Negative Interest Rates in U.S.

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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Sun Aug 25, 2019 11:57 am

welderwannabe wrote:
Sun Aug 25, 2019 11:18 am
Not a lot different than me setting up "The Welderwannabe Prize in Bogleheads Studies in memory of Alfred Nobel" and calling it a Nobel prize :beer
As long as the Nobel Foundation, the holder of the copyright to the name "Nobel Prize", doesn't object you will be good to go. You will also have to set up the endowment to support the prize.

RCL
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Re: Negative Interest Rates in U.S.

Post by RCL » Sun Aug 25, 2019 2:34 pm

Kevin M wrote:
Sat Aug 24, 2019 1:34 pm
schleprock117 wrote:
Fri Aug 23, 2019 8:02 pm
What's worst case scenario for holding all TBM in a negative interest rate environment?

Or are you asking about the difference in returns once yields are negative? In this case we need to know the yields of each type and maturity of bond, as well as additional changes in yields going forward.

Kevin
If I may, I think the poster is asking what to expect for his holding of TBM (not sure what exact fund), not individual bonds, in a negative interest rate environment.

As a retired person, I too was wondering what the future would look like (crystal ball time :wink: ) regarding the Vanguard VBTLX Total Bond Market fund in a negative interest rate environment..
..maybe asked another way,
What direction do you think the NAV would move, and what would happen to the dividend and yield amounts?

Assuming yields will go negative, would the bond fund investor have to pay the difference between zero and a negative rate or would it just be a matter of a reduction the account balance ?

I hope this question makes sense, if not I will try another approach
Thanks
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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Sun Aug 25, 2019 2:54 pm

RCL wrote:
Sun Aug 25, 2019 2:34 pm
Assuming yields will go negative, would the bond fund investor have to pay the difference between zero and a negative rate or would it just be a matter of a reduction the account balance ?
Corporate bonds will never go negative. For sovereign bonds they will take out of the principal.

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Kevin M
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Re: Negative Interest Rates in U.S.

Post by Kevin M » Sun Aug 25, 2019 3:29 pm

RCL wrote:
Sun Aug 25, 2019 2:34 pm
Kevin M wrote:
Sat Aug 24, 2019 1:34 pm
schleprock117 wrote:
Fri Aug 23, 2019 8:02 pm
What's worst case scenario for holding all TBM in a negative interest rate environment?

Or are you asking about the difference in returns once yields are negative? In this case we need to know the yields of each type and maturity of bond, as well as additional changes in yields going forward.

Kevin
If I may, I think the poster is asking what to expect for his holding of TBM (not sure what exact fund), not individual bonds, in a negative interest rate environment.
Yes, I understood that. The thing is that TBM is a collection of individual bonds, so to hypothesize what would happen to TBM, you need to hypothesize what would happen to the individual bonds in TBM. For example, a drop in yields of the longer term bonds will have a larger impact on the NAV than a similar magnitude drop in shorter-term bond yields.
RCL wrote:
Sun Aug 25, 2019 2:34 pm
As a retired person, I too was wondering what the future would look like (crystal ball time :wink: ) regarding the Vanguard VBTLX Total Bond Market fund in a negative interest rate environment..
..maybe asked another way,
What direction do you think the NAV would move, and what would happen to the dividend and yield amounts?
If all rates were constant negative values, the NAV would gradually decline, since the bond holdings would decline from some value greater than 100 (100% of face value) to 100 at maturity. If bond yields were all negative, the yield to maturity (and SEC yield) of the fund would be negative. The dividend yield probably would be close to 0%, but you could still have positive dividend yield with negative yield to maturity (and SEC yield).

If yields are negative, bonds will be issued with very small coupon rates, or possibly 0%, and this will translate into very low or 0% dividend yield for a fund holding the bonds. Someone posted somewhere that the minimum yield on a Treasury note or bond is 0.125%, but whether it's 0% or 0.125%, the bond would be priced at more than 100 (100% of face value). For example, if the coupon rate is 0% on a 1-year bond priced at 102, the yield is about -2%.

There still would be existing bonds with positive coupon rates, but the prices will be high enough to make the yields negative. So these bonds still would contribute to positive dividend yield for a fund, but they'd also contribute to a negative SEC yield.

