>>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.
(All of the above is completely without source or further arguments or detailed analysis available, just my thoughts.)
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.
In essence, the market is simply an economic manifestation of evolutionary theory.
But the same way if evolution took place for an organism with rapid mutations and a short life cycle across seasons, you'd potentially have most of the species adapting to cold weather and then suddenly dying off during summer, our short outlooks are probably creating market optimizations that are adaptive in the short term but maladaptive in the long term (as an obvious example, trying to cover up global warming instead of plan around its inevitability).
I keep seeing the market make changes that make sense if the world was going to end in the next five years, and dig itself into a deeper and deeper hole, continually confident in its wisdom.
>>being presented with options like negative interest rates ought to nudge people further together (I think you meant towards) current consumption
The hypothesis in the article is that the reason near-zero and even negative interest rates are seemingly required to give the same kind of nudge now is that the underlying preference for current consumption has weakened substantially. The other side of this coin being that people will now happily lend money for a much lower rate because they now value future consumption relatively more than was previously the case (the 'natural rate of interest' has gone down).
>>the underlying preference for current consumption has weakened substantially
I have a feeling this is a rabbit hole I don't want to go down :-) - but has the underlying preference for current consumption weakened substantially because of (the author's claim) that people are living longer after retirement, or is it because people feel current consumption isn't giving them their money's worth? When you hand in your dollar, you expect to receive something worth that dollar.
In other words, if people suddenly woke up tomorrow and started accepting gold as currency, will the preference for current consumption be as weak? Or will it return to the previous levels because it is easier to see if you are getting your "unit of currency"'s worth? To be clear, I don't know the answer. But if it is the latter, then people's time preferences may not have really changed.
Here's another possibility, though: what if a lot of the consumption that was stimulated since the GFC was really capital expenditure brought forward - things like households upgrading and replacing their durable goods - replacing that dodgy fridge a little earlier than was planned, that sort of thing? Eventually that well will run dry, and households might well start saving instead of buying concert tickets or whatever.
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.
I'm pretty amateur when it comes to math, but I'm working on it.
They don't take their extra $100K and stick it under a mattress.
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.
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.
“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”.
Median net worth is $97k, and between 80 and 90 percent of households are above zero: https://dqydj.com/net-worth-brackets-wealth-brackets-one-per...
>To derive this, I initially take the nominal net worth aggregates for each wealth group that are provided by the Federal Reserve and subtract out consumer durables. Consumer durables are things like cars and fridges that many academics who work on wealth distributions do not consider wealth. The average person in the top 1 percent owns around 32x as many consumer durables (in dollar terms) as the average person in the bottom 50 percent owns. So the subtraction of them reduces the inequality between the top 1 percent and bottom 50 percent.
From there, I adjust the 1989 figures to 2018 dollars using the CPI-U-RS price index. This is what the Federal Reserve also does to adjust wealth figures over time in its Survey of Consumer Finances reports.
What the final product reveals is a 2018 where the top 1 percent owns nearly $30 trillion of assets while the bottom half owns less than nothing, meaning they have more debts than they have assets. This follows from 30 years in which the top 1 percent massively grew their net worth while the bottom half saw a slight decline in its net worth.
Does the bottom half own less than nothing when summed, or does every person in the bottom half own less than nothing?
IMO "net worth" is kind of fuzzy, e.g. people have organs that could be sold for profit but those aren't included in calculations. I'd rather look at income minus expenses.
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?
However, sometimes they have more money than their investment prospects can handle. Normally under those circumstances, they would buy treasuries from the federal reserve, which return the "risk-free rate". They always want to invest their money in things that return more than the risk-free rate, but sometimes they can't find enough stuff to invest in that they think will have a better return. In those cases, they're forced to buy treasuries.
Now, if the risk-free rate is negative, you might reasonably ask: Why doesn't the bank just keep cash? And the answer to that is that they're legally prevented from doing so. Banks have to maintain their capital reserves at the Fed, and the Fed pays them the "federal funds rate" on those reserves. So if they can't lend out the capital, they have to keep it with the Fed, where it earns whatever rate the Fed chooses to give them.
Some cursory research suggests this is not the case. The Federal Reserve website states: "Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks." 
How does what you said mesh with the notion that keeping cash might be riskier / more cumbersome than investing in the "risk-free" treasury bonds?
Banks are required by law to keep a portion of their assets on deposit in reserve. So if a bank has say, 1 billion in deposits, they might be required to maintain a balance with the Fed of 100 million.
What I think you're asking though is "why don't they just not keep the cash at the federal reserve". And the answer is that that's just not a thing you can do. Your bank maintains an account with the Fed - that's how it actually "stores" money. It can also physically store cash, but that comes with carrying costs (protecting it, etc.). Those carrying costs are one form of a negative interest rate.
At the end of the day, someone is storing the money somewhere. And the root-level money storer in the economy is the Fed. If the Fed wants to charge you 0.5%/year to store your money, what are your alternatives? You could keep physical cash. But then you have to protect it. You could invest in other assets, like stocks/bonds/mortgages, but those have risks. If you can't find any investments you like, and you don't want to physically store the cash, you don't really have any other choice.
No, they’re not. They must hold certain quantities of reserves with the Fed. But banks are free to hold the rest as cash in their vaults.
This is why many countries with negative rates still have zero deposit rates.
Also banks and certain investors are mandated to purchase debt with certain ratings - in the absence of positive-yielding appropriately rated bonds they have no choice but to accept the negative yield.
So for example let's say you bought a -0.1% yield, but newly issued bonds are now only offering a -0.5% yield you can now actually sell your bonds paying out -0.1% at a profit, since even if they paid you a 3.5% premium on the price you paid, it would still be more attractive than the rate on offer for new bonds.
