Anyone with an ounce of common sense knows that negative interest rates cannot occur naturally, can only occur with government or central bank intervention, have nothing to do with free markets, and must fail eventually.
That’s two to four strikes against them, depending on how one counts duplicate ideas.
The question at hand is: Have negative interest rates backfired already?
The Wall Street Journal discusses the “early evidence” in Are Negative Rates Backfiring?
Two years ago, the European Central Bank cut interest rates below zero to encourage people such as Heike Hofmann, who sells fruits and vegetables in this small city, to spend more.
Policy makers in Europe and Japan have turned to negative rates for the same reason—to stimulate their lackluster economies. Yet the results have left some economists scratching their heads. Instead of opening their wallets, many consumers and businesses are squirreling away more money.
When Ms. Hofmann heard the ECB was knocking rates below zero in June 2014, she considered it “madness” and promptly cut her spending, set aside more money and bought gold. “I now need to save more than before to have enough to retire,” says Ms. Hofmann, 54 years old.
Recent economic data show consumers are saving more in Germany and Japan, and in Denmark, Switzerland and Sweden, three non-eurozone countries with negative rates, savings are at their highest since 1995, the year the Organization for Economic Cooperation and Development started collecting data on those countries. Companies in Europe, the Middle East, Africa and Japan also are holding on to more cash.
There is a growing suspicion that part of problem may be negative rates themselves.
“People only borrow and spend more when they are confident about the future,” says Andrew Sheets, chief cross-asset strategist at Morgan Stanley. “But by going negative, into uncharted territory, the policy actually undermines confidence.”
Low interest rates should encourage consumers and businesses to spend by depressing returns on savings and safe assets such as government bonds. Such spending should create demand for goods, help lift sagging inflation and boost economic growth.
The last paragraph above is rather amusing. Consumers have proven economists wrong (once again).
Data Reflects Anecdotes
Here are a few more anecdotes from the article. Anecdotes do not constitute data, but the data reflects the anecdotes.
Lasse Bohman, a 63-year old newsstand worker from Stockholm, said the concept of negative interest rates is “weird” and makes him want to save more for retirement rather than spend. “I am just going to keep on putting money in the bank,” he says, or “put it under the mattress at home.”
In Germany, Europe’s largest economy and a nation known for thrift, savings as a percentage of disposable household income rose to 9.7% in 2015, according to preliminary data from the OECD. That is the highest rate since 2010, and the OECD expects the savings rate to rise further this year, to 10.4%.
In December, Ms. Hofmann, the Korschenbroich fruit vendor, used her Christmas bonus to buy two 10-gram bars of gold. She has since bought more and has put it, and every euro she can set aside, into a safe at home, saying she doesn’t trust banks. “Every time I check my savings account, it makes me want to cry,” she says.
Money in the Safe
In Japan, the threat of negative interest rates on savings accounts did not spur spending except on safes to hoard cash.
I discussed this back in February in Safes Sold Out in Japan: Customers Hoard Cash in Response to Negative Rates.
Mike “Mish” Shedlock
It gives me a warm feeling to hear of the fruit vendor in the article buying gold to protect her hard earned wealth.
In regards to one’s long term savings, if gold gives you a 0% return in the long run (which appears to be the long-run worst case, historically), it’s strictly better (and arguably more secure) than a <0% return on your fiat at the bank.
Now, the economists always seem to want to assume that people will act rationally based on incentives…so why exactly did the central banks think that people wouldn't catch on and make the (seemingly, to me anyway) strictly better choice?
Rational people have a idea of what they need to save. Reduce that accumulation and the shortfall must be made up.
David A said:
Most people, especially the growing closer to retirement population, are striving to save a set amount. Destroy that secure income and they will make up for it.
So the bank will pay me to take a mortgage every month?
Or is this only a one way street with savings?
Per Desteen said:
The individual will never be paid, nor benefit from negative interest rates.
Only the crony, the corporation, and those with first access to FRN.
Tim Bassett said:
I really don’t see why negative rates could not occur naturally especially in a deflationary environment (just supply and demand for money after all) nor why anybody would expect them to spur borrowing.
One of the peculiarities of the tax system is that interest charges/deductions are based on nominal not real rates. For a typical firm it makes way more sense to borrow when nominal rates are high than when they are negative, real rates being equal. In the former the effective post tax real rate achieved is often negative while in the latter case it is not. The slope of the post tax real WACC in the MM model is upwards in a negative rate environment. Firms are not stupid and respond to real post tax effective rates which is why they start piling up cash when rates go very low and real rates remain high – this effect been obvious in Japan for years. The effect in the personal sector is less pronounced but certainly exists deposits in a positive real rate deflationary environment are tax free.
