What do you think are long run consequences of negative interest rates?

[LongHaul]

Interest rates are negative in some countries which is totally out of my frame of reference/understanding. 

I can't think of any period with negative rates like this for this duration.  And one can do back over 500 years on the history of interest rates.  Even longer with other data.  Even in Roman times interest rates were positive positive from what I have read.

 

But there have to be long run consequences- demand, supply, inflation. 

 

What do you think are long run consequences of negative interest rates? 

[TwoCitiesCapital]

Interest rates are negative in some countries which is totally out of my frame of reference/understanding. 

I can't think of any period with negative rates like this for this duration.  And one can do back over 500 years on the history of interest rates.  Even longer with other data.  Even in Roman times interest rates were positive positive from what I have read.

 

But there have to be long run consequences- demand, supply, inflation. 

 

What do you think are long run consequences of negative interest rates?

 

Long run you get an ease on fiscal balance sheets, which are terrible, at the expense of the currency as money flows to areas where it can actually earn a return. You want to own gold in periods of negative real returns and having negative interest rates is a good way to start getting negative real returns.

 

I'd also say you risk ruining the fabric of the current financial system given that it likely would encourage 1) hoarding cash at 0 return and 2) providing a disincentive for saving at all. You think it's coincidental that politicians are now discussing getting rid of large denomination bills in Europe?

 

Plus, it just doesn't make any reasonable sense that a borrower should be getting paid to borrow while those who provided the money/capital should be getting negative returns. I think that there are a whole host of non-obvious repercussions from turning that on its head and instituting policies that don't make any clear sense outside of the very, very narrow view of the impact that it will have on market confidence this month/year.

[DTEJD1997]

Hey all:

 

In the short term, I think there will be few consequences.

 

In the long term, I think all sorts of craziness will happen.

 

How will people retire/build for their future?  Pension plans will be absolutely ruined.  GM is expecting to get a 6.5% return on their capital.  Might be pretty hard to do.

 

Additionally, let us say that you are an individual.  You work hard all your life, save & invest your money.  As you get towards retirement, you start pulling your money out of the market.  Where do you put it?  In a negative interest rate account?  That is going to incentivize people keeping capital in the market at all times.  What happens if the market goes down 30% a couple of years before you retire?

 

Then you are going ot have all sorts of problems with cash.  The big wigs will want to get rid of it, control it.  I used to work in a business where cash was needed.  It was need for several reasons.  Some of the customers/suppliers we were working with were of "sketchy" financial standing.  They weren't doing anything illegal per se, they just had TERRIBLE credit.  Their businesses were under capitalized.  We were also dealing with used items.  Items sold on an "AS-IS" basis.  So you did not want to take a check, you didn't want to risk a chargeback or dispute with a credit/debit card.  Cash worked...  Of course, the higher ups don't have to deal with such trivial matters.

 

I also think that getting rid of cash, or restricting it is going to REDUCE trust/belief in the government.  It might breed open revolt, but it is going loosen social cohesiveness.

 

People are also going to revolt at "favored" borrowers getting paid to borrow money.  The common schleb in the street is still going to pay high rates.  Favored borrowers always paid less, but they still paid something.  When the common man sees that the government or AAA borrowers get paid to borrow, and they have to pay 8% on their auto, there is a psychological threshold that is crossed.  They get PAID, I got to pay...is not going to play out well.

 

You are also going to have lots of capital flowing into gold/silver/diamonds/bitcoin, etc.

 

Negative interest rates are not going to end well.

[ni-co]

I think they should be very bad for insurance companies, PE, banks — anybody who's got large financial assets and wants to make a return on them. However, what's overlooked at the moment is that they should be good for large borrowers with solid (recession proof) cash flows and abilities to reinvest earnings at above average ROIs (like cable cos for example).

[TwoCitiesCapital]

I think they should be very bad for insurance companies, PE, banks — anybody who's got large financial assets and wants to make a return on them. However, what's overlooked at the moment is that they should be good for large borrowers with solid (recession proof) cash flows and abilities to reinvest earnings at above average ROIs (like cable cos for example).

 

The problem with that is who provides that to those borrowers? It's not going to take very long for creditors to realize that this is just a massive wealth transfer from creditors to debtors which should reduce the number of creditors quite substantially...so maybe the first movers of corporations benefit, but in the long term, I don't think many people will be happy to lend at 0 or sub-zero rates of return.