On the way to 0%, and below, you would earn nice capital gains, but the future expected returns at that point would be pretty bleak.
Assuming yields will go negative, would the bond fund investor have to pay the difference between zero and a negative rate or would it just be a matter of a reduction the account balance ?
I'm not sure I understand this question, but let me try to answer.

Again, as yields decrease, bond price and NAV increase, so you'd actually have an increase in account balance (NAV) as yields moved lower. Once the yields stop falling, with bond prices above 100, bond prices will fall toward 100 as they approach maturity (bonds mature at 100 = 100% of face value), so at some point, assuming no more yield changes, bond prices and NAV will fall.

If yields all were to remain unchanged at negative yields, new bonds would be issued at a premium (price > 100), and fall to 100 at maturity, which would be reflected in a continual decline in NAV. So yeah, with steady-state negative yields, you'd see a continual reduction in NAV (what happens to account balance also depends on cash flows into and out of the fund).

Kevin
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KarenC
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Re: Negative Interest Rates in U.S.

Post by KarenC » Sun Aug 25, 2019 3:30 pm

J G Bankerton wrote:
Sun Aug 25, 2019 11:57 am
welderwannabe wrote:
Sun Aug 25, 2019 11:18 am
Not a lot different than me setting up "The Welderwannabe Prize in Bogleheads Studies in memory of Alfred Nobel" and calling it a Nobel prize :beer
As long as the Nobel Foundation, the holder of the copyright to the name "Nobel Prize", doesn't object you will be good to go.
That is a safe assumption:
As it is not one of the prizes that Alfred Nobel established in his will in 1895, it is not technically a Nobel Prize.[10] However, it is administered and referred to along with the Nobel Prizes by the Nobel Foundation.[11] Laureates are announced with the Nobel Prize laureates, and receive the award at the same ceremony.[3]
https://en.wikipedia.org/wiki/Nobel_Me ... c_Sciences
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lazyday
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Re: Negative Interest Rates in U.S.

Post by lazyday » Sun Aug 25, 2019 3:55 pm

J G Bankerton wrote:
Sun Aug 25, 2019 2:54 pm
Corporate bonds will never go negative.
Some already have.

MoneyMarathon
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Re: Negative Interest Rates in U.S.

Post by MoneyMarathon » Sun Aug 25, 2019 4:10 pm

welderwannabe wrote:
Sun Aug 25, 2019 11:18 am
Not a lot different than me setting up "The Welderwannabe Prize in Bogleheads Studies in memory of Alfred Nobel" and calling it a Nobel prize :beer
https://www.nobelprize.org/the-nobel-pr ... titutions/

The not-a-Nobel-prize prize is awarded by the Royal Swedish Academy of Sciences, the same one awarding prizes in Physics and Chemistry. Other than that... sure, not a lot different.

Angst
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Re: Negative Interest Rates in U.S.

Post by Angst » Sun Aug 25, 2019 4:12 pm

Kevin M wrote:
Sun Aug 25, 2019 3:29 pm
RCL wrote:
Sun Aug 25, 2019 2:34 pm
Kevin M wrote:
Sat Aug 24, 2019 1:34 pm
schleprock117 wrote:
Fri Aug 23, 2019 8:02 pm
What's worst case scenario for holding all TBM in a negative interest rate environment?

Or are you asking about the difference in returns once yields are negative? In this case we need to know the yields of each type and maturity of bond, as well as additional changes in yields going forward.

Kevin
If I may, I think the poster is asking what to expect for his holding of TBM (not sure what exact fund), not individual bonds, in a negative interest rate environment.
Yes, I understood that. The thing is that TBM is a collection of individual bonds, so to hypothesize what would happen to TBM, you need to hypothesize what would happen to the individual bonds in TBM. For example, a drop in yields of the longer term bonds will have a larger impact on the NAV than a similar magnitude drop in shorter-term bond yields.
RCL wrote:
Sun Aug 25, 2019 2:34 pm
As a retired person, I too was wondering what the future would look like (crystal ball time :wink: ) regarding the Vanguard VBTLX Total Bond Market fund in a negative interest rate environment..
..maybe asked another way,
What direction do you think the NAV would move, and what would happen to the dividend and yield amounts?
Not asking Kevin directly, but someone in the Euro-Boglehead Community ought to be able to contribute some insight about all of this without having to hypothesize anything at all. No? There must be "Total Bond"-like funds in Europe. What are they yielding? How has the progression into a "negative rates environment" (if you will) affected you and your bond fund investments?

columbia
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Re: Negative Interest Rates in U.S.

