Yellen: "We're taking a look at negative interest rates."

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BogleBuddy12
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Yellen: "We're taking a look at negative interest rates."

Post by BogleBuddy12 »

What are the implications for investors here? Look for other investments like emerging markets bonds? Or stay the course (Total Bond Market) no matter what happens?

I assume short-term bonds would be a bad investment as well...?

Janet Yellen: Negative U.S. interest ra ... ie/1PPFHQF
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nisiprius
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Re: Yellen: "We're taking a look at negative interest rates."

Post by nisiprius »

source
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If the Fed sets a negative target interest rate for overnight deposits, that doesn't mean Total Bond will earn negative rates.

Right now, as I'm sure we're all aware, short-term rates (checking accounts, money market accounts, Treasury bills, LIBOR) are all earning very close to zero.

But longer term rates are not zero. 1.5%, 2%.

And Total Bond's SEC yield isn't zero or close to it. It's 2.20%.

And the interest rate of a bond that has already been issued doesn't change when "interest rates" change. Most of the bonds in Total Bond were issued several years ago, and for several years to come the yield of Total Bond will reflect the interest rates of the last few years, not today's rates.

And regardless of what the yield is on bonds, you are not likely to get much higher yield than Total Bond without taking much higher risk than Total Bond. I'm staying the course in Total Bond; among other things, I see no reason to think I can afford to take on more risk than I could a few years ago. If anything, it's the other way!

Finally, given all of the rumbling about possible issues in bond funds and ETFs that invest in bonds that are not highly liquid--as shown by the complete collapse of Third Avenue Credit Focused Credit--I don't think this is any time to be futzing around with bond funds that invest in something unfamiliar unless you have verified for yourself that they are highly liquid. I know that corporate bonds are not as liquid as they used to be. I know that junk bonds are considered to be a problem area. I'm not sure about emerging markets bonds. Why don't you find out if they're liquid and report back to this thread?
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scone
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Re: Yellen: "We're taking a look at negative interest rates."

Post by scone »

(In before the lock.)

Since you are a young person, you shouldn't be bothering with this stuff at all. Stick to plain vanilla bond funds, raise your savings rate, and focus on your career or business. Investing in yourself, making yourself more marketable, and having all the boring financial ducks in a row is what matters right now-- and always.

In particular, don't fool around trying to beat the market with speculative trades like "emerging market bonds." You don't know what you are doing, and the sharks will eat you for lunch.

Obliterate debt, and get that savings rate up! :D
"My bond allocation is the amount of money that I cannot afford to lose." -- Taylor Larimore
skepticalobserver
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Re: Yellen: "We're taking a look at negative interest rates."

Post by skepticalobserver »

I can't give investment advice. I will, note, however, that this morning she mentioned surprise at the widespread use and depth of negative rates in Europe and Japan. I got the sense that this is not a place the Fed would like to go. Of course anything is possible.

Before rates go below zero the Fed can take away the Dec. hike. Also, last year during a couple of auctions the 28 day t-bill sold at 0%.
Last edited by skepticalobserver on Thu Feb 11, 2016 1:11 pm, edited 1 time in total.
letsgobobby
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Re: Yellen: "We're taking a look at negative interest rates."

Post by letsgobobby »

It'd be more reason to hold TBM for the time being; as rates continue to fall, TBM will go up in value because the higher rates are that much more attractive. At some point the yield will approach near-zero or negative rates if such rates have been attained across the board, but not until/if that happens.

For non-institutional investors, it also makes CDs, rewards checking accounts, I bonds and EE bonds, etc, much more attractive.
Joey_Freshwater
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Joey_Freshwater »

Let me weight in here:

Despite negative interest rates in Europe and Japan, No bank has ever charged negative rates to customers holding cash deposits as of now. Most banks do not even have the ability from a technology perspective to charge negative rates. It will probably not matter much to normal retail customer (i.e. individuals). It probably will make a difference to commercial entities that have massive cash balances. Banks will probably just stop accepting deposits from these customers. It will also be very bad for banks as the whole notion of gathering customer deposits and paying them one rate while loaning them out at a higher rate would not make sense anymore since the more balances a customer has with you the more money you are losing.

The fed is able to influence the short end of the interest rate curve, but not the long-term rates. Since the fed raised rates back in December, long term interest rates have actually fallen. Stick with Total Bond Fund.
saurabh
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Re: Yellen: "We're taking a look at negative interest rates."

Post by saurabh »

ajacobs6 wrote:What are the implications for investors here? Look for other investments like emerging markets bonds? Or stay the course (Total Bond Market) no matter what happens?

I assume short-term bonds would be a bad investment as well...?

