Interest is so low that Germans have to pay for savings

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paulsiu
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Interest is so low that Germans have to pay for savings

Post by paulsiu »

http://www.telegraph.co.uk/finance/news ... banks.html

Interest rate has dropped so much that people now has to pay to keep money in the bank. The US had some deflation in the past as well. Did it ever get to the point where people have to pay banks to hold their money?

Paul
toto238
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Re: Interest is so low that Germans have to pay for savings

Post by toto238 »

While people in the US have been crying "hyperinflation", the rest of the world has been trying to fight off devastating deflation. It's a good reminder that you should be hedged against deflation in your portfolio as well. Just because long periods of deflation haven't happened in America recently doesn't mean they won't happen ever. And considering that Japan and Europe are struggling with deflation right now, the possibility is very real that America could too.
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SimpleGift
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Re: Interest is so low that Germans have to pay for savings

Post by SimpleGift »

paulsiu wrote:The US had some deflation in the past as well. Did it ever get to the point where people have to pay banks to hold their money?
There was an article last year in The Big Picture blog with a bit of history on negative nominal interest rates:
David Kotok wrote:There is only a limited history of the use of negative interest rates. Many decades ago, Switzerland discouraged incoming Swiss-franc deposits by imposing a negative interest rate on balances placed with Swiss banks. In other words, a person deposited money in the bank, and the bank charged the depositor for the privilege of keeping it there.

During the financial crisis in the US, the Bank of New York imposed a negative interest rate – a penalty – on deposits over $50 million. The bank essentially told customers to remove their money.

^^^Correction: This policy was apparently proposed, but never implemented.

Sweden’s central bank, the Sveriges Riksbank, also attempted a negative interest rate during the financial crisis but quickly reversed its policy. I had the opportunity to discuss the Swedish experience with the governor of the central bank at the Global Interdependence Center (GIC) meeting in Helsinki. Governor Stefan Ingves was quick to point out that benefits from negative interest rates did not seem to be observable. He did not get into the costs associated with negative interest rates, but he did affirm that it was unlikely that Sweden would use them again.
Last edited by SimpleGift on Wed Nov 05, 2014 5:27 pm, edited 1 time in total.
Grt2bOutdoors
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Re: Interest is so low that Germans have to pay for savings

Post by Grt2bOutdoors »

Simplegift wrote:
paulsiu wrote:The US had some deflation in the past as well. Did it ever get to the point where people have to pay banks to hold their money?
There was an article last year in The Big Picture blog with a bit of history on negative nominal interest rates:
David Kotok wrote:There is only a limited history of the use of negative interest rates. Many decades ago, Switzerland discouraged incoming Swiss-franc deposits by imposing a negative interest rate on balances placed with Swiss banks. In other words, a person deposited money in the bank, and the bank charged the depositor for the privilege of keeping it there.

During the financial crisis in the US, the Bank of New York imposed a negative interest rate – a penalty – on deposits over $50 million. The bank essentially told customers to remove their money.

Sweden’s central bank, the Sveriges Riksbank, also attempted a negative interest rate during the financial crisis but quickly reversed its policy. I had the opportunity to discuss the Swedish experience with the governor of the central bank at the Global Interdependence Center (GIC) meeting in Helsinki. Governor Stefan Ingves was quick to point out that benefits from negative interest rates did not seem to be observable. He did not get into the costs associated with negative interest rates, but he did affirm that it was unlikely that Sweden would use them again.
Don't know who David Kotak is but that information posted above is factually incorrect. I'll let you do the digging, since you posted it. :)
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kramer
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Re: Interest is so low that Germans have to pay for savings

Post by kramer »

I had read before that German depositors could make a lot of money in the event the Euro was disbanded -- all their deposits could be converted to German Marks at a favorable rate. And so there is more demand to save money in Germany than in some other Euro countries. Hopefully, someone can provide more detail.
FrugalFrida
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Re: Interest is so low that Germans have to pay for savings

Post by FrugalFrida »