Post by columbia » Sun Aug 25, 2019 4:24 pm

lazyday wrote:
Sun Aug 25, 2019 3:55 pm
J G Bankerton wrote:
Sun Aug 25, 2019 2:54 pm
Corporate bonds will never go negative.
Some already have.
It certainly says a lot about the prospects of equity investing in those countries.

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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Sun Aug 25, 2019 4:28 pm

lazyday wrote:
Sun Aug 25, 2019 3:55 pm
J G Bankerton wrote:
Sun Aug 25, 2019 2:54 pm
Corporate bonds will never go negative.
Some already have.
Link? We are talking about Vanguard VBTLX.

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Kevin M
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Re: Negative Interest Rates in U.S.

Post by Kevin M » Sun Aug 25, 2019 4:44 pm

Angst wrote:
Sun Aug 25, 2019 4:12 pm
Kevin M wrote:
Sun Aug 25, 2019 3:29 pm
RCL wrote:
Sun Aug 25, 2019 2:34 pm
Kevin M wrote:
Sat Aug 24, 2019 1:34 pm
schleprock117 wrote:
Fri Aug 23, 2019 8:02 pm
What's worst case scenario for holding all TBM in a negative interest rate environment?

Or are you asking about the difference in returns once yields are negative? In this case we need to know the yields of each type and maturity of bond, as well as additional changes in yields going forward.

Kevin
If I may, I think the poster is asking what to expect for his holding of TBM (not sure what exact fund), not individual bonds, in a negative interest rate environment.
Yes, I understood that. The thing is that TBM is a collection of individual bonds, so to hypothesize what would happen to TBM, you need to hypothesize what would happen to the individual bonds in TBM. For example, a drop in yields of the longer term bonds will have a larger impact on the NAV than a similar magnitude drop in shorter-term bond yields.
RCL wrote:
Sun Aug 25, 2019 2:34 pm
As a retired person, I too was wondering what the future would look like (crystal ball time :wink: ) regarding the Vanguard VBTLX Total Bond Market fund in a negative interest rate environment..
..maybe asked another way,
What direction do you think the NAV would move, and what would happen to the dividend and yield amounts?
Not asking Kevin directly, but someone in the Euro-Boglehead Community ought to be able to contribute some insight about all of this without having to hypothesize anything at all. No? There must be "Total Bond"-like funds in Europe. What are they yielding? How has the progression into a "negative rates environment" (if you will) affected you and your bond fund investments?
Vanguard has a Total International Bond Index fund (VTABX), so we could look at that. The problem is that we're not in the hypothesized steady-state "negative interest rate environment"; yields generally have been falling, so bond prices (and NAV) have been increasing, as the bond math dictates.

For what it's worth, the SEC yield of VTABX is 0.34%, so getting close to 0%. It started the year at 1.00%.

Vanguard doesn't publish a distribution yield, but we can estimate it using the most recent dividend distribution an reinvest price at about 1.05%: =0.0207/23.18/31*365. So here we see distribution yield still is quite a bit higher than the SEC yield, because the fund still holds bonds with higher coupon rates; the average coupon rate was 3.0% as of 7/31/2019.

Kevin
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lazyday
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Re: Negative Interest Rates in U.S.

Post by lazyday » Sun Aug 25, 2019 5:17 pm

J G Bankerton wrote:
Sun Aug 25, 2019 4:28 pm
lazyday wrote:
Sun Aug 25, 2019 3:55 pm
J G Bankerton wrote:
Sun Aug 25, 2019 2:54 pm
Corporate bonds will never go negative.
Some already have.
Link? We are talking about Vanguard VBTLX.
Globally, over $1 trillion worth. Including some issued overseas by US companies.

https://www.cnbc.com/2019/08/21/negativ ... stors.html

Image

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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Sun Aug 25, 2019 5:48 pm

lazyday wrote:
Sun Aug 25, 2019 5:17 pm
J G Bankerton wrote:
Sun Aug 25, 2019 4:28 pm
lazyday wrote:
Sun Aug 25, 2019 3:55 pm
J G Bankerton wrote:
Sun Aug 25, 2019 2:54 pm
Corporate bonds will never go negative.
Some already have.
Link? We are talking about Vanguard VBTLX.
Globally, over $1 trillion worth. Including some issued overseas by US companies.
That is backward Beardstown accounting click bate. The bonds were not issued with negative yields.

