If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

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justsomeguy2018
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If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by justsomeguy2018 »

If you are essentially losing money in nominal terms from negative interest rates (let's say even on bank deposits), would it make more sense to just start consuming and increasing consumption of things vs losing money in a bank account/bond fund? (which is kind of the point of a negative interest rate I suppose, to increase consumption and stimulate the economy)

Or I wonder if there would be a huge surge in collectibles or precious metals in that scenario?
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McGilicutty
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by McGilicutty »

If this happens I'll just keep investing in the stock market and be thankful for all the Bogleheads that are willing to loan money to the government at negative interest rates.

[OT comment speculating on legislation removed by moderator oldcomputerguy]
Last edited by McGilicutty on Sun Aug 16, 2020 10:17 pm, edited 1 time in total.
CurlyDave
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by CurlyDave »

It would certainly be discouraging to realize that money in my mattress was doing better than money in a CD or savings account.

I would not increase consumption, but would look seriously at gold. Gold is interesting because it can hold value in relatively small denominations. I can put $100k into gold coins and sell off smaller amounts of it. Collectables, not so much. They require a lot of special knowledge. And, $100k is not going to get you a piece of art by a famous artist, but could take a very long time to sell.
000
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by 000 »

I have thought that durable consumer goods one can use oneself would be a good investment. They offer 0% real return assuming zero storage cost.

I would not buy a bunch of stuff with the hope of selling it to others.
sport
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by sport »

CurlyDave wrote: Sun Aug 16, 2020 10:15 pm It would certainly be discouraging to realize that money in my mattress was doing better than money in a CD or savings account.

I would not increase consumption, but would look seriously at gold. Gold is interesting because it can hold value in relatively small denominations. I can put $100k into gold coins and sell off smaller amounts of it. Collectables, not so much. They require a lot of special knowledge. And, $100k is not going to get you a piece of art by a famous artist, but could take a very long time to sell.
Of course, if gold is an obvious choice, there would be a lot of demand for it, thus pushing up the price of gold. So, then you would have the risk of the price dropping once interest rates went to positive numbers. So, you could lose more by buying gold than you gained by avoiding negative interest rates.
typical.investor
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by typical.investor »

justsomeguy2018 wrote: Sun Aug 16, 2020 10:05 pm If you are essentially losing money in nominal terms from negative interest rates (let's say even on bank deposits), would it make more sense to just start consuming and increasing consumption of things vs losing money in a bank account/bond fund? (which is kind of the point of a negative interest rate I suppose, to increase consumption and stimulate the economy)

Or I wonder if there would be a huge surge in collectibles or precious metals in that scenario?
I don’t see munis, EE bonds, corporate debt, or emerging market debt as going negative.

If safe assets (treasuries, CDs, TIPS, bank deposits) return less than inflation, I might increase my allocation to risky assets (stocks, munis, corporate debt, or EM debt) with higher yields to bring my safe assets up above inflation.

The way I look at it is that treasuries and CDs in the past had risk too - primarily inflation risk - that seems to have abated for the time being.

I want to keep safe assets as they are useful in panic crashes (spending and/or rebalancing), and I think combining them with a higher returning assets is actually keeping a similar risk.

I mean if safe assets have an expected negative real return, are they really that safe? Isn’t something that is more likely to produce a real return safer?

So instead of spending, I guess I will shift my allocation to keep my fixed income on pace to at least break even.

Those are my preliminary thoughts anyhow.
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jeffyscott
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by jeffyscott »

justsomeguy2018 wrote: Sun Aug 16, 2020 10:05 pmIf you are essentially losing money in nominal terms from negative interest rates (let's say even on bank deposits), would it make more sense to just start consuming and increasing consumption of things vs losing money in a bank account/bond fund?
I don't see the point in buying stuff that I don't want, but if that's a plan it seems like it would make more sense to base the decision on real rates, rather than nominal. If I am losing 1% per year on cash, but prices are declining by 2%, there is no reason to accelerate spending.

In any case, there is no evidence that negative nominal rates will ever be a thing for individuals investing in things like CDs.
Despite negative government bond rates in many European countries, they all still have positive rates for what would seem to be the equivalent of CDs, based on this: https://thebanks.eu/compare-banking-pro ... t-accounts
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Robot Monster
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by Robot Monster »

Questions like these should consider inflation. Switzerland's 3-month bond is -0.740%, but its inflation is -0.9%. That negative yield is a lot less odious when you take inflation into account.