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.
But in the EU, the deposit rate set by the ECB is -0.40%. So that would explain why EU banks would be willing to buy negative yielding bonds instead to hold in reserve, as long as the yields on those are less negative.
But then the yield on German bunds is actually even lower, hitting -0.60% recently, so it's not just that.
I have a hard time seeing interest rates continuing to drop, however. (On the other hand, I never thought I'd see them this low. But they can't keep going lower forever... can they?)
If you have $1000 today and can either spend it now or put it in the bank and withdraw $999 a year from now, what would you do? I suspect some would spend it now.
But what if that number goes down to $990 or $975? More and more people will be willing to spend it now instead of savings therefore "growing" the economy now.
First, since you don't have to make payments, you can't default.
If you can't default, why bother with qualification?
If you don't have to qualify, is there an upper limit to how much you can/should borrow?
If there's no upper limit and you never have to pay, it doesn't matter whether the seller charges $100k or $1M or $10M.. it demonstrates that the entire system is entirely made up.
Negative interest rates make sense if you consider them as a lender trading current cash-on-hand for future cash flow. That is, the bank has $200k today, but it would rather see that broken up into payments over 10 years, even if it has to pay you to do it.
When viewed through this lens, it becomes clear that the factor driving this is likely that the bank is being disincentivised from storing the cash directly.
In fact, I would be surprised if you could get away with no payments (a balloon payment loan, as it were). I would be rather shocked if they were offering such loans.
Absent data that they are actually offering such loans (balloon and/or untethered to the price of the property), I find your conclusions unwarranted.
"In Denmark, the ultra-low interest rate environment has in turn caused home prices to increase as borrowers could afford pricier homes."
This applies whether you are a person with a wallet/mattress, or a bank with a high security vault.
That happens regardless of the interest rate and affects both cash and bond/treasuries.
Institutions don't have that luxury - the government doesn't insure large amounts of cash. If they keep it in a bank and the bank goes under, they lose their money. So they keep their money in national governments, which are far safer than banks.
Due to the low interest rates German insurance companies are already considering to store cash in their own vaults instead of buying bonds: https://translate.google.com/translate?hl=&sl=de&tl=en&u=htt...
Slightly negative interest rates work because physically storing cash is going to be more expensive than buying bonds (especially if you factor in costs for security, insurance, etc.). But if interest rates decreases further it's soon going to be cheaper to store cash, which is going to create a lower bound for the interest rate (assuming the government doesn't prohibit storing large amounts of cash).
So your guess is that insurance companies, companies for which their entire business model revolves around risk management, are not taking into account something as mundane as risk of theft?
That's a... curious line of reasoning.
Bonds are claims on sovereigns with a printing press.
What has a lower chance of default?
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.
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.
Government bonds in foreign currencies. Of course this exposes you to whatever that country does with their central bank and to foreign exchange rates.
Corporate bonds, obviously riskier than government bonds but at least you can get positive interest rates in your preferred currency
Preferred stock, which are similar to bonds. Before you invest in these, make sure you know how they work. They can be called back by the issuer
Other asset classes which are less safe but could help you diversify: crypto, commodities and precious metals, collector's items and art, foreign currencies. Wouldn't really recommend putting too much money in this
Put your upfront costs at the first year's row (you're buying the system).
Calculate how much the system will save you in the current year (365 days), and put that in another column ("energy income") on the first row.
Each future energy income row gets discounted by ~7% multiplicatively: (1/1.07) * prev_row. This is to account for your ability to earn money from other investments, and to discount the future energy flows because of uncertainty. You can tweak this number up or down if you think the regulatory or technical value of solar energy is riskier than I do, or have different opinions about the stock market.
If the sum of the energy income column is bigger than the sum of the expense column, it's a good idea to buy solar. Shop around for the best deal you can get.
Google Sunroof: https://www.google.com/get/sunroof
Always buy the panels (no PPA), don't buy storage unless your net metering agreement with the utility is terrible (likely kills the ROI, storage isn't cheap enough yet). Ensure your tax liability is enough to capture the full 30% federal tax credit. Check for state, utility, and SREC benefits in your area. Panels are 25 year warranty, stay away from SolarEdge inverters; their mortality rate has skyrocketed over the last 12-18 months. Paying cash is best, otherwise find the cheapest debt you can find to finance whatever remains after incentives.
So your ROI is pretty much calculated with:
How much do the panels cost (installed)
How long do they last, whats expected maintenance, etc
How much energy are they expected to produce
Whats your electricity bill.
From there its pretty simple math. The hardest part is how much energy they are expected to produce, and no online calculator will help figuring out how much sun hits your roof.
There's also no limit to the amount you can buy.
Bottom line is that if there are still positive yielding bonds in a market dominated by negatives (we're not yet there) the risk of default is priced in.
Bitcoin makes zero sense as an investment. Doubly so during a recession.
"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.
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 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, 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.
<seriously>that was a good reminder though to revisit my cached belief, thanks :)</seriously>
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.
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.
Central banks attempt to adjust interest rates to keep inflation at a target rate, which is a balancing act between maintaining a stable currency and stimulating (or resuscitating) an economy.
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.
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.
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%.
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:
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.
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.
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.
That is not the only thing interest rate is supposed to reflect. Interest rate is supposed to also reflect the price of transferring your consumption over time (if you borrow , you want to consume earlier, if you lend, you want to consume later). And there is no real  reason why this price would have to clear only at positive values. So you have also possibly negative components on affecting the interest rate, thus it is completely feasible that the total interest rate is negative.
 outside the flawed assumptions of economics textbooks, that is.
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.
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.
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.
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?
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.