"Investors don’t actually pay to borrow money, but the negative yield is symbolic of how much above par investors are willing to pay for these bonds." Shouldn't that be investors don't pay to lend money?

No one pays a company to hold their bonds. Negative rate sovereign bonds are a hard sell. Germanie's negative rate bond offering was a flop.

How does a bond paying positive interest become negative interest no matter how much one pays for the bond?

alex_686
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Re: Negative Interest Rates in U.S.

Post by alex_686 » Mon Aug 26, 2019 1:00 pm

index2max wrote:
Sat Aug 24, 2019 11:38 am
I'm going to need to keep reading more about how the Federal Reserve does its bookkeeping. Thanks for trying to explain it!

I'm a simple man. I can understand how an inflexible money supply that's backed by something scarce like gold works.

The only part of fractional banking I've understood so far is that the increase of money through a series of deposits and lending follows a geometric series.
I think you have a simplistic and idealized view of a historical past that never existed. The value of money bounded around a lot under the gold standard. There was a recession or 3 in the US because there was not enough money. The West had commodities that the East wanted to buy, the East had manufactured goods that the West wanted to buy, and Wells Fargo literally could not haul gold back and forth fast enough.

Next, banking requires the use of fractional reserves. This is even more true under the gold standard than the current standard. I will point out that most of the money (note - not currency) is “near money” (think commerical paper) that is outside of the Fed system.

So I would skip reading up on the Fed and instead read up on Basel III. As others have noted, the Fed is playing a smaller role in money creation. The real action is around Basel. But that is even more technical.

A better place to start would be Money: The Unauthorized Biography by Felix Martin. It is a light popular read.

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Phineas J. Whoopee
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Re: Negative Interest Rates in U.S.

Post by Phineas J. Whoopee » Mon Aug 26, 2019 5:19 pm

J G Bankerton wrote:
Sun Aug 25, 2019 2:54 pm
...
Corporate bonds will never go negative. For sovereign bonds they will take out of the principal.
Entirely incorrect.

The way negative bond yields, Yield to Maturity, YTM, work is the bonds are issued above par. At auction. Nobody gets a lower yield than they are prepared to accept. Including a negative yield.

On the secondary market nobody is forced to buy. Each, including institutions, makes its own decisions regarding what it believes is best for itself.

What you sloppily refer to as principal is par. Nondefaulted bonds always pay par, on time and in full, per the terms of the contract, and a bond is a contract. If they don't, then they aren't nondefaulted.

PJW

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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Mon Aug 26, 2019 5:57 pm

Phineas J. Whoopee wrote:
Mon Aug 26, 2019 5:19 pm
J G Bankerton wrote:
Sun Aug 25, 2019 2:54 pm
...
Corporate bonds will never go negative. For sovereign bonds they will take out of the principal.
Entirely incorrect
YTM is Beardstown accounting. How much interest does the company issuing the bonds get from the buyers?

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Phineas J. Whoopee
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Re: Negative Interest Rates in U.S.

Post by Phineas J. Whoopee » Mon Aug 26, 2019 6:01 pm

J G Bankerton wrote:
Mon Aug 26, 2019 5:57 pm
Phineas J. Whoopee wrote:
Mon Aug 26, 2019 5:19 pm
J G Bankerton wrote:
Sun Aug 25, 2019 2:54 pm
...
Corporate bonds will never go negative. For sovereign bonds they will take out of the principal.
Entirely incorrect
YTM is Beardstown accounting. How much interest does the company issuing the bonds get from the buyers?
I rest my case.

PJW

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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Mon Aug 26, 2019 6:19 pm

Phineas J. Whoopee wrote:
Mon Aug 26, 2019 6:01 pm
J G Bankerton wrote:
Mon Aug 26, 2019 5:57 pm
Phineas J. Whoopee wrote:
Mon Aug 26, 2019 5:19 pm
J G Bankerton wrote:
Sun Aug 25, 2019 2:54 pm
...
Corporate bonds will never go negative. For sovereign bonds they will take out of the principal.
Entirely incorrect
YTM is Beardstown accounting. How much interest does the company issuing the bonds get from the buyers?
I rest my case.