Janet Yellen: Negative U.S. interest ra ... ie/1PPFHQF
I think you are overthinking this bond thing from your multiple posts, not sure if it is because you are a very risk averse investor. If you want lack of volatility and predictable nominal returns invest in CDs. I personally think that yields on Treasuries and TBM are terrible for long-term investors and am willing to take on credit risk in intermediate term corporate bonds. The Vanguard IT Corporate Bond Index fund yields 3.6% for a fund with a duration of 6.4 years and half of its holding are rated A and above, and that yield is fine by me. I am willing to take the risk that we might have a crisis like 2008-2009 and see a 10% peak to trough loss. I think the probability of that transpiring is very low, and in any case credit spreads will normalize if you can hold through the decline.

I don't have any investments in the Emerging Markets Govt Bond fund, but I think for those whose risk appetite might allow them to consider investing a US high yield fund, this is a superior alternative right now. It has a yield of 5.2% vs. 6.8% for the high yield fund (although it does have slightly higher duration of 6.1 vs. 4.5 years). The debt held by the Vanguard EM fund is dollar denominated, and EM governments have much stronger balance sheets than in the Western developed world, not to mention risky developed world corporate credits, yet their debt is being priced like a junk bond fund. Keep in mind that in a flight to quality the EM bond fund will be killed, in the credit crisis it had a > 30% peak-to-trough decline.

Another practical thing to think about is that the 1.6% yield difference between investment grade credits and the EM sovereign debt on a 60/40 stock/bond portfolio is only going to make a 0.8% difference to your annual return, and in the short turn it won't make much difference to your wealth. I could use the same logic with TBM and the Corporate Bond Index, but I simply hate to have 40-50% of my portfolio in a investment with 0% expected real returns. I like my bonds to have at least a 1% expected real return in the worst case, 1.5% is better and 2.0% is awesome but unlikely without taking a lot more credit risk.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Steadfast »

Forgive me, but I do worry about a slippery slope with negative interest rates. Where does it end? And why does it end there?

Could it be the case that negative rates got so low for so long, that banks had no other alternative but to pass negatives rates down to the customer level, forcing (a) cash withdrawals to avoid negative interest, and/or (b) forcing investment in riskier assets?

One can imagine a (seemingly undesirable) economics in which the only viable alternatives are to spend or invest, and not save. That's the stated goal of zero interest rate policies: economic stimulus. A little pain for savers translates into economic growth, benefiting everyone. With all of the central banks talking about negative rates and some starting to use it, I genuinely want to know where the logic leads us. Is it really just to be dismissed? Will Bogleheads just have the same CD rate threads, but they will be about which bank has the least-negative CD rates, and everything will be rosy otherwise?
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letsgobobby
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Re: Yellen: "We're taking a look at negative interest rates."

Post by letsgobobby »

This would occur in a deflationary or near-deflationary environment, so the impulse to spend is much weaker than you suggest. This in fact is the slippery slope of deflation. The consumer benefits from delaying spending, because prices are falling. Next month, the car will cost $100 less. So spending stops... the economy contracts... prices decline further. Witness Japan. It's what global central banks are most worried about, and why they are trying to get ahead of the curve with QE and other creative maneuvers.

Meanwhile, in such a scenario, investors are willing to accept a loss in nominal value because of perceived safety, and/or because of the perception that real interest rates are still positive despite negative nominal rates (ie, rates may be -1%, but if inflation is -2%, that's still a positive real rate of return).

The deflation argument is bolstered by those looking at global demographics in the developed world.

Personally I can't predict the future so I stay 60/40. Stocks: 60% international. Fixed income: 40% TBM. 40% stable value. 20% I bonds, EE bonds, muni bonds (Vanguard intermediate tax exempt). Trying to hedge all bets, hoping to withstand either prolonged inflation or prolonged deflation or neither or both.
Quark
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Quark »

The problem wouldn't be the Fed targeting negative interest rates, it's the economic conditions under which negative interest rates would make sense.

Rising bond prices (falling rates) and declining equities indicate that the market has a dim view of the economy. One can only hope the market is wrong or that something can be done to improve things. In the meantime, stay the course (assuming you have a sensible asset allocation).
Joey_Freshwater
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Joey_Freshwater »

saurabh wrote:Forgive me, but I do worry about a slippery slope with negative interest rates. Where does it end? And why does it end there?

Could it be the case that negative rates got so low for so long, that banks had no other alternative but to pass negatives rates down to the customer level, forcing (a) cash withdrawals to avoid negative interest, and/or (b) forcing investment in riskier assets?

