
Interest Rates: Naturally Negative? - toomuchtodo
https://blog.pimco.com/en/2019/08/interest-rates
======
bubble_talk
When I see people defend negative interest rates, I am reminded of this saying
by Orwell: "One has to belong to the intelligentsia to believe things like
that: no ordinary man could be such a fool."

>>One likely factor behind the savings glut and negative interest rates is
negative “time preference.” Once upon a time, economic theory maintained that
people always value today’s consumption more than tomorrow’s consumption – and
thus display positive time preference.

An alternative theory: people's time preference is still very much positive,
but becomes negative when presented with a set of equally bad options -
negative interest rates plus high risk speculative investments plus a history
of governments around the world unexpectedly seizing or devaluing wealth
building assets. To me, these bad options seem to be the making of the
governments and not naturally occurring scenarios.

~~~
beefield
Especially for rich people and for _consumption_ (not investment) it looks
_obvious_ to me that they have negative time preference for consumption. Why?
They could choose to consume all their money today to whatever they want
(business jets, charity, space travel etc) and live rest of their lives in
poverty if they face negative interest rates on their assets. That's what a
positive time preference looks like. Of course, even when rates are negative,
the rich people choose to live comfortably also in the future, even if their
total consumption is slightly smaller. And as the wealth has been
concentrating during the last decades more and more to the wealthy ones, the
interest rate needs to reflect more and more the time preference of the
wealthy ones. You want to get higher interest rates, you need to reverse the
wealth concentration.

(All of the above is completely without source or further arguments or
detailed analysis available, just my thoughts.)

~~~
pjc50
To me this comes back to the "r > g" controversy:
[https://www.ft.com/content/e1b9254e-f476-11e3-a143-00144feab...](https://www.ft.com/content/e1b9254e-f476-11e3-a143-00144feabdc0)

In order to earn a positive rate of return without simply taking wealth off
others, the overall world economy has to grow. This growth appears to be
slowing, and also significant concentrations of wealth are being stashed away
(e.g. Chinese investers in Vancouver and other cities).

Not to mention the huge "negative growth" risks presented by climate change.
There's going to be significant investment needed to reduce CO2 and/or
mitigate the impacts of these, just to maintain the same level of economic
output! An exogenous source of negative growth.

Basically the wealthy have to choose between negative interest rates,
voluntary charity, wealth taxes, sudden confiscation, or invalidation of worth
due to collapse. You can't take it with you, as the saying goes.

------
aalleavitch
The reason that there's a naturally negative interest rate isn't because
"people are getting better at saving". The reason there's a naturally negative
interest rate is because over half of the American population owns less than
nothing; they have more debts than assets. Investors simply own too much
wealth, and the general public owns too little. The economy is so lopsided
that investment is yielding a negative rate of return, because the wealthy
invest the majority of their money while the poor have to spend it just to
survive, and a lesser and lesser proportion of wealth belongs to the poor.

~~~
allana
Money doesn't have high velocity in the upper echelons of society compared to
in the bottom half. One dollar will pass through many hands if paid to a
person in the lower half of our economy, while in the top 10% this same dollar
barely makes it into one other person's hands, let alone multiple.

The economically disadvantaged chunk of society has grown as middle wage jobs
have disappeared, while their wages have effectively dropped. This is terrible
for economic growth IMO.

~~~
thdxr
Do you have a source for your money velocity claim? Intuition implies it would
be the opposite

~~~
remarkEon
How so? It checks with my intuition quite fine. Do you mean as a total volume
of dollars earned?

~~~
refurb
Wealthy people are likely to invest any cash received immediately which would
be invested or loaned out to businesses that purchase things and pay salaries.

They don't take their extra $100K and stick it under a mattress.

~~~
atq2119
Investment is a problematic word because it has so many subtly different
meanings.

Let's say you "invest" in the stock market. Does that actually _cause_ any
business to "invest" more? The answer is likely no. It'll drive up the stock
prices of the company whose shares you buy, yes, but companies don't tend to
make investment decisions based on their share price.

Conversely, companies _do_ make investment decisions based on the demand for
their products, so giving money to poor people who immediately spend it is
likely to cause more (real world) investment than giving it to rich people who
merely "invest" it.

~~~
imtringued
Even if you transferred the money directly into the bank account of those
corporations they would just merely pay it out as a dividend or give the CEO a
bonus. What then? "Invest" again?

