
Interest rates on some European government bonds have gone negative - cwal37
http://www.vox.com/2015/2/5/7981461/negative-interest-rates-europe
======
mrb
_" And yet it seems the impossible has happened."_

This is a great example showing how little we understand economics, which is
very ironic: economics is the study of something that is 100% man-made, yet we
cannot explain many of its aspects. Heck I am more confident in physicists
able to explain physics, and mathematicians able to explain mathematics, than
in economists able to explain economics. This is why topics such as basic
income guarantee [1], Bitcoin and cryptocurrencies, inflation vs deflation,
capitalism vs socialism, etc, are all so debated. Nobody agrees on anything
because quite frankly, we don't know how to make the economy work optimally. I
would not be surprised if, 50 or 100 years from now, widely accepted views on
economics will completely change.

[1] There was a great HN post from yesterday:
[https://news.ycombinator.com/item?id=9004287](https://news.ycombinator.com/item?id=9004287)

~~~
TheCraiggers
> _This is a great example showing how little we understand economics, which
> is very ironic: economics is the study of something that is 100% man-made,
> yet we cannot explain many of its aspects. Heck I am more confident in
> physicists able to explain physics, and mathematicians able to explain
> mathematics, than in economists able to explain economics._

Physicists and mathematicians often have the advantage that if they run an
experiment / solve a problem by using the same inputs, they can expect the
same output. Obviously this is not the case for economics, which at its core
is driven by human interactions. Not only does it often have many, many
variables, but they're also difficult to control.

In my estimation, it's actually impressive we have as good a grasp as we do on
economics.

~~~
orbifold
What I find surprising is that a Soviet style state run economy has not proven
to be more successful. By exercising central control they should have been
able to drastically reduce the number of variables and with sufficiently
sophisticated planning maybe eventually gained a competitive advantage. I
guess unfortunately it collapsed before the advent of powerful enough computer
systems.

~~~
magoghm
I don't think there ever will be a computer powerful enough to solve such a
large scale planning problem. On top of that, I don't think it is even
possible to get the data for it. Each person has his own personal "utility
function" which he is trying to maximize and it is locked inside his brain.

~~~
ArkyBeagle
It may be dated, but some writers and economists hold that people aren't even
consciously aware of their own preferences. So even if you could gather the
data from what people way they want, there would still be error.

One of the most colorful examples of this comes not from economics, but a
strange book on advertising called "The Hidden Persuaders". It also talks
about erotic images airbrushed into the ice cubes of whiskey ads :) When I'd
first heard of "Mad Men", I'd hoped it would be about that, but it wasn't.

~~~
magoghm
Yes. That's exactly what I meant when I wrote "locked inside his brain".

------
kazinator
This should be no news to consumers who have been accustomed to parking their
money in negative bonds. These are called "checking and savings accounts",
where interest is next to nonexistent, and the balance is nibbled away by
various fees.

People still put their money in the bank for similar reasons why people buy
these negative interest bonds: for example, it's secure, and cheaper than
building your own safe, putting cash in it, and guarding it.

If you want to hold some foreign currency, you could just buy it and have it
sitting in a trading account. But there are perhaps some fees involved which
are worse than parking it in a negative bond. The account may also not be
secured compared to a bond.

------
fiatmoney
One thing they don't mention as a cause is regulatory requirements to hold
certain classes of sovereign debt or other "risk-free" securities, for
instance as collateral.

~~~
bradleyjg
Do the rules forbid holding cash? At least for capital adequacy, I was under
the impression that cash, like own-country sovereign debt, is not risk
discounted. Normally you'd prefer debt to cash, but if it has a negative
nominal yield, I'd think you'd prefer the opposite.

Ditto for bonds as currency play, why not cash instead?

Frankly the only rational reason I can think of to buy a bond with a negative
yield is if the loss is less than the carrying costs of cash. And while that's
not free, it's hard to see that anywhere near 100 bps per year on large sums
of money.

~~~
aembleton
There is some costs associated with securing that amount of cash and then I
guess you'd want to insure that money in case of theft. The insurer would then
need to store a large amount in safe assets, which would then go into bonds.

I guess, maybe storage companies might move into this business but it's
probably just safer and more convenient to buy a piece of paper.

~~~
bradleyjg
The Swiss Franc, just to take an example, comes in denominations up to 1000
Franc ($1083 at current exchange rates).

According to this site:
[http://www.pagetutor.com/trillion/index.html](http://www.pagetutor.com/trillion/index.html)
$100M fits on a pallet stacked 3 feet high or so. With banknotes worth 10x as
much, that'd be a billion Swiss francs.