Sources:
http://www.worldgovernmentbonds.com/bon ... /3-months/
https://tradingeconomics.com/switzerland/inflation-cpi
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dbr
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by dbr »

It is a truism that low interest rates punish savers and benefit borrowers and relatively speaking spenders.

But the consequences of not saving are still the consequences of not saving and only you can decide how what you do now will affect how you end up in the future.
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by jeffyscott »

Robot Monster wrote: Mon Aug 17, 2020 9:15 am Questions like these should consider inflation. Switzerland's 3-month bond is -0.740%, but its inflation is -0.9%. That negative yield is a lot less odious when you take inflation into account.

Sources:
http://www.worldgovernmentbonds.com/bon ... /3-months/
https://tradingeconomics.com/switzerland/inflation-cpi
And despite the bond rates, Swiss banks are still paying positive rates, based on link I posted above.
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JoMoney
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by JoMoney »

dbr wrote: Mon Aug 17, 2020 9:22 am It is a truism that low interest rates punish savers and benefit borrowers and relatively speaking spenders.

But the consequences of not saving are still the consequences of not saving and only you can decide how what you do now will affect how you end up in the future.
FWIW, the virtues of saving are pretty well enshrined in our culture, I expect (especially with the participants of this website) and I personally do believe/hope that future me will be thankful for sacrifices the younger me made. But it's not always the case that there are "consequences" for not saving. It's never a given that the sacrifices made for the future will yield anything, that I'll be around to enjoy it, that it won't be squandered in some useless way or by someone else, that I wouldn't have received more enjoyment in current consumption, or that their won't be some sort of ineligible benefit missed by having the resources i.e. a means-tested credit you're ineligible for BECAUSE you have savings.
If you knew there would be no tomorrow, getting the use of huge amounts of debt might be 'optimal'.
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by nisiprius »

I'll cross that bridge when I come to it.

No predictions at all but I will be surprised if short-term rates go very negative for very long. I suspect that just as home ownership is seen as being in the public interest, non-negative interest rates on FDIC-insured bank accounts will be seen as being in the public interest. Of course there will be a ton of nuisance fees, and avoiding or minimizing them will become a game.
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Chicken Little
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by Chicken Little »

jeffyscott wrote: Mon Aug 17, 2020 6:38 amI don't see the point in buying stuff that I don't want, but if that's a plan it seems like it would make more sense to base the decision on real rates, rather than nominal. If I am losing 1% per year on cash, but prices are declining by 2%, there is no reason to accelerate spending.
Agree. Real rate matters.

If nominal savings rate was 0.01% and you weren’t buying a lot of extra stuff, or shifting to riskier assets, and rates changed to -0.01% and you started doing those things? That seems more about behavioral finance than any kind of well thought out plan.
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by dbr »

JoMoney wrote: Mon Aug 17, 2020 9:48 am
dbr wrote: Mon Aug 17, 2020 9:22 am It is a truism that low interest rates punish savers and benefit borrowers and relatively speaking spenders.

But the consequences of not saving are still the consequences of not saving and only you can decide how what you do now will affect how you end up in the future.
FWIW, the virtues of saving are pretty well enshrined in our culture, I expect (especially with the participants of this website) and I personally do believe/hope that future me will be thankful for sacrifices the younger me made. But it's not always the case that there are "consequences" for not saving. It's never a given that the sacrifices made for the future will yield anything, that I'll be around to enjoy it, that it won't be squandered in some useless way or by someone else, that I wouldn't have received more enjoyment in current consumption, or that their won't be some sort of ineligible benefit missed by having the resources i.e. a means-tested credit you're ineligible for BECAUSE you have savings.
If you knew there would be no tomorrow, getting the use of huge amounts of debt might be 'optimal'.
Sometimes the best one can do is enjoy the fruits of their labor as they come.
True. The consequences are probabilistic. Nothing is certain. That's why you pays yer money and you takes yer choice. An awful lot of conversation on this board boils down to making choices rather than finding "the answer."
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by dbr »

Chicken Little wrote: Mon Aug 17, 2020 10:20 am
jeffyscott wrote: Mon Aug 17, 2020 6:38 amI don't see the point in buying stuff that I don't want, but if that's a plan it seems like it would make more sense to base the decision on real rates, rather than nominal. If I am losing 1% per year on cash, but prices are declining by 2%, there is no reason to accelerate spending.
Agree. Real rate matters.