This is truly hilarious to watch. The idiots in charge are desperately trying one scam after another in an effort to paper over the financial calamities brought on by years of corruption and greed orchestrated by the so-called Ivy League intelligensia in government and Wall Street.
Our forefathers must be appalled at the notion of corporate bailouts, QE and now negative interest rates. They must be squirming in their graves while mouthing the words “How could you @*#&*^ up such a beautiful thing that we handed off to you?”
And with each new scam they dig us a deeper hole. It only means that when the economy finally blows the magnitude of the damage will only be that much greater. Scams are temporary. Math is forever.
Trump strikes me as a smart man. I’ve no clue why at this point in history he would want to be our 45th President. I’d say chances are excellent (in the 70% range) that the fallout will happen in the next 4 years, almost certainly in the next 8. And whoever’s in the White House at that time will shoulder full blame and go down in the record books in the same chapter as Hebert Hoover. Fair? Of course not. But it’s the nature of man.
I have to give Obama credit for one thing. He timed his departure perfectly.
I’d feel much better about it if we could laugh at it from a much greater distance. Unfortunately for us, space travel is well out of our budget.
The inmates are now in control of managing the asylum.
Trader Joe said:
“How could you @*#&*^ up such a beautiful thing that we handed off to you?”
Look no further then (((them)))
Physical gold will turn you into a target if anyone finds out. I save lead in a certain form, which in certain environments, will trade ounce for ounce with gold.
Lazy Rentier said:
Hah, exactly. Lead trumps gold in any decent apocalyptic scenario. Guns, food and posse is the way to go, not gold.
If saving is a virtue, then oddly enough the Central Banks are encouraging virtue and giving a boost to gold prices at the same time. Perhaps negative interest rates will thus become textbook instruments for boosting savings and gold prices.
I wonder why the mainstream is rocking the boat. Sudden journalistic integrity?
I noticed the same thing… the narrative has changed. They need to keep us watching, but alternative news sites keep stealing the show, so they are forced aboard the bus. I hope they keep being forced to the back of the bus, because it tells us that the people a hearing the real news and now it makes sense.
Some things are impossible to ignore, so they have to be reported. Otherwise the media will go out of business, and loyalty to their own business trumps ideology.
Of course, the next step will be to give it a “spin” –and that should be easy in this case. I mean, who can argue with the savings rate going up? Central Banks will have no choice but to embrace it, and eventually they will claim that was the original purpose all along in order to keep their money printing franchise intact.
Or the worst case scenario, they will double down in various ways, becoming more totalitarian and citing the increased savings and gold buying as need to accelerate the War on Cash and start a War on Gold. Once private gold holdings buildup, it would be the perfect time to pull FDR’s 1933 stunt of confiscating the gold in exchange for fiat currency that is immediately devalued 40%. In that way, the central bank acquired gold below cost and devalued the fiat currency at the same time.
Could go either way.
Negative interest rates do occur in the market:
December 9, 2008: Three-Month Bill Yield Goes Negative
At some point during the afternoon, the yield on the three-month Treasury bill dipped below 0%, according to traders, as investor desire to hold short-term liquid debt trumps all else.
What the market did amid total panic is now official policy at major central banks, and the public is responding the same way.
“…negative interest rates cannot occur naturally, can only occur with government or central bank intervention, have nothing to do with free markets…”
Thus, negative interest rates are also a “socio-political indicator,” a measure of the degree to which a government and central bank regime is totalitarian or authoritarian and Marxist in outlook (abolition of the free market).
John Spiers said:
Are negative interest rates policy, or a failure thereof? I always thought bonds were selling for what the market will pay, not the price set…
Raoul Pal on Dollar Shortage. Ex hedge fund manager.
Otis the Sweaty said:
From a purely mathematical perspective, is there an end game to negative interest rates? As long as bonds have negative yields, why can’t the gov just prop up the zombie private economy forever through deficit spending ala Japan. Even if the debt/GDP ration goes to 1000%, what difference does it make since the government is actually getting paid to hold that debt?
The whole thing is mind boggling.
I agree – the negative interest rates are nuts.
If the problem is insufficient Demand, why not simply pay people more for their Work? Close the loopholes on the corporate earnings tax so that corporations pay a higher *effective* rate on their earnings. That gives them an *incentive* to share more with Workers, stimulate the economy, and either slow or stop the Race to the Bottom.
It would also decrease the returns on price gouging — so consumer prices go down, and Workers would have more disposable income, and either spend or save more. And pay more in income taxes.
Interesting — we never had a Demand Problem until a couple decades after Reaganomics/Voodoo Economics had run its course. Now those “free markets” are completely dependent on Government Assistance and Entitlements. And most of the taxpayers who are footing the bill don’t even realize it yet.