It's hard to believe it is going to cost you 8.12 million francs to securely
store that for two years, which is what you'll currently pay for the privilege
of owning the two year Swiss bond.

~~~
darkmighty
Remember a single fire could destroy that if you just stacked it on a pallet.
I agree 8.12 million is probably too much, but even handling e.g. USD $1
billion costs a lot (you have to bring them from the central bank I suppose?).
Even having a company that has enough capital and is trusted enough costs a
lot of money.

I think the principle shouldn't be "Interest rates will never go below zero",
but "Interest rates have a lower bound", which still stands I suppose.

~~~
xxxyy
Well then what is the lower bound? The standard way to prove inequalities that
should exist in a free market is through showing arbitrage patterns. This way
one can prove f.eg. that a call option should never be more expensive than the
underlying security, or that a call plus a put is essentially a futures
contract.

How do we show the lower bound on bond yield rate? Arbitrage executed through
a company that employs exhaustive security measures allowing its clients to
store pallets of cash? It still depends on time-varying factors, such as
employee costs, utilities, the probability of a random natural disaster or the
probability of a fire wrecking the entire building.

~~~
darkmighty
Yes, that lower bound is a function of all those things: security costs, labor
costs, etc. They can be laboriously _approximately_ quantified. But it surely
exists: for example, it's inconceivable the rate to ever reach -30% because
storing money will never get that expansive in normal conditions (please
discount apocalyptic scenarios).

------
randomname2
A lot of this is also frontrunning the central banks. The ECB has already
indicated they will buy german bonds (which have negative yield). Rates can
(and will) go even negative-er, so if you buy now and sell later, you still
make a profit.

------
cwal37
Thanks for changing the title, I always just err on the side of leaving it,
even if it is absolutely terrible (as this one originally was).

On the actual topic, it's always interesting to see things go differently than
economists expected. I fill an economist-ish role at work and it's kind of
amazing to see the union of hand wavey-ness and certainty that pervades so
much of the field. We drill down hard on data and stick with open source tools
like Python as much as possible, but I definitely look around and see
supposition treated as fact.

~~~
SixSigma
Economics is full of false assumptions.

~~~
pfortuny
You want to say "full of false truths"...

~~~
SixSigma
why not both !

------
nostromo
I can't shake the feeling we're going to see another black swan in '15 or
'16\. Maybe the epicenter will be Greece this time instead of Bear Stearns.

[http://i.imgur.com/UyM0j2M.jpg](http://i.imgur.com/UyM0j2M.jpg)

I'm curious to see what the Fed will do if we have a correction while interest
rates are at zero. I suppose 0% + QE will become standard policy rather than a
response to a crisis.

~~~
ollifi
You might be right, but I don't know if that counts as black swan. Greece and
euro troubles were mainstream headlines five years ago spring of 2010. Through
out the years the situation has been evolving and nobody of course knows how
it will unravel. I'm more surprised how slow the buildup is.

------
tosseraccount
US Treasury yields went negative in 2008 ...

[http://www.nytimes.com/2008/12/10/business/10markets.html](http://www.nytimes.com/2008/12/10/business/10markets.html)

[http://blogs.wsj.com/marketbeat/2008/12/09/three-month-
bill-...](http://blogs.wsj.com/marketbeat/2008/12/09/three-month-bill-yield-
goes-negative/)

~~~
remarkEon
Right, but what's interesting right now is that EU corporate paper had a
negative yield for a while there. That hasn't happened before.

------
api
Economists also thought stagflation was impossible before the USA in the late
70s.

~~~
zenogais
They also thought the efficient-market hypothesis was true, until the
financial crisis hit in 2008.

~~~
bobcostas55
What does the EMH have to do with the financial crisis?

~~~
the_why_of_y
EMH claims that marked prices always reflect reality, so the housing bubble of
2000-2007 (with house prices rising at twice the rate as rents) whose bursting
caused the financial crisis ought to be impossible.

------
_sword
Europe's economy is in a very bad place

~~~
pdecker
Europe is most likely in the "Late Phase" of their recession...QE will pull up
growth some....here's a macro view of the EU I did on my blog a couple of
weeks back...would love any feedback.

www.theeconomicmachine.tumblr.com/post/108174705732

~~~
cylinder
It seems to me that there really is no hope for developed, advanced economies.
There's not a lot to be done, other than high-level technological advancement,
within these countries. The high-level tech generates little tax revenue and
employs negligible amounts of human labor (actually it usually eliminates
jobs). So any economic gains will just be from productivity improvement (via
technology and regulatory reform) and selling goods and services to developing
countries.

It seems to me that the best thing these stagnating developed countries can do
is band together and really push to open and develop Africa, the rest of Asia,
India, etc. Adding a couple billion to the middle class is their only hope to
sell more goods and services; their own birth rates are never coming back nor
is immigration the answer as we've seen.