A corporation doesn't need a third factory if no one is buying their products.
Because of deflation it may even want to get rid of it's second factory.

~~~
aalleavitch
It’s like that comic with the dog holding the ball going “no take, only
throw!”

“No purchase, only invest!”

At the end of the day the economy only works because it’s extracting profit
from consumers, if the profit you’re extracting is money you lent them in the
first place...where is the profit coming from? Hence the negative interest
rates: you NEED them to take on more debt so they can even buy things from you
to begin with. It’s the market itself saying “you need to give them more
money”.

------
opportune
I understand why you would want to set interest rates negative if your central
bank is going to buy up all that debt, but as an individual or institutional
investor why would you ever want to hold something with negative interest
instead of cash?

Why is there even a market for a bond with negative interest rates at all,
since compared to a $X bond with negative interest, $X in currency seemingly
carries less risk, more liquidity, _and_ a higher rate of return?

~~~
toomuchtodo
> but as an individual or institutional investor why would you ever want to
> hold something with negative interest instead of cash?

There are no effective ways besides these bonds to hold tens or hundreds of
millions of dollars as cash, even if you hire a warehouse, security, and store
pallets of fiat (which has been attempted). You are paying a premium for
principal safety.

You either make this choice voluntarily as an asset manager, or because you
are required by regulation or other means to hold a percentage of your
portfolio in this asset class.

~~~
somebodythere
Also cash can be made illegal.

~~~
rubbingalcohol
Technically but likely not functionally.

~~~
kingo55
True, but they can always impose greater restrictions such as how much you can
spend with cash. Cash transaction limits have been decreasing for some time.

[https://wolfstreet.com/2017/01/28/europe-limits-on-cash-
tran...](https://wolfstreet.com/2017/01/28/europe-limits-on-cash-transactions-
war-on-cash/)

------
fitech
I love the discussion on this topic. Classic HN. A bunch of pretty smart
people throwing out claims and arguing assertions with no evidence or even an
inkling of how they could justify their claims.

Perhaps this topic is especially suited to these types of arguments as
economics and financial instruments _seem_ to follow some sort of intuition.
The problem is that you can have lots of ideas about what causes something but
unless you can build a model that seems to reflect the world properly and then
introduce your change and see if it results in the outcome you expected, you
have no idea if it is even close to possibly true.

Arguing off intuition is fun and could even give you some ideas but it is
ultimately pointless if you don’t test your intuition and correct it if you
are off.

~~~
bubble_talk
Unlike, say, the design of an actual rocket ship (where it is perfectly OK to
leave everything to the experts), the economy is the truest form of democracy
- of the people, for the people, by the people and all that. You cannot really
opt out of it. And ignoring it is generally a bad idea. And to make it worse,
someone you don't know and cannot influence (and is generally unaccountable to
the elected political class also) controls policies which directly affect your
livelihood.

We probably need more discussions, not less. But I agree with you that folks
should also spend more time learning about economics. If you think there are
good sources for learning the subject, please let us know.

------
xchaotic
Obviously this article shows up when the negative rates are already here, with
the benefit of hindsight. What I am more interested in at this point is what
is a good, safe alternative for a small time investor who’s already overweight
on equities and housing. Bonds used to be the sensible pillar that worked at
times when stock market crashed and now it doesn’t really make sense to use
them for a small guy.

~~~
all_blue_chucks
It's only government bonds that go negative. Corporate bonds will always
provide a positive yield.

~~~
christophilus
Apple issued negative bonds in some European country recently, if I understand
this[0] correctly. Anyway, I don't think there's anything preventing a company
from issuing negative bonds. Whether or not anyone would buy them is another
question.

[0] [https://markets.businessinsider.com/bonds/apple_incsf-
notes_...](https://markets.businessinsider.com/bonds/apple_incsf-
notes_201530-bond-2030-ch0271171693)

------
ZainRiz
The article presented and dismissed a valid alternative in the same breath:

"average net monthly payroll gains have now slowed [and] aggregate hours
worked for production and non-supervisory workers are now contracting...,
something that usually doesn’t happen outside of a recession."