Ron J said:
“Interesting — we never had a Demand Problem until a couple decades after Reaganomics/Voodoo Economics had run its course.”
Interesting- deflation follows inflation, to complete a cycle.
There is a demand problem every 8 years or so. They are commonly called recessions.
“Now those “free markets” are completely dependent on Government Assistance and Entitlements.”
What nonsense. There is no more free market. The government has destroyed it with regulations and tax policy. Corporations need to pay higher taxes? I’ll bet you’re a socialist Sanders fan. The US already has just about the highest tax on businesses in the whole world. The reasons that US companies move their businesses to other countries is not just lower labor cost.
Brian E Considine (@e_considine) said:
1. Negative rates not only can occur naturally but are natural. For almost all of nature and 99% of human history interest rates were negative. When a squirrel ‘saves’ 100 nuts for the winter, he is lucky if he is able to eat 90 of them. That’s a negative 10% rate of return. He will never save 100 nuts and discover at the end of the winter he has 105 nuts.
2. Rates are negative not because Central Banks are making them so but because the market is. The CB only can impact the rate of stuff it buys. In the US that is the 3 month Treasury bill. QE expands that list of assets somewhat but CB’s do not commit to a set interest rate with QE, they simply make a monthly purchase (i.e. $30B of 30 yr Treasuries each month or something like that). If the market thought such money creation was going to spark inflation, you would see negative rates vanish in an instant. Countries with inflation that runs in the double digits have central banks that print money and purchase their government paper with it all the time, that doesn’t cause negative rates because in those economies the market knows if someone borrows $100 today then 365 days from now the lender will need at least $120 back just to break even.
“In regards to one’s long term savings, if gold gives you a 0% return in the long run (which appears to be the long-run worst case, historically), it’s strictly better (and arguably more secure) than a <0% return on your fiat at the bank."
BS. First over the long term there's been plenty of periods where the price of gold has fallen (see http://www.macrotrends.net/1333/historical-gold-prices-100-year-chart) Saying the worst case is a 0% return is untrue. You are no more guaranteed against a loss by buying gold than you are guaranteed against a loss by buying stock.
Second, returns are meaningless to compare without risk. A deposit in a bank savings account paying a slightly negative rate of return has relatively little risk. Your $100 may turn into $99.50 after a year, but odds are very high you'll have $99.50 and not $0 or only $50. An ounce of gold may double in price but it could also fall just as easily. The risk of it dropping to $0 is also possible in the sense that while the actual market price of gold isn't going to go to $0 unless someone invents a cheap gold replicator ala Star Trek, someone could break into your house and steal your gold nuggets or the 'gold investment firm' that is holding gold on your behalf could end up being a fraud that ends up losing your gold just like some bitcoin exchanges have let their clients accounts get 'hacked'.
Ron J said:
“Low interest rates should encourage consumers and businesses to spend by depressing returns on savings and safe assets such as government bonds.”
Low rates cause people to have to save more to make up for the low rates.
Negative rates have not backfired. They are working as intended, which is to support governments that borrow to meed normal daily operating expenses. Negative rates allow governments to pay unrealistically low interest rates while borrowing increasing amounts. They also allow financial assets to increase in value almost exponentially, allowing holders to cash out and take the skim for themselves, becoming even more wealthy.
Negative rates are working with perfection.
You must be mistaken in what YOU THINK negative rates are supposed to accomplish. Negative rates are most likely not doing anything even close to those things. “Those things” are the demo sales pitch to get you hooked.
“Low interest rates should encourage consumers and businesses to spend by depressing returns on savings and safe assets such as government bonds. Such spending should create demand for goods, help lift sagging inflation and boost economic growth.”
Their theory is stupid beyond belief. Those wise enough to save for a rainy day or retirement aren’t going to spend that money simply because they aren’t getting a proper interest rate on it nor are they going to risk it in equities. They will simply save MORE to make up what they aren’t getting in interest.
Those who live paycheck to paycheck aren’t affected by low rates because they don’t save anyway nor are they credit worthy enough to be loaned more money to immediately spend (exceptions: subprime auto loans and student debt, which is why debt totals in those two areas are skyrocketing).
Only ivory tower types with six figure incomes, seven figure net worth, and large, secure retirement pensions could just look at their mostly BS formulas and models based upon their grossly oversimplified economic theories and come up with that kind of easily disproved idiocy.
Speaking of “large, secure retirement pensions”:
It’s actually worse than that article indicates, because many CA “public servants” are in retirement systems other than Calpers.
Digby Green said:
Given that all these countries with low interest rates are not booming, that is proof that they are not working. So the central bankers must be made to reverse this policy.
Here in New Zealand with constantly reducing savings interest rates, I am putting some of my spare cash in our Bonus Bonds (which is like a lottery, but you still have your money)