[marazul]

NI-CO-This is a great point. Companies that employ debt and have stable cash flows will definitely benefit. Specially, those that debt is a significant portion of the EV.

[scorpioncapital]

Some sort of increase in capital gains taxes?

 

 

 

[undervalued]

1. Since people are getting paid to borrow, they will borrow more money.

2. People have money but they don't want to earn negative interest so they spend it by buying goods/services/assets.

3. Asset prices will increase since there will be more demand from people buying them and will lead to inflation.

[doughishere]

you have things like annuities and perpetuity which are so heavily dependent on interest rates. Huge chunks of the markets are based on assumptions of greater than 0% interest rates.

 

For instance, you have all these Universities out there that have all these scholarship funds based on interest rates at say like 4%, assuming tuition costs stay the same, you need some sort of present value to establish the fund....present value of a perpetuity is 1/ DiscountRate times amounts per year...nothing exciting. So if you need to increase your amounts you need per year get 1/(DiscountRate - GrowthRate in CashFlows)...again nothing exciting well....whats that growth rate needed if that DiscountRate goes to  zero or negative?

 

Its generally assumed that people are pretty shitty at estimating the growth rate. So you throw in a negative or zero DiscountRate....suddenly you need a lot larger amount to establish that fund to get just the same tuition cost. Where do you get that?

 

 

To me thats all you need to know about ZIRP. Its almost a self sustaining deflationary(is it deflationary?) policy. And now its not even just the Universities...Social security, pension plans..yadda yadda yadda.

 

Is the logic wrong? 

 

 

I just pulled out my accounting text book.

 

 

the value of of (DiscountRate - GrowthRate) turns negative and results in a meaningless negative number. The analyst who encounters such a situation should reconsider whether a firm can generate growth at a higher rat than its discount rate forever. Perhaps the growth rate assumption is too large or the discount rate is too low or the growth will stop at some future time.

 

 

Is it meaningless any more because now you have a negative number with a 0% discount rate. Surprise! That means something now.

 

 

 

I sent this to Mr. Napier a few weeks ago. He agreed. No one else did.

[vinod1]

I think when we are talking about negative interest rates, we are talking about negative rates on sovereign debt, not on consumer or commercial debt. There is a credit premium as well that would make interest rates positive for non-sovereign debt. So credit card debt, mortgage debt, auto, vast majority of the commercial lending are going to be at positive interest rates.

 

Interest rates are negative real rates for some of sovereign debt for a long time. So I do not see what the fuss is all about going a bit deeper into negative territory.

 

Wealthy landlords used to keep their gold at goldsmiths and pay them for safe keeping. So negative rates on deposits is just going back to basics :)

 

Negative rates if they do push down all other rates even more lower (assuming they stay that way for a very long time) should support much higher equity valuations. So even though cash flows are going to be lower in an environment of weak growth and very low interest rates, equity valuations can rationally be much higher due to lower discount rate.

 

Vinod

[JBTC]

1. Since people are getting paid to borrow, they will borrow more money.

2. People have money but they don't want to earn negative interest so they spend it by buying goods/services/assets.

3. Asset prices will increase since there will be more demand from people buying them and will lead to inflation.

 

These would seem the logical outcomes and are what the central banks are looking for.

 

The question is why haven't they shown up? Or is it just a matter of time?

 

[maverick]

Long term consequences are that the rest of the world (US/Europe) ends up being just like Japan. imho there is no painless way to get out of the malaise we are in.

[Investor20]

1. Since people are getting paid to borrow, they will borrow more money.

2. People have money but they don't want to earn negative interest so they spend it by buying goods/services/assets.

3. Asset prices will increase since there will be more demand from people buying them and will lead to inflation.

 

These would seem the logical outcomes and are what the central banks are looking for.

 

The question is why haven't they shown up? Or is it just a matter of time?

 

 

Invert...always invert:

 

1. Since I won't get interest I need a lot more money to retire.

2. So save more, buy less

3. Less demand

[ni-co]

1. Since people are getting paid to borrow, they will borrow more money.

2. People have money but they don't want to earn negative interest so they spend it by buying goods/services/assets.

3. Asset prices will increase since there will be more demand from people buying them and will lead to inflation.

 

These would seem the logical outcomes and are what the central banks are looking for.

 

The question is why haven't they shown up? Or is it just a matter of time?