PJW
Why didn't you answer a simple question? What company issued a bond that people paid the company interest to own? The answer is none.

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Kevin M
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Re: Negative Interest Rates in U.S.

Post by Kevin M » Mon Aug 26, 2019 6:50 pm

J G Bankerton wrote:
Sun Aug 25, 2019 5:48 pm
lazyday wrote:
Sun Aug 25, 2019 5:17 pm
J G Bankerton wrote:
Sun Aug 25, 2019 4:28 pm
lazyday wrote:
Sun Aug 25, 2019 3:55 pm
J G Bankerton wrote:
Sun Aug 25, 2019 2:54 pm
Corporate bonds will never go negative.
Some already have.
Link? We are talking about Vanguard VBTLX.
Globally, over $1 trillion worth. Including some issued overseas by US companies.
That is backward Beardstown accounting click bate. The bonds were not issued with negative yields.

"Investors don’t actually pay to borrow money, but the negative yield is symbolic of how much above par investors are willing to pay for these bonds." Shouldn't that be investors don't pay to lend money?

No one pays a company to hold their bonds. Negative rate sovereign bonds are a hard sell. Germanie's negative rate bond offering was a flop.

How does a bond paying positive interest become negative interest no matter how much one pays for the bond?
You seem to be confused between coupon rate and yield. Yield is what matters.

If a company issues a 1-year bond with a 1% coupon rate at a price of 102, the buyer will earn about -1% at maturity, consisting of 1% income return and -2% capital return. Here are the cash flows on $100 of value:

-102
+1
+100

Net return of -$1. The +$1 of income return is no more meaningful than the -$2 of capital return.

Corporations have indeed issued bonds with negative yields: Worldline debt issue takes negative yields to new frontiers.
French payments company Worldline broke new territory this week by issuing some of the most negative-yielding debt on record in Europe, showing the levels of market distortion caused by central bank stimulus.
<snip>
Investors will pay nearly 1% for the privilege of lending Worldline 600 million euros ($668 million)
<snip>
Because of the complexity of having a negative coupon, it is common on negative-yielding issues to sell the bonds at a cash price higher than par. This means the issuer pays back less than the amount borrowed, removing the need to figure out how to organise reverse coupon payments.
<snip>
In the corporate bond world, the likes of Deutsche Bahn have issued negative-yielding bonds in the past, and this month Merck sold three tranches of debt, the shortest of which held a negative yield.
Or ...
E.On opens a new age of negative corporate bond yields:
E.On, the German electricity company <snip> opened a new era in pricing, with the first ever five year bond at a negative yield.
Kevin
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index2max
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Re: Negative Interest Rates in U.S.

Post by index2max » Mon Aug 26, 2019 9:24 pm

alex_686 wrote:
Mon Aug 26, 2019 1:00 pm
index2max wrote:
Sat Aug 24, 2019 11:38 am
I'm going to need to keep reading more about how the Federal Reserve does its bookkeeping. Thanks for trying to explain it!

I'm a simple man. I can understand how an inflexible money supply that's backed by something scarce like gold works.

The only part of fractional banking I've understood so far is that the increase of money through a series of deposits and lending follows a geometric series.
I think you have a simplistic and idealized view of a historical past that never existed. The value of money bounded around a lot under the gold standard. There was a recession or 3 in the US because there was not enough money. The West had commodities that the East wanted to buy, the East had manufactured goods that the West wanted to buy, and Wells Fargo literally could not haul gold back and forth fast enough.

Next, banking requires the use of fractional reserves. This is even more true under the gold standard than the current standard. I will point out that most of the money (note - not currency) is “near money” (think commerical paper) that is outside of the Fed system.

So I would skip reading up on the Fed and instead read up on Basel III. As others have noted, the Fed is playing a smaller role in money creation. The real action is around Basel. But that is even more technical.

A better place to start would be Money: The Unauthorized Biography by Felix Martin. It is a light popular read.
Thanks for the suggestion. I'm still trying to finish "The Ascent of Money" by Niall Ferguson. It's ok as a sort of introduction to the concept of money. I always enjoy light introductions to new subjects.