One can imagine a (seemingly undesirable) economics in which the only viable alternatives are to spend or invest, and not save. That's the stated goal of zero interest rate policies: economic stimulus. A little pain for savers translates into economic growth, benefiting everyone. With all of the central banks talking about negative rates and some starting to use it, I genuinely want to know where the logic leads us. Is it really just to be dismissed? Will Bogleheads just have the same CD rate threads, but they will be about which bank has the least-negative CD rates, and everything will be rosy otherwise?
CD's would probably not exist in such a scenario. Why not just move your money to a zero-interest checking account?
Steadfast
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Steadfast »

letsgobobby wrote:This would occur in a deflationary or near-deflationary environment, so the impulse to spend is much weaker than you suggest. This in fact is the slippery slope of deflation. The consumer benefits from delaying spending, because prices are falling. Next month, the car will cost $100 less. So spending stops... the economy contracts... prices decline further. Witness Japan. It's what global central banks are most worried about, and why they are trying to get ahead of the curve with QE and other creative maneuvers.

Meanwhile, in such a scenario, investors are willing to accept a loss in nominal value because of perceived safety, and/or because of the perception that real interest rates are still positive despite negative nominal rates (ie, rates may be -1%, but if inflation is -2%, that's still a positive real rate of return).
This makes a lot of sense. Thank you.
letsgobobby wrote: Personally I can't predict the future so I stay 60/40. Stocks: 60% international. Fixed income: 40% TBM. 40% stable value. 20% I bonds, EE bonds, muni bonds (Vanguard intermediate tax exempt). Trying to hedge all bets, hoping to withstand either prolonged inflation or prolonged deflation or neither or both.
Same here, more or less. Hold a good bit of all the major asset classes, and try to enjoy the ride.
We don't see things as they are, we see things as we are.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by jdilla1107 »

Joey_Freshwater wrote:Let me weight in here:

Despite negative interest rates in Europe and Japan, No bank has ever charged negative rates to customers holding cash deposits as of now. Most banks do not even have the ability from a technology perspective to charge negative rates.
Charging someone $5 a month for a checking account with $1,000 in it is a grossly negative interest rate. Banks are already doing this.
Northern Flicker
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Northern Flicker »

My take on this is that the Fed is concerned with one of the outcomes on the table: that the economy slips into recession before they get very far with the tightening campaign, and they don't have much room to cut rates to stimulate the economy
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Re: Yellen: "We're taking a look at negative interest rates."

Post by ogd »

nisiprius wrote:And the interest rate of a bond that has already been issued doesn't change when "interest rates" change. Most of the bonds in Total Bond were issued several years ago, and for several years to come the yield of Total Bond will reflect the interest rates of the last few years, not today's rates.
Actually, the yield on bonds that have been issued does change when market yields change. So the SEC yield of Total Bond reflects today's rates exactly, modulo the relatively small 30-day averaging period.

It's not helpful to think of bond coupons in isolation. The yield of both kinds (coupon and capital return) is just as good and connected by mathematics. In fact, it's in the interest of taxable shareholders that older premium coupons be traded away for lower coupon current bonds, whenever allowed by the fund's mandate.
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Phineas J. Whoopee
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Phineas J. Whoopee »

^ I agree with ogd. We go around and around here because of posters not using precise terms. I thought we had been through all of that when it comes to interest, yield, SEC yield, distribution yield, yield to maturity, coupon, cash flow, declining maturities, yield curve, real, and nominal. New posters, of course, may not know and shouldn't be bitten because of it.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Infidel447 »

I'm not a sophisticated investor by any means, but my instinct says the very fact they are looking at negative rates cant be a good thing--especially since they just raised the rate in Dec. I believe maybe the Fed should do less talking. For small fry individual investors like us I don't think it affects us much...but it is still disconcerting.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by obgyn65 »

This thread may be actionable for some.
As I wrote in another thread, I am also concerned about the possibility of negative rates, therefore I have decided to cash some CDs to buy a condo which I am going to rent out.
scone wrote:(In before the lock.)

Since you are a young person, you shouldn't be bothering with this stuff at all. Stick to plain vanilla bond funds, raise your savings rate, and focus on your career or business. Investing in yourself, making yourself more marketable, and having all the boring financial ducks in a row is what matters right now-- and always.

In particular, don't fool around trying to beat the market with speculative trades like "emerging market bonds." You don't know what you are doing, and the sharks will eat you for lunch.

Obliterate debt, and get that savings rate up! :D
"The two most important days in someone's life are the day that they are born and the day they discover why." -John Maxwell
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Tanelorn »

Joey_Freshwater wrote:Let me weight in here:

Despite negative interest rates in Europe and Japan, No bank has ever charged negative rates to customers holding cash deposits as of now. Most banks do not even have the ability from a technology perspective to charge negative rates. It will probably not matter much to normal retail customer (i.e. individuals).
You haven't been keeping up with the times. It hasn't happened in the US yet (unless you count all the junk fees for small accounts), but it's happening already in Europe:

http://www.businessinsider.com/negative ... ?r=UK&IR=T
In Switzerland, one bank is already punishing its customers for keeping their electronic money in its accounts. Alternative Bank Schweiz (ABS) will begin imposing interest charges on deposits in 2016. Current accounts will get a -0.125% rate, and deposits over 100,000 Swiss francs ($98,650, 92,420 euros) will see a -0.75% penalty. ABS feels it has no choice: "This decision on negative rates is costing us a lot of money — pretty much the equivalent of our entire annual profit last year," ABS chief Martin Rohner told AFP.
Japan, Europe, Switzerland, Denmark, and Sweden all have negative rates at this point and once they get large enough (Sweden just cut to -0.5%), the banks will have to start charging everyone. Might be time to invest in a larger mattress.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by madbrain »