For the consumer the rates are usually higher, I have 1.0/1.2/1.3% in my saving accounts. The central bank lowered the rate from 0.25% to 0% a week ago.
Grt2bOutdoors
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Re: Interest is so low that Germans have to pay for savings

Post by Grt2bOutdoors »

The Germans would do well to pay off any nominal debt if they hold it - since cash is a losing asset, paying off liabilities is a win-win.
The same could be said of those who hold nominal debt here in the States - if your return on assets with similar matching duration is below the rate paid, then debt reduction is a prudent move. If you really feel deflation is coming, those I and EE bonds look enticing; no penalty to hold them. Full blown on deflation isn't here just yet, as many lenders are paying rates above zero.
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SimpleGift
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Re: Interest is so low that Germans have to pay for savings

Post by SimpleGift »

Grt2bOutdoors wrote:Don't know who David Kotak is but that information posted above is factually incorrect. I'll let you do the digging, since you posted it.
Not sure what you're getting at, but the Federal Reserve Bank of St. Louis includes similar examples, from both the U.S. and Europe, in their January 2013 report:

How Low Can You Go? Negative Interest Rates and Investors’ Flight to Safety
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Phineas J. Whoopee
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Re: Interest is so low that Germans have to pay for savings

Post by Phineas J. Whoopee »

Simplegift wrote:
Grt2bOutdoors wrote:Don't know who David Kotak is but that information posted above is factually incorrect. I'll let you do the digging, since you posted it.
Not sure what you're getting at, but the Federal Reserve Bank of St. Louis includes similar examples, from both the U.S. and Europe, in their January 2013 report:
...
Bank of New York announced the charge, but ended up not implementing it.
PJW
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Phineas J. Whoopee
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Re: Interest is so low that Germans have to pay for savings

Post by Phineas J. Whoopee »

It isn't structured as interest, but I know plenty of people who don't engage in overdrafts or anything like that, who pay more in monthly fees to their banks than they earn in interest.
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CPABOB
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Re: Interest is so low that Germans have to pay for savings

Post by CPABOB »

I seem to recall reading something about Japanese paying to keep their savings overseas after their bubble burst.
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Phineas J. Whoopee
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Re: Interest is so low that Germans have to pay for savings

Post by Phineas J. Whoopee »

paulsiu wrote:http://www.telegraph.co.uk/finance/news ... banks.html

Interest rate has dropped so much that people now has to pay to keep money in the bank. The US had some deflation in the past as well. Did it ever get to the point where people have to pay banks to hold their money?

Paul
According to the article it's only one particular bank:
The Guardian wrote: ...
Deutsche Skatbank, a medium-sized co-operative based in Altenburg, East Germany, has introduced an interest rate of -0.25pc for certain clients, blaming the European Central Bank's negative rates.
...
"We can no longer offer cover costs due to the current interest rate environment," the bank said.
...
Those with deposits of more than €500,000 (£393,000), will, rather than receiving interest on their deposits, have an interest rate of -0.25pc per annum. However, the bank said it would only actually apply this if balances went above €3m.
...
"People" is a bit of an overstatement. Very large depositors, with over three million Euros, will pay. Workin' stiffs like us won't, at least not under that policy at that bank.

Where is East Germany? I know of eastern Germany, but what's this place the Guardian refers to? The date on the article is today, not 1989.

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lululu
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Re: Interest is so low that Germans have to pay for savings

Post by lululu »

Phineas J. Whoopee wrote:It isn't structured as interest, but I know plenty of people who don't engage in overdrafts or anything like that, who pay more in monthly fees to their banks than they earn in interest.
PJW
My credit unions don't charge me fees unless I were to do something like an overdraft. What are these fees you speak of? Oh, yes, you're talking about banks.
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Phineas J. Whoopee
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Re: Interest is so low that Germans have to pay for savings

Post by Phineas J. Whoopee »

lululu wrote:...
My credit unions don't charge me fees unless I were to do something like an overdraft. What are these fees you speak of? Oh, yes, you're talking about banks.
Yup. One former colleague went so far as to brag about all the good services he received in exchange for his $8 per month.