We could instead be entering a recession. They tend to happen about every 10
years, and we're a tad overdue for one now.

~~~
freddie_mercury
> They tend to happen about every 10 years, and we're a tad overdue for one
> now.

Though it is oft-repeated, it is not just wrong but meaningless to claim that
recessions "tend to happen about every 10 years".

If we look about the NBER data on recessions[1] there is not a single way of
measuring that has a 120 month cycle. Not if you measure trough to peak. Not
if you measure trough to trough. Not if you measure all recessions,
1854-present. Not if you just limit yourself to post-World War 2,
1945-present.

The average length of a post-WW2 expansion is 58.4 months, or under 5 years.

But, as should be clear from the data in the link, averages are pretty
meaningless. Even if we _pretend_ recessions are normally distributed (and
there's no reason to believe that), the standard deviation is 33 months,
nearly 3 years. Meaning there is a tremendous amount of variance, such that we
can't say things like "we're a tad overdue".

But, especially on HN where any scientific study has immediate replies about
small sample size, we should all know that something that only has 11
observations (post-WW2) or 33 observations (1854-present) is far too few to
draw any actual conclusions from.

What's more, any claims about "the average time between recessions" can't just
look at the US, unless we are claiming there is something so unique about US
economic activity that we don't need to account for out-of-sample data around
the world.

Australia, famously, has gone 27 years without a recession. So much for "they
happen every 10 years". Japan had no recession from 1961-1993 (32 years). The
Netherlands had no recession from 1981-2008 (27 years).

And on the other side, there's Greece, which has had 3 recessions just since
2010. Or Argentina which has had 5 or 6 recessions in the past 20 years.

If you look at this chart of economies around the world and their incidence of
recessions[2], it should be pretty clear there is no such thing as a 10-year
cycle.

It is just a made up story. The same old made up story of humans seeing
patterns in data that aren't actually there.

[1]: [https://www.nber.org/cycles.html](https://www.nber.org/cycles.html) [2]:
[https://amp.businessinsider.com/images/59de54466d80ad23008b5...](https://amp.businessinsider.com/images/59de54466d80ad23008b5d08-640-788.jpg)

~~~
ZainRiz
Are you saying my high school economics professor taught me something without
verifying it's authenticity and just relying on social proof?

mild_shock.jpg

<seriously>that was a good reminder though to revisit my cached belief, thanks
:)</seriously>

------
scottmsul
My understanding is that interest rates were cut originally in order to
provide a "safe landing" instead of a "sharp drop" after the last economic
crisis (and that they were left low since then). If interest rates are imposed
externally by Central Banks instead of by a free market, how do we know what
the natural rate would be? Do Central Banks attempt to adjust interest rates
towards the natural rate or is it in some sense completely arbitrary/detached?

~~~
H8crilA
The article is talking mostly about long term interest rates (on 10, 20, 30 yr
government bonds). Those are set by the market, by a simple demand/supply
mechanism on individual bond issues. Things like QE have some impact, but the
impact is hard to gauge. The central banks normally determine only the short
term interest rates (up to 3-6 months).

Note that even as QE is being slowly reversed in the United States and the
short term interest rates have been raised - the 10yr, 20yr, 30yr treasury
yields are still tanking like crazy. So it is _not_ the fault of the central
banks, which is the point of the article.

In short - people are buying bonds which eventually drives the yield below
zero. There's no rule that says "a bond can only be sold at below the levels
that the 0% yield implies", therefore brace yourself for the possibility of
breaching this level. For any currency, including USD.

~~~
scottmsul
> The central banks normally determine only the short term interest rates (up
> to 3-6 months).

But if the short-term rates are manually set by central banks to be
artificially low, wouldn't that be the primary driver behind negative long-
term interest rates even if the exact number is determined by supply and
demand? The article is talking about natural drivers like "negative time
preference" which just sounds wrong.

~~~
H8crilA
Well 10yr or 20yr should still be above zero even if short term rates are kept
around zero for an extended period of time. This is due to the cost of locking
money in for a long period of time. What the article is trying to say by
"negative time preference" is that this sound logic: "I'm giving you money for
20 years instead of lending money 80 times for 3 months each time; pay me more
for that privilege" is disappearing in the market.

------
roenxi
I don't understand why people are just shrugging off the adjective
'naturally'. Interest rates in the present system aren't natural, they are set
by the central banks.

A system where a small number of central bankers choose a number might be a
good system, but to call it natural is an abuse of language. If the 'natural'
rate for lending money was 10%, we'd never be able to find it because the US,
European and whichever other central banks would intervene.