Tanelorn wrote:Might be time to invest in a larger mattress.
Or pay off any debt with a positive interest rate . My 1.99% 7-year car loan and 3.25% 30year fixed mortgage look expensive compared to negative interest rate.

Personally, I don't care for deposits with a negative interest rate, but I sure wouldn't mind borrowing at a negative interest rate :)
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Re: Yellen: "We're taking a look at negative interest rates."

Post by tibbitts »

Most banks do not even have the ability from a technology perspective to charge negative rates.
Really? That could be fixed by the end of the day. Add a little time for testing and you're done. It's not like you'd have the frenzy over Y2K all over again.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by nisiprius »

tibbitts wrote:
Most banks do not even have the ability from a technology perspective to charge negative rates.
Really? That could be fixed by the end of the day. Add a little time for testing and you're done. It's not like you'd have the frenzy over Y2K all over again.
I doubt that it could be fixed "by the end of the day" or that testing would take "a little time."

If you are a software engineer and you work professionally with financial systems, then I am willing to stand corrected and you can educate me. Otherwise, I believe... based on my experiences with NON-financial software... that...

You could have a situation where negative interest rates were designed in at the beginning--the entire program, top to bottom, written with that in mind and tested with that in mind, but had the ability to set a flag to lock out negative interest rates on the assumption that it was probably operator error--then, sure. Turn the flag off and test for regression. That would take a "little" time (but "little" would be a few weeks, not a few hours).

But if it wasn't designed in, then you have a major, major Here Be Dragons situation. I don't think the scope and the danger are terribly different from Y2K. It is perfectly possible, particularly if the system is coded in COBOL--
"PIC 9(6)V99 6 whole numbers and 2 decimal places
PIC S99V999 2 whole numbers and 3 decimal numbers, the sign is remembered"
--that interest rates could be stored without a sign, in which case the ripple effect of changing it to signed could be terrifying. Seemingly Y2K is "just" a question of using four digits in place of two. Seemingly negative interest rates is "just" a question of allowing one extra position for an added "-" sign.

I personally was bitten by difficulties buying and selling TIPS online at Fidelity because their system was not equipped to deal with a situation of a negative real yield. Admittedly this was not an important situation, but they didn't just "fix it by the end of the day." As far as I know, they never did fix it. The transactions all had to be handled manually by phone, with a $19.95 commission automatically charged and then manually refunded.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Oicuryy »

Interest rates have been declining for the last thirty-plus years. Negative rates would just be a continuation of that decline. If the decline so far hasn't dissuaded you from owning bonds, further declines shouldn't either.

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Re: Yellen: "We're taking a look at negative interest rates."

Post by technovelist »

nisiprius wrote:
tibbitts wrote:
Most banks do not even have the ability from a technology perspective to charge negative rates.
Really? That could be fixed by the end of the day. Add a little time for testing and you're done. It's not like you'd have the frenzy over Y2K all over again.
I doubt that it could be fixed "by the end of the day" or that testing would take "a little time."

If you are a software engineer and you work professionally with financial systems, then I am willing to stand corrected and you can educate me. Otherwise, I believe... based on my experiences with NON-financial software... that...

You could have a situation where negative interest rates were designed in at the beginning--the entire program, top to bottom, written with that in mind and tested with that in mind, but had the ability to set a flag to lock out negative interest rates on the assumption that it was probably operator error--then, sure. Turn the flag off and test for regression. That would take a "little" time (but "little" would be a few weeks, not a few hours).

But if it wasn't designed in, then you have a major, major Here Be Dragons situation. I don't think the scope and the danger are terribly different from Y2K. It is perfectly possible, particularly if the system is coded in COBOL--
"PIC 9(6)V99 6 whole numbers and 2 decimal places
PIC S99V999 2 whole numbers and 3 decimal numbers, the sign is remembered"
--that interest rates could be stored without a sign, in which case the ripple effect of changing it to signed could be terrifying. Seemingly Y2K is "just" a question of using four digits in place of two. Seemingly negative interest rates is "just" a question of allowing one extra position for an added "-" sign.

