that the Austrians have the cure for a savings glut which is attributable to excessive inequality, a cure worst than the disease. So what will it be: fiscal stimulus (i.e., state investment in public goods) or the Austrian's final solution?

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macroeconomic management

if monetary policy is insufficiently expansionary

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.", F.A. Hayek

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"by some measures, [Germans] have a level of national wealth relatively low for their per capita income, in part because Germans are less likely to own their own homes."

Home-ownership rates (HOR) are a skewed way of measuring financial health of a country's populace. First, there are all sorts of externalities that influence HOR while the rate itself says nothing about the average wealth. Romania has a HOR of 96%, Switzerland 42%. Thus macro-wise high HORs should have a negative impact on wealth.

On the individual level it's not different either: Property is usually a lifetime's biggest investment and most don't buy with cash but debt. It is the opposite of diversification. Keep it intact while living in it, owner-occupied property is not an investment – it's a consumable.

Zero interest rates pushing market prices which in turn push future home owners to become part-time landlords in order to finance their debt – it has more likeliness with a ponzi-scheme than a solid wealth-plan.

Having more residential REITS and big housing corporations (whether private, state-run or cooperatives ) should be the way forward, instead of politicians pushing for higher HORs. Being a landlord's sole tenant is by most measures a bad deal as the landlord will be overstrained with basic requests. Owning one property and living in it may shield you from property price inflation, but once you move out nothing is gained, unless you move into something significantly smaller or a cheaper place.

"According to the OECD, Germany’s near neighbors Sweden, Denmark, the Netherlands, and Switzerland all save more in percentage terms than Germany does."

Austria, Switzerland and Germany all have the same low HORs (So the old chestnut of WW2 bombings being responsible for Germany's low HOR should fly out the window) but otherwise the savings rate in Germany is indeed bad, which is mostly due to that after taxes and social security payments there isn't that much left to invest in.

Especially if you add a historically grown cultural penalty on financial gains plus the current interest rate inflated property prices. While of the citizens of the Netherlands, Japan, US, UK or Switzerland at least 20% own stocks, in Germany that rate is 5%!

"otherwise the savings rate in Germany is indeed bad, which is mostly due to that after taxes and social security payments there isn't that much left to invest in."

Exactly right I would say. What passes for a "good" salary in Germany is not much at all - certainly not compared to what is earned in Switzerland or Denmark - especially when one takes into account what a bite taxes take off. Add to that ever rising rents in any remotely desirable German city and really, what are you left to do any serious investing with?
Switzerland has high living costs but together with higher salaries and lower taxes I think you still come out far ahead there financially.

Far ahead indeed.

The correlation between low interest rate caused inflated housing costs (either through rent or mortgages) and low shareholding rates sticks out even more if you compare German shareholder rates among age groups: The younger, the longer educated they are, the later they start earning, the more likely they are to be urbanites and have excessive housing costs:

Of that mentioned 5% of Germans that own stocks, only 10% are younger than 40 years.

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The stock ownership rate in the US is 50%. Part of what makes America successful economically is a greater openness to taking risk.

https://www.ici.org/viewpoints/view_18_main_street

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"they have a level of national wealth relatively low for their per capita income, in part because Germans are less likely to own their own homes"

Who owns these homes, then?

Well Germans I guess. Anyone living in a city basically lives in an apartment there but you have very few high-rise type buildings (or anything over 3 floors really). What you see a lot of are large houses, which at one point were probably single-family occupied, but have been divided up into apartments. The whole thing is owned by one person/family but they only live in one of the apartments and rent out the other ones.
This kind of thing seems to be common. Otherwise there are some housing rental companies which may own larger buildings and rent out the apartments but there aren't all that many of those.

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I noted the same thing. Germans not owning their home will only make them less wealthy in aggregate if the homes are owned by foreigners.

The measure given was median wealth not aggregate. It's not just homeownership though, as mentioned above in practice its pretty tough to actually save meaningful amounts of money in Germany especially for younger people. Take-home pay isn't very high compared to the cost-of-living, even for people with "good" jobs.
I wonder if the whole "German Saver" thing is not a bit of a myth - its really a small but vocal subset of mostly pretty old people who have been able to do the saving (also probably the minority of people who general own the properties that get rented out). I don't actually think the typical German does much saving at all, nor has any real opportunity to do so.

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Tyler, if you're having to posit a German aversion to being taxed, that might be a sign that your theory is off course.

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This is all about supply and demand in the savings and investment markets. Nothing impossible about modestly negative rates. Tell me about real assets that don't have carrying costs.

Yes, NGDP targeting, Germany needs to get over itself.

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"...not a jerry-rigged tax on deposits."

Very punny.

And a common mistake. The correct term is "jury rigged" and that gets conflated with "Jerry built."

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Maybe infrastructure takes a long time to build in Germany and is relatively costly. So perhaps the government could use tax credits to get everyone out of their diesel cars and/or into electric vehicles. This might appeal to Germans because they are environmentally conscious and in the case of EV's because it saves future money on oil.

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This is why we need cryptocurrency.

Don't we already have like a zillion of those?

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What is the common view in the UK of German negative rates? Are they seen as part of a trade/currency manipulation?

If the UK issued bonds denominated in EUR, would they get a negative rate? Could their treasury just hold the proceeds to maturity?

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The Economist magazine had an illuminating article on Ordoliberalism some time ago. In considering the likely future of the Euro and of the EU, it is much under-appreciated how different the training and perspectives of German economists are from almost everybody else - not only from Anglo-Saxon economics, but also from the French, the other pole of the EU.

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There is also an argument that Germans are saving too much. But by some measures, they have a level of national wealth relatively low for their per capita income, in part because Germans are less likely to own their own homes.

Who owns the homes they rent from then? Instead of saving so much why not buy them?

More generally, a significant segment of the German population is upset or outraged by the policy. There is even a claim that the revenue from the negative interest payments will be used to finance other EU countries.

Does this claim make sense? No. A central bank doesn't need to pinch money from people's savings accounts, it can simply print money. If the ECB is doing anything for, say, Greece, it can do so by printing money.

It's hard enough to make sense of monetary policy already but if we indulge half baked theories of those who don't know what they are talking about rather than simply saying "you don't know what you're talking about", it ain't going to get any easier.

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