I plan on getting more into the Austrian School of Economics eventually since their theories are a bit simpler to follow. Like Jack Bogle, I'm definitely a follower of Occam's razor!

As far as recessions go, which three recessions were you referring to? Money definitely gets tight when things go bad. That's human nature. Would a typical person go out and buy an expensive car with an auto loan if they weren't sure there would receive a paycheck the next month?

People hoarding money doesn't seem to be the cause of recessions, rather it appears to be easy credit that leads to bubbles or malinvestment as the Austrian School of Economics calls it, like the subprime mortgages being sold off as investment-grade vehicles before 2008.

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Re: Negative Interest Rates in U.S.

Post by willthrill81 » Mon Aug 26, 2019 9:56 pm

index2max wrote:
Mon Aug 26, 2019 9:24 pm
I plan on getting more into the Austrian School of Economics eventually since their theories are a bit simpler to follow.
As an aside, I agree with the 'micro-level' idea of Austrian economics because it is simply logical to me that all economic activity is simply the cumulative result of many individual decisions. The notion that economics can only be studied in a meaningful way from a macro perspective just seems completely absurd to me. Like many phenomena, I believe that we can examine them from a micro or a macro perspective.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Phineas J. Whoopee
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Re: Negative Interest Rates in U.S.

Post by Phineas J. Whoopee » Mon Aug 26, 2019 10:16 pm

index2max wrote:
Mon Aug 26, 2019 9:24 pm
...
I plan on getting more into the Austrian School of Economics eventually since their theories are a bit simpler to follow. Like Jack Bogle, I'm definitely a follower of Occam's razor!
...
Of course the Austrian School of Economics is simpler. One of its underlying tenets is evidence of anything doesn't amount to evidence of anything. Economics simply is what they say it is and that's it. What they claim are the results of central banking repeatedly happened before the advent of central banking. But they say so. So that's it.

PJW

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Phineas J. Whoopee
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Re: Negative Interest Rates in U.S.

Post by Phineas J. Whoopee » Mon Aug 26, 2019 10:20 pm

willthrill81 wrote:
Mon Aug 26, 2019 9:56 pm
index2max wrote:
Mon Aug 26, 2019 9:24 pm
I plan on getting more into the Austrian School of Economics eventually since their theories are a bit simpler to follow.
As an aside, I agree with the 'micro-level' idea of Austrian economics because it is simply logical to me that all economic activity is simply the cumulative result of many individual decisions. The notion that economics can only be studied in a meaningful way from a macro perspective just seems completely absurd to me. Like many phenomena, I believe that we can examine them from a micro or a macro perspective.
Presumably you're aware that both macro and microeconomics exist as legitimate fields of study.

PJW

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willthrill81
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Re: Negative Interest Rates in U.S.

Post by willthrill81 » Mon Aug 26, 2019 10:25 pm

Phineas J. Whoopee wrote:
Mon Aug 26, 2019 10:20 pm
willthrill81 wrote:
Mon Aug 26, 2019 9:56 pm
index2max wrote:
Mon Aug 26, 2019 9:24 pm
I plan on getting more into the Austrian School of Economics eventually since their theories are a bit simpler to follow.
As an aside, I agree with the 'micro-level' idea of Austrian economics because it is simply logical to me that all economic activity is simply the cumulative result of many individual decisions. The notion that economics can only be studied in a meaningful way from a macro perspective just seems completely absurd to me. Like many phenomena, I believe that we can examine them from a micro or a macro perspective.
Presumably you're aware that both macro and microeconomics exist as legitimate fields of study.

PJW
Of course.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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J G Bankerton
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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Tue Aug 27, 2019 7:13 am

Kevin M wrote:
Mon Aug 26, 2019 6:50 pm
You seem to be confused between coupon rate and yield. Yield is what matters.
I'm not confused. People keep dragging a red hearing across my posts. The poster I was responding was asking about Vanguards total bond index fund going negative.
J G Bankerton wrote:
Mon Aug 26, 2019 6:19 pm
What company issued a bond that people paid the company interest to own? The answer is none.
End of discussion; I don't want to get the thread locked.

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Nate79
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Re: Negative Interest Rates in U.S.