I personally was bitten by difficulties buying and selling TIPS online at Fidelity because their system was not equipped to deal with a situation of a negative real yield. Admittedly this was not an important situation, but they didn't just "fix it by the end of the day." As far as I know, they never did fix it. The transactions all had to be handled manually by phone, with a $19.95 commission automatically charged and then manually refunded.
As someone who has been a programmer longer than some people on this forum have been alive, I agree that this is not likely to be a quick and easy change.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Northern Flicker »

I doubt that it could be fixed "by the end of the day" or that testing would take "a little time."

If you are a software engineer and you work professionally with financial systems, then I am willing to stand corrected and you can educate me. Otherwise, I believe... based on my experiences with NON-financial software... that...
Rest assured that banks are not above average when it comes to being nimble with their software systems.

On the other hand, they already seem to have solved the problem of rolling out new fees whenever they feel like doing so.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Valuethinker »

Steadfast wrote:Forgive me, but I do worry about a slippery slope with negative interest rates. Where does it end? And why does it end there?

Could it be the case that negative rates got so low for so long, that banks had no other alternative but to pass negatives rates down to the customer level, forcing (a) cash withdrawals to avoid negative interest, and/or (b) forcing investment in riskier assets?
If prices are falling, a negative bank interest rate (nominal) can still equal a positive return (real).

What appears to be happening is people are holding more cash. Problem: Sweden and Switzerland are very low crime countries, generally (Sweden has some exceptions). USA and UK for example, that brings issues (we had a gang knocking down front doors with motorcycles and stealing jewelry).

Stickiness w deposits is a real factor, albeit probably bigger in pre internet days. Banks were limited to 5% interest rates on deposits, but not everyone moved their savings into 10%+ money market funds.
One can imagine a (seemingly undesirable) economics in which the only viable alternatives are to spend or invest, and not save. That's the stated goal of zero interest rate policies: economic stimulus.
If you believe the economy is below full employment equilibrium, then the goal of monetary policy is to drive it there. US (and UK) unemployment is low but US labour force participation is down around its early 1980s levels (UK is all time high). Is this structural (Baby Boomers retiring? Millennials in college?) or is it the result of low demand?

The viable alternatives are: to spend, to invest in higher risk assets or to accept a negative return on your cash. In periods of higher inflation, after tax interest rates for cash generally did not keep up with inflation, so you were experiencing a negative real return then. So this is about money illusion.
A little pain for savers translates into economic growth, benefiting everyone. With all of the central banks talking about negative rates and some starting to use it, I genuinely want to know where the logic leads us. Is it really just to be dismissed? Will Bogleheads just have the same CD rate threads, but they will be about which bank has the least-negative CD rates, and everything will be rosy otherwise?
It's very real (no pun intended ;-) ). For a host of reasons I think the US central bank will be about the last to try it. Before the oil price crash I would have said it was "impossible" that the US would go into deflation, which merely shows how bad my crystal ball is.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Ged »

madbrain wrote:
Tanelorn wrote:Might be time to invest in a larger mattress.
Or pay off any debt with a positive interest rate . My 1.99% 7-year car loan and 3.25% 30year fixed mortgage look expensive compared to negative interest rate.

Personally, I don't care for deposits with a negative interest rate, but I sure wouldn't mind borrowing at a negative interest rate :)
If we are in a deflationary period and you take a car loan with a negative interest rate that is tied to some estimate of inflation (which will be negative) you are still going to end up better off paying cash because the interest rate will be less negative than the inflation rate.
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jazman12
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Re: Yellen: "We're taking a look at negative interest rates."

Post by jazman12 »

The only ones getting screwed is the banks having to hold large reserves at negative rates.It is in their collective interest to produce more loans and reduce their reserves. Although, new regulatory requirements require the banks to hold massive reserves so they cant FAIL!
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Re: Yellen: "We're taking a look at negative interest rates."

Post by 3CT_Paddler »

What happens to the financial system if people believe that they might be charged negative interest for holding funds in a savings account or CD? If enough people come to the conclusion that there is more risk in money in the bank vs in the mattress (or gold), it could go south fast. Nearly all central banks have similarly near zero rates, so the risk is that all of these national banking systems are collectively seen as frail.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by garlandwhizzer »

The real problem with central bank negative rates is what it says about the state of the economy. It makes two points. First how difficult it is now for central bankers to stimulate their economies which even after drastic central bank action are either stuck in neutral or growing sluggishly. The second point is the question raised by such drastic measures as negative interest rates. Are we going into a global long term deflationary cycle where economic growth is absent or negative and resistant to maximal monetary policy for years on end? We have had essentially zero interest rates for 7 years now in the US and growth is still very sluggish. Negative rates may not work economic magic either.

Secular deflation has only happened once in US history, the Great Depression, but it can become self-sustaining as it did then. Personal spending and loan volume, the lifeblood of the economic growth, gets deferred on the expectation that prices of goods will over time actually decrease. Fixed rate interest payments on loans will have to paid back with future dollars that have greater purchasing power than today due to negative inflation. While central banks have effective tools to deal with inflation, raising interest rates which is painful but works, their tools to deal with deflation and decreasing end demand are less effective and have great social cost, punishing savers and pension plans with increasingly negative rates.