~~~
qroshan
which part of savings glut do you not understand?

~~~
roenxi
I understand what a savings glut is.

The point is, we wouldn't know if we had one because that the interest rates
are a number being chosen by a small committee. We might not have a savings
glut, we might have a natural rate of interest at 10% that is being suppressed
by central banks.

There is a minor pension crisis in the United States and their infrastructure
is not in great shape. That doesn't make it look like there is a savings glut.
There is a lot that needs to be done.

------
kebman
This Danish bank has a -0.5 percent interest rate. Source (in Danish
language): [https://www.jyskebank.dk/bolig/nyheder/realkredit-med-
negati...](https://www.jyskebank.dk/bolig/nyheder/realkredit-med-negativ-
rente) It still looks like it'll actually be over 0 percent with fees and
costs.

~~~
gruez
Excuse me what? If something is already negative interest rate, how would fees
and costs (which are also negative) push that to 0?

~~~
refurb
Cash you get (loan amount) minus cash you give (payments + fees) will give you
a net interest rate.

With negative mortgage interest rates you might borrow $200K and only pay back
$190K, but if there are $10K in fees, then you're net interest rate is 0%.

~~~
zxcmx
Hm. This is going to be a dumb question but why wouldn't you borrow a billion
dollars, spend your 5 million immediately, then pay the rest back in
instalments?

~~~
kebman
Because the bank would never let you borrow a billion dollars unless you could
prove to them that you also have the income AND the discipline to service such
a loan. For that you'll have to show them quite a bit about your personal
economy, which may even include showing them your tax bill. They'll also want
papers that prove that they have a stake (mortgage) in what you're loaning
money for. On the other hand, if you know your way around law and certain
organizational structures, then there are more ways than one to get quite
exorbitant loans depending how you go about it. ;)

------
gridlockd
The market must simply be anticipating interest rates going even deeper
negative, especially in the EU, where there's a huge amount of sovereign debt,
collateralized across different countries.

The "natural" demand is there in the form of reserve requirements by European
banks. This is limited by the amount of cash that banks can store at cost, but
that practice can restricted or eliminated:

[https://www.imf.org/~/media/Files/Publications/WP/2018/wp181...](https://www.imf.org/~/media/Files/Publications/WP/2018/wp18191.ashx)

------
bryanlarsen
Risk free interest has been called "welfare for rich people", money for
nothing. You shouldn't expect a return unless you put your money to work.

~~~
pmiller2
That makes no sense. Rich people are precisely those people who are most able
to take risks ("put [their] money to work.") Nobody has millions sitting
around in bank accounts earning the risk free rate when they can afford to
take risk and earn more on average.

------
worldvoyageur
Negative interest on wealth is the historic norm for people who have a lot of
it. Think storage costs for gold, guards (and maintenance) for your palace, or
your yacht - not to mention the crazy depreciation.

For the ultra rich, 50 basis points of holding costs would arguably be a
bargain. Even normally wealthy people don't hesitate to pay 200 basis points
for their wealth to be managed in, for instance, mutual funds.

[https://twitter.com/TheStalwart/status/1155840864146661378](https://twitter.com/TheStalwart/status/1155840864146661378)

~~~
gridlockd
Except when you're giving out a loan you're not asking the debtor to "store
the wealth", you're asking them to pay you back the principal plus interest
when the loan matures.

The debtor is free to do as they wish with your money in the meantime. The
debtor is also "free" to default and not give you back anything. The interest
rate is supposed to reflect that risk.

In the case of a government bond, you either have the risk of sovereign
default, or the risk of currency devaluation to pay back otherwise
unservicable debt.

The idea that already heavily indebted governments will be "storing your
wealth" is completely naive. They'll be playing this game until suddenly they
can't hide the massive inflation anymore, then they'll have to hike interest
rates to double digits to get it back under control. This literally just
happened in Turkey last year, but it also happened in the US in the seventies.

~~~
worldvoyageur
I agree. The difference is that at large levels of wealth, levels beyond what
most of us can realistically imagine happening, then storage becomes an issue.

No regular person is going to buy a bond with a negative interest rate. Just
hold cash. But once you start to have large amounts of cash, different
considerations enter the picture. How do you store it? Security guards. Guards
to watch the security guards. Too much cash is hard to spend, so you want it
in electronic form.

The market is now saying that for certain types of cash in electronic form,
the risk adjusted fee for creating the electronic record and holding it for
you is greater than the interest they will pay you for the money.