 

 

Invert...always invert:

 

1. Since I won't get interest I need a lot more money to retire.

2. So save more, buy less

3. Less demand

 

I think this is a chicken/egg confusion. Inverting your statement: Would you say that higher interest rates lead to higher demand?

[petec]

1. Since people are getting paid to borrow, they will borrow more money.

2. People have money but they don't want to earn negative interest so they spend it by buying goods/services/assets.

3. Asset prices will increase since there will be more demand from people buying them and will lead to inflation.

 

These would seem the logical outcomes and are what the central banks are looking for.

 

The question is why haven't they shown up? Or is it just a matter of time?

 

 

Invert...always invert:

 

1. Since I won't get interest I need a lot more money to retire.

2. So save more, buy less

3. Less demand

 

I think this is a chicken/egg confusion. Inverting your statement: Would you say that higher interest rates lead to higher demand?

 

Depends on your starting point but from here I would not be at all surprised.  But there'd be a nasty period of asset deflation first.

[doughishere]

1. Since people are getting paid to borrow, they will borrow more money.

2. People have money but they don't want to earn negative interest so they spend it by buying goods/services/assets.

3. Asset prices will increase since there will be more demand from people buying them and will lead to inflation.

 

These would seem the logical outcomes and are what the central banks are looking for.

 

The question is why haven't they shown up? Or is it just a matter of time?

 

 

Invert...always invert:

 

1. Since I won't get interest I need a lot more money to retire.

2. So save more, buy less

3. Less demand

 

 

@Investor20, I think your spot on with this...Interest income is a real part of income. You have less income you spend less...easy as that...I think the M2 hawks are not quite inverting. Theyve given Noble prizes for less thinking.

 

@ni-co, Higher interest rates lead to higher income which leads to more likely to spend which leads to more demand. Think of it on a small basis. A single mom and pop near retirement or a Grandfather on social security who only has savings in the bank. They are less likely to spend becasue the interest was their sole source of income...Americans have a Labor Force Participation Rate is at a 40 year low of about 60% so that leaves 4 out of every 10 americans required to save money if they care to have it in the future.... How quickly we forget our micro. So in a way if you have someone who does not participate in the labor force but still has savings and there is a "higher than zero" interest rate then they are "technically" earning income to be able to spend. Its almost as if they have a job but they dont work....now extrapolate this to people who work but also have a job. In a way if interest rates are "less than zero" and they have a job and they have savings then the portion of income from interest is almost a "second job." Further extrapolate this to business who think about future capital out lays based upon how much they think they are going to make in the near future....well if your a company your less likely to make those future out lays if a portion of your "interest income" is gone. You need to save that money.

 

Simple microeconomics applied to the macro level folks....they've given Nobel Prizes for less.

 

 

BLS LFPR Google Search:https://www.google.com/search?q=Labor+Force+Participation+Rate&oq=Labor+Force+Participation+Rate&aqs=chrome..69i57.402j0j9&sourceid=chrome&es_sm=91&ie=UTF-8

 

 

 

Edit: Bundesbank seems to agree with me: https://www.bundesbank.de/Redaktion/EN/Downloads/Publications/Discussion_Paper_1/2014/2014_10_27_dkp_27.pdf?__blob=publicationFile

 

There are many financial models out there that no longer make sense. What is the cost of future pension liabilities if one discounts by negative rates? Is it infinite? What is the value of the equity of companies legally bound to meet pension fund shortfalls.

 

 

[ni-co]

@ni-co, Higher interest rates lead to higher income which leads to more likely to spend which leads to more demand. Think of it on a small basis. A single mom and pop near retirement or a Grandfather on social security who only has savings in the bank.... How quickly we forget our micro.

 

You can't argue with one micro scenario when it comes to a macro decision like cutting or raising interest rates. This is the paradox of aggregation. Higher interest rates may lead to higher income for savers, but for creditors they naturally have the opposite effect; they tighten credit and this – in aggregate – slows down the economy and leads to less spending.

 

Though I doubt that negative interest rates would be very effective I don't think that central bank are so clueless that they accidentally tighten monetary policy when they want to ease it.

[doughishere]

@ni-co, Higher interest rates lead to higher income which leads to more likely to spend which leads to more demand. Think of it on a small basis. A single mom and pop near retirement or a Grandfather on social security who only has savings in the bank.... How quickly we forget our micro.

 

You can't argue with one micro scenario when it comes to a macro decision like cutting or raising interest rates. This is the paradox of aggregation. Higher interest rates may lead to higher income for savers, but for creditors they naturally have the opposite effect; they tighten credit and this – in aggregate – slows down the economy and leads to less spending.