While this gives us something to worry about--there is always something to worry about in markets and economies--I do not believe that these dire scenarios are going to happen. Current fears are greater than reality in my view. I further believe that the global economy will slowly strengthen and that markets, though volatile, will continue to show an slow grind upward over the next few years. Even in the worst case, secular deflation, bond holders need not worry. Bonds are one of the best asset classes in terms of performance in real inflation adjusted returns during secular deflation. A safe zero to 1.5% yield can look pretty good when combined negative rate of inflation.

Take home message in my opinion: if you have a well thought out bond/stock asset allocation stick with it. This, too, shall pass.

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Re: Yellen: "We're taking a look at negative interest rates."

Post by dodecahedron »

garlandwhizzer wrote:
Secular deflation has only happened once in US history, the Great Depression, but it can become self-sustaining as it did then.
Only once? What about the deflationary periods in the 19th century?

https://research.stlouisfed.org/publica ... ES1030.pdf

But we are in a very different world now. The prior deflationary history, including the Great Depression, happened during periods when US monetary policy was anchored to a gold standard. There really is no clearly analogous precedent in US history for the current deflation.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by letsgobobby »

NY Times explanation of negative rates;

http://www.nytimes.com/2016/02/13/upsho ... v=top-news
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Random Musings »

Central banks are playing the currency game. We are just mere pawns.

RM
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Re: Yellen: "We're taking a look at negative interest rates."

Post by telemark »

nisiprius wrote:If you are a software engineer and you work professionally with financial systems, then I am willing to stand corrected and you can educate me.

As it happens, I am a programmer who works with professionally with financial systems, and I think you have it exactly right.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by acanthurus »

As it happens, I am a programmer who works with professionally with financial systems, and I think you have it exactly right.
This thread is probably the most actionable thread I've read on Bogleheads, ever. I will now think carefully every time before typing my default uint16_t. Although integer overflow might be an awesome way to get a bank error in your favor.
Last edited by acanthurus on Fri Feb 12, 2016 2:00 pm, edited 2 times in total.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by dc81584 »

Won't happen.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by telemark »

acanthurus wrote:uint16_t
For interest calculations where people care about the answer, you really need decimal arithmetic. In C that means using a library.* mpdecimal is a good choice: Cowlishaw knows what he's doing. This is one reason why dinosaurs languages like RPG and COBOL continue to see use.

But the main problem for most banks is the patching together of different systems and technologies dating from many different decades.

* On the iSeries you can declare zoned decimal variables in C as decimal(9,2), if you don't need to worry about portability.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by sawhorse »

The idea of paying a small amount to keep money in the bank is palatable as it's the price you pay for FDIC insurance. But how much? On this board we talk about expense ratios of 0.10%. It would be hard to stomach the idea of paying more than that to park cash.

Furthermore, is there actually evidence that this works? Economic models might point in one direction, but those models are based on assumptions that might not hold in the real world, and they are also based on the assumption that real world economic outcomes are determined by mathematical laws. (This is my major gripe with economics as a field of study.)

The whole concept of negative interest rates is baffling to me and hard to accept at face value. If I, a highly educated person, can't understand, then how will the Fed explain it to the general public? What will that do to the trust people have in the Fed?

I could be convinced by evidence that it's actually working in countries that have tried it. Hasn't Switzerland had it for a while? How are they doing?
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Re: Yellen: "We're taking a look at negative interest rates."

Post by eigenperson »

sawhorse wrote:The idea of paying a small amount to keep money in the bank is palatable as it's the price you pay for FDIC insurance. But how much? On this board we talk about expense ratios of 0.10%. It would be hard to stomach the idea of paying more than that to park cash.

Furthermore, is there actually evidence that this works? Economic models might point in one direction, but those models are based on assumptions that might not hold in the real world, and they are also based on the assumption that real world economic outcomes are determined by mathematical laws. (This is my major gripe with economics as a field of study.)

The whole concept of negative interest rates is baffling to me and hard to accept at face value. If I, a highly educated person, can't understand, then how will the Fed explain it to the general public? What will that do to the trust people have in the Fed?

I could be convinced by evidence that it's actually working in countries that have tried it. Hasn't Switzerland had it for a while? How are they doing?
I actually think people will understand it pretty quickly.

The only reason you don't understand it right now is that you are anchored to the expectation of positive (or at least non-negative) interest rates. If you had lived for a while in a world of negative interest rates, they would make perfect sense to you, and positive rates might seem alien: "Really? The bank PAYS ME to store my money?? That can't be right."