When I opened my present S&L B&M account they said they could only offer me free checks if I signed up for their optional $5 per month service package. I replied that $60 a year sounded like a lot to pay for free checks.

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BlueEars
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Re: Interest is so low that Germans have to pay for savings

Post by BlueEars »

paulsiu wrote:http://www.telegraph.co.uk/finance/news ... banks.html

Interest rate has dropped so much that people now has to pay to keep money in the bank. The US had some deflation in the past as well. Did it ever get to the point where people have to pay banks to hold their money?

Paul
German investors are apparently quite different then US investors on average. They are very income oriented. Here is a good Economist article: http://www.economist.com/news/finance-a ... r-mattress

Any Europeans out there with some insights?

If the US gets some deflation, I'd expect negative rates could happen as our Fed is comparatively more comfortable with some inflation. Hopefully we won't have to find out.
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bottlecap
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Re: Interest is so low that Germans have to pay for savings

Post by bottlecap »

I'm shooting off the cuff here, but it seems to me that deflation a and artificially low (or negative) interest rates is not the same thing. The posts here seem to suggest they are. Can anyone explain?

JT

JT
Pacific
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Re: Interest is so low that Germans have to pay for savings

Post by Pacific »

Then the Germans should just put theri money in a place like . . . . Iceland. :oops:
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BlueEars
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Re: Interest is so low that Germans have to pay for savings

Post by BlueEars »

bottlecap wrote:I'm shooting off the cuff here, but it seems to me that deflation a and artificially low (or negative) interest rates is not the same thing. The posts here seem to suggest they are. Can anyone explain?
Rates are low now in the US with very modest inflation (around 1.6% annually). Should we get very low inflation dipping into deflation then most people would guess that the Fed will go more radical to combat it. Nobody wants a repeat of the early 1930's. Negative rates are one possible tool to discourage the lack of risk taking. In that sense deflation might be connected with negative rates (nominal or even real).
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Phineas J. Whoopee
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Re: Interest is so low that Germans have to pay for savings

Post by Phineas J. Whoopee »

bottlecap wrote:I'm shooting off the cuff here, but it seems to me that deflation a and artificially low (or negative) interest rates is not the same thing. The posts here seem to suggest they are. Can anyone explain?
...
Hi JT,

They are decidedly not the same thing, but often they'd be expected to go hand in hand.

I'm using the non-Austrian, non-Chicago School, definition of deflation as a persistent and pervasive reduction in price levels. I point that out in an attempt to forestall arguments.

In deflation one would expect the same amount of currency to buy more in the future, even without earning any interest. It sounds great, money under the mattress buys more next year, but in the broader economy it's terrible. Nobody will buy anything other than necessities, so employment collapses, capacity utilization collapses, demand for capital collapses, and consequently interest rates collapse with or without a central bank.

The so-called Crime of [18]'73 was a shift in the US from a bi-metallic standard to a gold standard. It meant indebted western farmers had to pay their debts, borrowed in silver, for all the capital goods they were forced to invest in, in gold, but faced deflation. William Jennings Bryan's famous Cross of Gold speech at the 1896 Democratic National Convention in Chicago was about allowing farmers to pay in silver, in which there was inflation. I'm not taking a political or economic position on any of this, just pointing out some pertinent history from a time when we didn't have a central bank.

Hope that helps.

PJW
Last edited by Phineas J. Whoopee on Wed Nov 05, 2014 6:09 pm, edited 3 times in total.
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Phineas J. Whoopee
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Re: Interest is so low that Germans have to pay for savings

Post by Phineas J. Whoopee »

BlueEars wrote:... In that sense deflation might be connected with negative rates (nominal or even real).
Negative real rates were a real reality just recently, as attested to by TIPS yields. The 10-year TIPS real yield was negative as recently as 6 June 2013.

[Edited to fix the quote attribution, and my apologies to both JT and BlueEars for having made the mistake in the first place.]

PJW
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