 

Though I doubt that negative interest rates would be very effective I don't think that central bank are so clueless that they accidentally tighten monetary policy when they want to ease it.

 

 

I think thats the argument for the 4% inflation "sweet spot". Creditors will still lend if they can get an over 4% return....I havent put a lot of though into the other side of that...ill be the first to admit it.......seems like we can control inflation...we did it in the 80s. One could argue that we saw deflation in the depression yeah we did but a different kind of deflation. There are significant changes since. One is we are no longer on the gold standard...we are now on the interest rate standard.

 

You can hardly fault the central banks and those that run them...we've given them an impossible job and to be honest old ways of thinking dont work but you must keep the old ways in mind because the could one day bef very true....i just that the central banks need to think differently.

 

I highly suggest you all listen to Mr. Napiers speech that was posted here a number of weeks....I did about a dozen times and combined with some mico level academics and accounting it seems to fit....Im talking about getting a spread sheet out and do annuity payments and bond payments. nothing fancy the numbers just need some moving to where the current environment has them.

 

Edit: Look at what a lump sum of an annuity has to be if you want annual 100$ payment at various interest rates ....now take into consideration if you want those lump sum payments to grow because maybe you are a University and want to help grow your scholarship fund or pay for research and developments(a very worthy cause) now multiply that by the number of universities. Now add on every busines out there, forget the corporations, ask the "small" business owners because they really want to pay their employees more to make them more productive and happy.....When business and Universities have less money or cant count on future cash inflows they begin to cut and begin to save. This is the risk adverse behavior the smart guys talk about. When you get a "risk free" 4% growth well you are most likely going to accept that...when you have to start taking more risks for that same 4% growth well.....everyone thinks they automatically understand it but no one is s-p-e-l-l-i-n-g it out. And im not really trying to critque this board its more of the people on the tv, controlling the message and such....they always look like they have such a hard time understanding whats happening but have an opinion on how to fix it.

 

 

Who knows maybe the centeral banks already know this...they are just constrained by the forces of the people.....weve given them an impossible job.

 

vox populi - the opinions or beliefs of the majority.

[LongHaul]

Here is how I see the long term effect of low interest rates.  I think of interest as the price of money.

 

1.  More demand for money for cars, homes, furniture, etc.  With interest rates low things become cheaper when financed. 

 

2. Less incentive to save and pay down debt because it is so cheap.  What if interest rates were 20% (with similar inflation).  It would kill demand for cars, homes, etc.  Just like the early 80's. 

 

3. The central bank is another lender willing to lend at super low rates.  Potentially a cause of higher inflation. 

 

4. So eventually the price of money should correct and increase.  Who knows when.

 

I am sure this is too simplistic - thoughts?

 

 

 

[doughishere]

Here is how I see the long term effect of low interest rates.  I think of interest as the price of money.

 

1.  More demand for money for cars, homes, furniture, etc.  With interest rates low things become cheaper when financed. 

 

2. Less incentive to save and pay down debt because it is so cheap.  What if interest rates were 20% (with similar inflation).  It would kill demand for cars, homes, etc.  Just like the early 80's. 

 

3. The central bank is another lender willing to lend at super low rates.  Potentially a cause of higher inflation. 

 

4. So eventually the price of money should correct and increase.  Who knows when.

 

I am sure this is too simplistic - thoughts?

 

I get what your saying...I really do you guys see what you guys are saying. I'm saying deflation is the asset prices are to high to support current demand and as such the price goes down.

 

If price of money is down then why is demand of goods down? If money is at an all time "cheapness" then why is there not more money chasing the same or less goods?

 

If money is ceaper now then why are there less homes being built? Why is there cut backs on capital expenditures? WEB just said he's doing his part on capital expenditures then why is demand for rail down? I think implying others arnt.

 

 

If it's easier to get debt to buy a home then why isn't there a boom in home loans? And go right down the asset list...if it's so cheep to buy a car on debt then why arnt more people doing it? Why do I not see more Ferraris on the street if everyone can get a low interest rate loan so easily?

 

I have to lay down more of my already earned capital in order to get the less annually payments(interest) The return-to-outlay ratio sucks. Smaller numerator / bigger denominator

 

 

The same dollar I had in 2008 returns less than it does today. O% interest rates when I buy a t-Bill. means I pay the govt to keep it safe. I loose money buy buying a t-Bill and hold it to maturity. When I do this its no different than putting it under the mattress. shit a mattress would be better because I now have 1$ vs .99c.