People today, especially young people, are already completely used to negative real interest rates on cash, and laugh at the quaint idea that keeping dollars in the bank could result in more purchasing power over time. But that used to be how it worked (before tax). Nowadays, if someone suggests storing a substantial amount of money in a bank account, the inevitable rejoinder is "You're losing value to inflation," and it's just taken for granted that this is How It Works.

Perhaps in 50 years, people will consider it quaint that keeping dollars in the bank used to result in having more dollars over time. In the future, it may be obvious that banks pay negative nominal interest, and it's just How It Works. Or perhaps not!
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Dirghatamas »

I don't see it (deflation) happening in the US because of Govt debt. Think of WHY inflation was invented. Romans did it because they had to fund military expeditions and with the far flung empire, they were running out of resources. So, they inflated the currency by literally having less precious metals per coin.

In the last couple of 100 years (even with gold standard), inflation has been the standard way Governments which have taken on large debts have figured out how to pay them. If your debt is in nominal dollars and you inflate the currency, even with no GDP growth over time, you collect taxes in nominal currency and the real value of debt keeps going down.

If you have deflation, the nominal value of your debt becomes a big deal over time. Given that increasing taxation is politically a controversial and hard fought option, inflation is a MUCH simpler option (revenue from taxation and debt reduction by inflation are similar things). Central banks and Govts are in this together and the FED (at least) are technocrats and fairly competent.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by mouses »

Steadfast wrote: A little pain for savers translates into economic growth, benefiting everyone.
It's not a little pain to many Seniors who hold things like CDs. Seniors are 13% of the U.S. population, and the Fed has drastically reduced their "income" and so their ability to buy things. Add in, companies paying people in general less and less in real terms, shipping their jobs out of the country, and/or people having crushing college debt. And then those idiots at the Fed wonder why the economy is not healthy.

I have yet to see this economic growth that's supposed to have happened as a result of the Fed lowering interest rates for several years. Literally none of my friends, highly qualified, hard workers, who wound up unemployed have found jobs.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by wearahat »

mouses wrote:
Steadfast wrote: A little pain for savers translates into economic growth, benefiting everyone.
It's not a little pain to many Seniors who hold things like CDs. Seniors are 13% of the U.S. population, and the Fed has drastically reduced their "income" and so their ability to buy things. Add in, companies paying people in general less and less in real terms, shipping their jobs out of the country, and/or people having crushing college debt. And then those idiots at the Fed wonder why the economy is not healthy.

I have yet to see this economic growth that's supposed to have happened as a result of the Fed lowering interest rates for several years. Literally none of my friends, highly qualified, hard workers, who wound up unemployed have found jobs.
It's unfortunate. Interest rates is simply a macroeconomic tool, that cannot target unemployment directly.
The only way for the Fed to increase employment is to make workers cheaper than foreign workers since businesses hire the cheapest labour per unit of output or substitute them for machines.
The Fed can achieve this through currency devaluation by literally printing money (not sure if it's legal, but laws can be changed) and handing it over to the US government to then inject that money into the economy. That's the direct and most effective path. Although it requires the assistance of the government.
Standard of living won't increase significantly because purchasing power will fall. However, as goods are manufactured locally and the current account moves into the surplus the dollar should rise over time.

Another way is for the government to simply write a law saying goods and services that are sold in the US have to be x% produced in US. Or introduce tariffs and subsidies. This would help US but create inefficiencies globally.

Or people have to accept the reality. Over time living standards in developed nations will converge with developing nations in a free market. A worker in US with the same skills will be worth the same as one in China. As long as workers in US are paid more than China, businesses will develop in China. Convergence will happen through either (a)jobs getting outsourced, (b) foreign nations increasing wages/ implementing minimum wage or (c) US decreasing wages.

Then there's the elephant in the room. Machines replacing humans which will reduce everybody's wages. Plenty of production power, just no purchasing power.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by mouses »

wearahat wrote: Machines replacing humans which will reduce everybody's wages. Plenty of production power, just no purchasing power.
There is a solution to that - untie living standards from wages and savings. Some country, I forget which one, is toying with or implementing a basic support for a decent living standard. (Also, I am thinking Star Trek :-) I don't recall seeing homeless people in the streets in the Federation.)

If machines can produce the items needed with only a small number of workers, then the government should supply some sort of currency to every individual to purchase what is needed for basic shelter; food; medical care and education should probably be free.

We already see something in this direction in the Scandinavian countries.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Quark »

mouses wrote:
Steadfast wrote: A little pain for savers translates into economic growth, benefiting everyone.
It's not a little pain to many Seniors who hold things like CDs. Seniors are 13% of the U.S. population, and the Fed has drastically reduced their "income" and so their ability to buy things. Add in, companies paying people in general less and less in real terms, shipping their jobs out of the country, and/or people having crushing college debt. And then those idiots at the Fed wonder why the economy is not healthy.