In that way, the net interest rate including all factors such as the risk of
default, ends up negative.

------
ptah
I wonder if periodic jubilee style debt forgiveness as in ancient societies
could help clear the stagnation of money flow implied by this article

------
Animats
Negative interest rates should result in storing giant shrink-wrapped bales of
currency in vaults. Is that happening yet?

------
dpc_pw
Just wait when the people accumulating these savings get a bit older, and
decide that now it the time to use them.

~~~
imtringued
What if they give the money to their children?

~~~
dpc_pw
Their children will start to spend them.

------
ackbar03
Are stocks still the best asset during negative rates and contracting growth?

------
acd
I argue that centrals banks are a monopoly that artificially manipulate
interest rates in the favor of banks.

Low interest rates drive up home prices as people can borrow more with the
same monthly payment. High house prices hurts first time home buyers younger
generations the most. Older generation do not need to loan to buy a home as
much as the have enjoyed price gain on their homes.

This is a form of generation inequality. Parents who have children will have
to think how the will afford home purchases with negative interest rates.

~~~
imtringued
Easy, just reduce the interest rates until even the children can afford their
70 year mortgage.

------
rolltiide
I like what this perspective adds, where Central Banks are only reactionary.
Yes, Central Banks _want_ to distort the market so that savers are forced to
invest if they want to keep their wealth growing.

But adding another dimension to why savers do what they do is fascinating.
Time value and life expectancy. Very fascinating. I don't think it explains
the last 10 years as an accelerant to suddenly consider this, but it is
interesting how it happens to coincide with other monetary policy adjustments.

Its like people stopped trusting the markets and money supply, so central
banks reacted to add liquidity to markets. This coincided with people
realizing en masse that they can also delay gratisfaction for a rosier
economic reality, and Central Banks react to that further by trying to push
saved liquidity in the markets.

So far, private persons have barely budged and will rather pay for the
privilege of keeping their money.

------
djyaz1200
5 months ago on HN...

10 points by djyaz1200 5 months ago | parent [-] | on: U.S. personal income
posts first drop in over thre...

"We can't sit there and leave interests rates low forever" ...says who? What
force dictates that the equilibrium for rates must be higher? Yes that's
historically been the case but that doesn't mean that's the right path for us
now and in the future. I would argue that low interest rates will be and need
to be the new normal.

Interest is the ultimate rent seeking activity. The fed funds rate is a form
of price fixing for banks whereby they collectively decide how much interest
they can extract from the economy without killing it. Why must this be the
case, the economy should be allowed to run much hotter for much longer.

Inflation is less of a risk now because of technology + globalization, right
now we are experiencing significant deflationary pressure as products and
labor converge towards global pricing/wages.

Our economy and government will be in very serious trouble if we have to pay
higher interest on our significant national debt, so the government has a big
interest (pun intended) in keeping rates low to protect its own financial
solvency.

Finally, high interest rates imply money is scarce and that's far from the
case now. Having large sums of money is not what it used to be, you're
competing against a lot of other people and organizations seeking to deploy
that money productively for a return. This generates downward pressure on
market interest rates as evidenced by European Central banks going below zero
to negative rates.

~~~
remarkEon
>Inflation is less of a risk now because of technology + globalization, right
now we are experiencing significant deflationary pressure as products and
labor converge towards global pricing/wages.

I've seen this point frequently cited on blogs, but I've yet to see any
academic data that supports it. Intuitively it makes sense to me. I just
haven't seen any raw data that backs it up yet. Indeed, isn't this what Trump
and Brexit are trying to _reverse_?

~~~
djyaz1200
I agree, I have yet to see hard data on this but academic research tends to
shed light on things long after the fact... while a big part of making money
is about what is happening right now. Anecdotally I've seen (and you probably
have too) that I can buy many of the items I need for daily life for dirt
cheap online, and when I need labor for my company I can hire
nationally/globally on sites like upwork for a fraction of what local talent
would cost. Both have low transaction costs and because of ratings I waste
much less time and money buying the wrong thing or hiring the wrong person...
which is an aspect of inflation.

That final point is probably worth study. My thesis would be that when the
economy is hot everyone is in a hurry and more likely to hire people/vendors
and buy things that aren't ideal. Online rating systems tend to direct demand
to the vendors who can successfully satisfy that demand. The web also makes
discovery of new vendors and products very quick lowering the switching costs.