~~~
Gravityloss
Everywhere I look, I see possibilities for massive efficiency improvements,
but there just aren't enough resources to do anything but a half assed job.

Most of it is just design. A big portion is software.

Let's take an example.

Say, if the public transportation could be improved not with brute force, but
with more elegance, comfort and intelligence, then massive savings could be
realized.

My country doesn't manufacture appreciable amounts of automobiles. It also
doesn't produce oil. Few developed countries produce oil.

So using cars for transportation leaks out large amounts of capital.

We have trams in my city, but the network of tracks is so old and
unsophisticated that the trams must drive extremely slowly in many places, to
avoid slamming intersections or curves. Some foreign tram models break
constantly.

This doesn't only have the effect of making you sit in the tram longer from A
to B, it also means that for a fixed amount of trams and drivers, they will
pass the stops less frequently, meaning you have to wait longer before you can
even get on board, and the throughput capacity of the lines is less too.

And the ride is quite noisy, bumpy and can feel stressful. But the views are
beautiful, and it doesn't generate exhaust. It feels like a natural part of
the city. If a tram rolls by, it doesn't make an aggressive sound like a
thundering bus, it rolls with a gentle rumble, sometimes ringing bells.

So you could improve the functionality of the city by fixing a lot of these
problems.

Some other parts of infrastructure have even regressed. Siemens was supposed
to automate the subway system. They managed to just make the arrival time
displays at the stations unreliable (that had been working just fine, probably
since the metro started around 1982) and waste millions before the city board
finally mustered enough courage to fire them.

So we have a huge amount of medium and even very low level technological
advancement ahead of us, with large payoffs. Rankine documented spiral curves
for tracks in 1862.

And don't get me started on healthcare IT.

~~~
TheOtherHobbes
That would mean moving from a Status Economy to a Productive Economy.

Without intelligent oversight, all economies - capitalist, communist,
socialist, democratic, fascist, you name it - tend towards status production
and social differentiation as a primary product.

Sometimes useful stuff falls out in the way of invention and innovation, but
more often it doesn't. Even when it looks useful it's likely to be driven by
fetishised status display as a primary goal, and not by high-velocity deep
innovation.

Status economies are fundamentally wasteful and non-productive in any
practical sense, because most resources are hoarded by a tiny minority of
high-status individuals.

You only get real growth when resources - including innovation and
intelligence - are dispersed and farmed strategically.

This has happened occasionally in the past, and I'd like to think it could
happen again.

But it's not happening now, and any path from the current system to a
productive one is going to be difficult and messy.

In a status economy, basic needs are rationed to maintain and expand status
differentials. So public infrastructure takes a beating, because 'the public'
\- by definition - are not high status, and must always be denied easy access
to quality resources.

~~~
Gravityloss
I think that's possible to a limited extent, but it's also kind of tangential
to what I tried to say.

The parent's thesis was that technology gains in productivity are small.

I work in logistics and there adding some intelligence to a supply chain saves
millions relatively quickly. It happens to be ecological as well, as spoilage
is reduced.

So clearly there were a lot of gains to be had. In my opinion we operate on
quite rudimentary levels in many areas of life and business. We're not limited
by currently known physics. We're struck down by organizational inefficiencies
and lack of brain resources.

At some point the inter-city council allowed getting into the busiest bus line
not just from the front door but through any door. Great, we got a free
speedup! It took years to drive that through the councils, maybe because it
was a new idea (new idea here).

Now, the distribution of those savings made is another matter. And some
changes are perhaps more politically charged than others, true.

------
jhundal
I'm not sure this article gets the definition of the zero lower bound right
(though I'd love to be corrected if it does.) As I understood it, the ZLB only
applies to central bank lending rates to other banks, which if they become
negative the other banks only have the incentive to hoard cash.

------
DunbarTrout
Could someone buy one of these negative bonds in hopes to short sell it? I
barely understand shorting, but it seems like this would be an opportunity (I
realize shorting is always risky).

~~~
driverdan
Shorting means borrowing the asset from someone else and selling it, not
buying then selling.

I'd guess shorting isn't allowed but could be wrong. It certainly _should_ be
allowed.

~~~
ewood
There are secondary markets for most bonds so yes, you can short them. However
most traders would do this through derivatives such as bond futures or ETFs.

~~~
whatok
Most traders would pick the optimal instrument to express their view which
could end up being bond futures or ETFs but not always.

------
RaCaS123
Certain corporate baonds have as well. Notably, Nestle's are negative.

~~~
wereHamster
Oh, so you read the article? First paragraph...