I have yet to see this economic growth that's supposed to have happened as a result of the Fed lowering interest rates for several years. Literally none of my friends, highly qualified, hard workers, who wound up unemployed have found jobs.
Seniors tend to get the majority of their income from Social Security. Those with substantial portfolios should be diversified, holding stocks and bonds. Stocks have done well over the past years, even taking into account the current decline. Bond values have increased. I've yet to see good evidence there are a very large number of people who have a large enough portfolio to matter whose sole holdings are CDs.

Shipping jobs overseas is at least partly a function of trade policy, which is not the Fed's bailiwick. Neither is median income or student debt.

Your friends may not be finding jobs, but millions of others have. Employment is up sharply, both in terms of numbers employed and the unemployment rate.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Quark »

wearahat wrote:Then there's the elephant in the room. Machines replacing humans which will reduce everybody's wages. Plenty of production power, just no purchasing power.
An increase in productivity (output per worker) is often regarded as a good thing. The industrial revolution is still widely regarded as a major success, despite initial claims similar to those in this quote.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by Quark »

jalbert wrote:
I doubt that it could be fixed "by the end of the day" or that testing would take "a little time."

If you are a software engineer and you work professionally with financial systems, then I am willing to stand corrected and you can educate me. Otherwise, I believe... based on my experiences with NON-financial software... that...
Rest assured that banks are not above average when it comes to being nimble with their software systems.

On the other hand, they already seem to have solved the problem of rolling out new fees whenever they feel like doing so.
A fee equal to x% of the amounts deposited, charged on a daily basis, would look an awful lot like a negative interest rate. Banks already have this capability (think loan software), so it's not like they would have to start from scratch.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by wearahat »

Quark wrote: An increase in productivity (output per worker) is often regarded as a good thing. The industrial revolution is still widely regarded as a major success, despite initial claims similar to those in this quote.
Yes, productivity is great. That's been the driver behind prosperity.
Whether people have the purchasing power to buy that output potential is a different issue altogether.
It's a shame that people who believe in perpetual productivity to grow the economy also believe that people will always find something to do which at least to me seems like a blatant disconnect with reality.
It's not a difficult concept. Machines have replaced people in many areas, and people found other things to do in the past (that machines could not do).
Now continue that trend. Machines continually become more advanced until they surpass people in every area. Where do people get their money to buy all the output when machines do everything better than them? They have to continually reduce their wages to compete on costs versus machines but there's a limit to that. People get sick, fatigued and make mistakes. At some point, no matter no low they price themselves, their shortcomings will be a net cost rather than benefit. They'd have to pay to work.

People are ridiculously inefficient as it is. Current technology has replaced many workers but there are far more that tech can replace, just hasn't been rolled out yet. Over time I expect lower participation rates in the workforce (following the long-term trend) and higher political participation. This is not going to reverse with monetary stimulus. It's the inevitable result of technological progress, innovation and productivity.

How people adapt to the change is the interesting part. A lot of people have lived a certain way for so long they will ask the irrelevant "how to create jobs" or "how do we stop the machines". They completely miss the point that the jobs aren't coming back and that machines are simply better. The value of human labour is going down over time. Deflation is the inevitable result of more efficient production and fall in demand.

The central banks around the world are finding out the hard way that they can't fight deflation. It's a good thing for investors that they're trying because the returns on bonds and stocks increase as rates go down.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by selters »

I don't get it. If money can be created out of thin air, then there is no way a sustained deflationary period can occur. As I understand it, central banks haven't even scratched the surface of what they can do to stimulate consumption. Isn't this what Ben Bernanke philosophy was?: deflation will never be an issue in a fiat money system, because the central bank can always issue money to increase demand and hence prices. With sufficiently high price growth, raised rates must follow.

To quote Ben Bernanke:

"To rebut this view, one can apply a reductio ad absurdum
argument, based on my earlier observation that money issuance must
affect prices, else printing money will create infinite purchasing
power. Suppose the Bank of Japan prints yen and uses them to acquire
foreign assets. If the yen did not depreciate as a result, and if
there were no reciprocal demand for Japanese goods or assets (which
would drive up domestic prices), what in principle would prevent the
BOJ from acquiring infinite quantities of foreign assets, leaving
foreigners nothing to hold but idle yen balances?"

Source: Bernanke, Ben S. "Japanese monetary policy: a case of self-induced paralysis?." Japan’s financial crisis and its parallels to US experience (2000): 149-166.
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Re: Yellen: "We're taking a look at negative interest rates."

Post by wearahat »

BoJ printing money and buying assets is simply transferring wealth from people who earned it to the BoJ.
The economy will still be in shambles, people will have less purchasing power only difference is everything is now owned by the central banks.

Nothing can stop the deflationary force of innovation. The sooner the central banks accept deflation the better off the market will be.
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