 

 

If low interest rates are making high inflation then why don't we see run away inflation. Howard marks said it in the fall conference I went to. Almost literal quote: "in the 80s we couldn't stop inflation...now we can't start it"

 

Not saying your wrong long haul, I'm just saying that this isn't two ends of a spectrum and more like a sine wave where low demand is on both ends of the "interest rate curve."  Thus both extremely low interest rates and extremely high interest rates create low demand. Where a "4% sweet spot" generates the most growth...where both creditors and those taking the loans benefit higher growth better than on the ends of the spectrum. And Mr. Napier seems to agree.

 

 

[Investor20]

Here is how I see the long term effect of low interest rates.  I think of interest as the price of money.

 

1.  More demand for money for cars, homes, furniture, etc.  With interest rates low things become cheaper when financed. 

 

2. Less incentive to save and pay down debt because it is so cheap.  What if interest rates were 20% (with similar inflation).  It would kill demand for cars, homes, etc.  Just like the early 80's. 

 

3. The central bank is another lender willing to lend at super low rates.  Potentially a cause of higher inflation. 

 

4. So eventually the price of money should correct and increase.  Who knows when.

 

I am sure this is too simplistic - thoughts?

 

If price of money is down then why is demand of goods down? If money is at an all time "cheapness" then why is there not more money chasing the same or less goods?

 

.......

 

The same dollar I had in 2008 returns less than it does today. O% interest rates when I buy a t-Bill means I pay the govt to keep it safe. I loose money buy buying a t-Bill. When I do this its no different than putting it under the mattress. shit a mattress would be better because I now have 1$ vs .99c.

.....

 

I think interests rates and demand are not as much related as it is made out to be. If there is lower interest rate, one does not need to spend the extra money, they can invest in some other asset type. I am of the same opinion as doughishere that interest rates are double edged sword. Interest rates may make something cheaper to buy but will also reduce income of savers and hence it is a double edged sword. People also have to outlay more for retirement. Additionally there is no rule that one has to put their savings in a bank for interest.  There are other assets one can invest in.

 

Additionally, and importantly, I think spending is more related to perception of their personal finances and there by affordability rather than interest rates.

 

If I feel secure in my financials/job and then I might take an extra vacation. If I feel not so secure in my financials/job I might drop a vacation. But do I adjust my vacations to interest rates?  I don't think so.

 

Look at below savings rate.  It never came back to pre-2008. The reason? My thought is it is not interest rates but perception of how people feel about their financial security.

 

https://research.stlouisfed.org/fred2/series/PSAVERT

 

I think people are less calculating and more acting on emotion.  They are not saying..hey the interest rate went down by 1%..now I can buy a house with another bedroom.  I don't think people work like that.

 

[doughishere]

Ray Dalio.

 

www.bloomberg.com/news/videos/2016-03-03/bridgewater-s-ray-dalio-on-economy-investing-success

 

Fast forward to about 8.10 into the conversation. Low interest rates are not enough. Even talks about negative feedback loops.

[LongHaul]

I am not fully sure why inflation has not picked up - this has surprised me.

 

Although it may be picking up a bit now if you look at the CPI ex food and energy.

http://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=CU_cpibrief

 

Demand for homes and cars has picked up a lot of since 09. GDP has grown.  Interest rates are low but productivity growth has been low (too much facebook and twitter!).

 

Last I heard standards for home loans had tightened a lot since the 08 so this has probably constrained home credit growth.

 

Ehh forget all this macro stuff - just find a really cheap company that is recession proof!

 

 

[doughishere]

I am not fully sure why inflation has not picked up - this has surprised me.

 

Although it may be picking up a bit now if you look at the CPI ex food and energy.

http://data.bls.gov/pdq/SurveyOutputServlet?request_action=wh&graph_name=CU_cpibrief

 

Demand for homes and cars has picked up a lot of since 09. GDP has grown.  Interest rates are low but productivity growth has been low (too much facebook and twitter!).

 

Last I heard standards for home loans had tightened a lot since the 08 so this has probably constrained home credit growth.

 

Ehh forget all this macro stuff - just find a really cheap company that is recession proof!

 

too much cobf...yeah im a little spent on macro...good convo Long et al.