If nominal savings rate was 0.01% and you weren’t buying a lot of extra stuff, or shifting to riskier assets, and rates changed to -0.01% and you started doing those things? That seems more about behavioral finance than any kind of well thought out plan.
Indeed, I don't think in general that 0% savings rate real or nominal marks a change in nature. Real rates, of course, have been negative for awhile and have been negative at different times in history. A return of -100% at any given time would be more concerning.
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by student »

I would not go buy bunch of stuff but I am not sure what I would do.
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by WildBill »

Howdy

Interesting question.

Here is a thought. What are real interest rates at the moment, ie what is the true rate of inflation? I have no idea, and I doubt if the CPI actually reflects it. Are we currently in a deflationary situation? If that is he case, real interest rates may be higher than it seems

For those who remember the late 70s early 80s, we had wonderful nominal short term rates of 8%, with inflation running at 12%. That was real negative interest rates. Do not think we are there yet.

W B
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by Hockey10 »

I have a lot of stuff I can sell you at a nice discount. Just come on over at your convenience.
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by H-Town »

justsomeguy2018 wrote: Sun Aug 16, 2020 10:05 pm If you are essentially losing money in nominal terms from negative interest rates (let's say even on bank deposits), would it make more sense to just start consuming and increasing consumption of things vs losing money in a bank account/bond fund? (which is kind of the point of a negative interest rate I suppose, to increase consumption and stimulate the economy)

Or I wonder if there would be a huge surge in collectibles or precious metals in that scenario?
:oops:

Time is on your side. Think about time as a critical factor in inflation/deflation analysis.

How long are we talking about? What's the dollar amount impact here?
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by arcticpineapplecorp. »

justsomeguy2018 wrote: Sun Aug 16, 2020 10:05 pm If you are essentially losing money in nominal terms from negative interest rates (let's say even on bank deposits), would it make more sense to just start consuming and increasing consumption of things vs losing money in a bank account/bond fund? (which is kind of the point of a negative interest rate I suppose, to increase consumption and stimulate the economy)

Or I wonder if there would be a huge surge in collectibles or precious metals in that scenario?
As others have commented, deflation leads to one not spending now, waiting for prices to further drop.
Inflation causes people to spend now rather than delay because why pay more for something later on?

that being said, just because interest rates fall, doesn't mean we have deflation. We just might not have sufficient inflation to grow the economy as desired. Low inflation rates aren't the same thing as deflation. What's deflation? When the inflation rate falls below 0%. We still have inflation currently.

The total stock market's dividend is around 1.65%. That's better than negative, right?
It's "Stay" the course, not Stray the Course. Buy and Hold works. You should really try it sometime. Get a plan: www.bogleheads.org/wiki/Investment_policy_statement
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by jeffyscott »

WildBill wrote: Mon Aug 17, 2020 12:12 pmHere is a thought. What are real interest rates at the moment, ie what is the true rate of inflation?
And a large part of that would depend on what you are going to buy. Buying a new phone now that you otherwise would not buy for a year would almost certainly be a mistake, even if you are getting -5% on your savings. On the other hand you could certainly pay your taxes early, rather than holding the money at even -.01%.

Many (most) things, meaning manufactured products have had declining prices or at least declining prices, when adjusted for quality for a long time.
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by Angst »

WildBill wrote: Mon Aug 17, 2020 12:12 pm Howdy

Interesting question.

Here is a thought. What are real interest rates at the moment, ie what is the true rate of inflation? I have no idea, and I doubt if the CPI actually reflects it. Are we currently in a deflationary situation? If that is he case, real interest rates may be higher than it seems

For those who remember the late 70s early 80s, we had wonderful nominal short term rates of 8%, with inflation running at 12%. That was real negative interest rates. Do not think we are there yet.

W B
That's a good perspective.
And I wish TIPS had existed that far back.

It would be interesting today to be able to look back and see what they were yielding when inflation exceeded ST rates by 4%. ST TIPS would have needed to yield something around -4% in order to get a breakeven inflation rate of 12% if ST treasuries were yielding 8%.

Real rates are slightly negative today, but they're nowhere close to anything like -4%
https://www.treasury.gov/resource-cente ... &year=2020
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Re: If bond/bank/cd rates go full negative, should you just go buy a bunch of stuff?

Post by Moneta »

Or purchase more education for yourself. Education doesn't lose value (at least, I hope it doesn't!).
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