Post by Nate79 » Tue Aug 27, 2019 9:07 am

Only ~10% of the total world bond market is in negative yield territory. There is still a lot of bonds yielding well above zero.

alex_686
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Re: Negative Interest Rates in U.S.

Post by alex_686 » Tue Aug 27, 2019 12:07 pm

index2max wrote:
Mon Aug 26, 2019 9:24 pm
Thanks for the suggestion. I'm still trying to finish "The Ascent of Money" by Niall Ferguson. It's ok as a sort of introduction to the concept of money. I always enjoy light introductions to new subjects.

I plan on getting more into the Austrian School of Economics eventually since their theories are a bit simpler to follow. Like Jack Bogle, I'm definitely a follower of Occam's razor!

As far as recessions go, which three recessions were you referring to? Money definitely gets tight when things go bad. That's human nature. Would a typical person go out and buy an expensive car with an auto loan if they weren't sure there would receive a paycheck the next month?

People hoarding money doesn't seem to be the cause of recessions, rather it appears to be easy credit that leads to bubbles or malinvestment as the Austrian School of Economics calls it, like the subprime mortgages being sold off as investment-grade vehicles before 2008.
Hoarding money has caused many a recessions. 1907 and the 1930s are 2 classic examples. Why go out and spend or invest your money (which is gold) when your gold is earning 2% risk free in your vault? In fact, most of the recessions and asset bubbles during the 19th century turned on the lack of money.

There are 2 good examples in early American history. One was in TN, the other in New Orleans. In both cases the local economy was booming. There was a influx of population, productivity was increasing, and transportation links were established. The economy shifted from subsistence farming to cash crops. Tobacco in TN and cotton in NO.

The problem was that while the economy doubled the supply of gold, and hence currency, was fixed. Currency and Money - which are different - are a very different asset then other forms of wealth.

The solution is obvious. If currency is fixed, create your own money, because that is what money really is. Real Bills and Warehouse receipts of tobacco and cotton were common. So the lack of currency (gold), lead to a demand in alternative money (warehouse receipts), which lead to a increase demand in tobacco and cotton (for more warehouse receipts), which lead more people to come in a farm lands, etc. In short, an asset bubble. Until it popped.

Oh, and anyone who had gold could use the fractional reserve system of banking to leverage up their returns. The higher the leverage the juicier the returns. Each bank would issue its own paper currency based on its own gold supply. IIRC in the 1880s there were over 300 different currencies in circulation. this worked great - until there was a dip in the economy - then collapse.

There are other more complex historical examples. London had lots of issues with real bills and warehouse receipts. The value of money fell with the CA gold strike of 1849. And then increased until the South African Gold Strike of 1890(?). And the silver strikes. Etc.

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Re: Negative Interest Rates in U.S.

Post by J G Bankerton » Tue Aug 27, 2019 2:32 pm

alex_686 wrote:
The solution is obvious. If currency is fixed, create your own money, because that is what money really is. Real Bills and Warehouse receipts of tobacco and cotton were common. So the lack of currency (gold), lead to a demand in alternative money (warehouse receipts), which lead to a increase demand in tobacco and cotton (for more warehouse receipts), which lead more people to come in a farm lands, etc. In short, an asset bubble. Until it popped.

Oh, and anyone who had gold could use the fractional reserve system of banking to leverage up their returns. The higher the leverage the juicier the returns. Each bank would issue its own paper currency based on its own gold supply. IIRC in the 1880s there were over 300 different currencies in circulation. this worked great - until there was a dip in the economy - then collapse.
This is a Youtube video with best selling author Felix Martin; he explains money and he mentions scripts issued by banks; they were bitcoin before there was Bitcoin. There is also a sermon about mammon at the end because the author was speaking at St. Paul's Abbey. The secular talk by the author starts at 2:50; money is not what most people think it is.
https://www.youtube.com/watch?v=GoF7BizBDRw

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Re: Negative Interest Rates in U.S.

Post by index2max » Fri Aug 30, 2019 6:31 pm

alex_686 wrote:
Tue Aug 27, 2019 12:07 pm
index2max wrote:
Mon Aug 26, 2019 9:24 pm
Thanks for the suggestion. I'm still trying to finish "The Ascent of Money" by Niall Ferguson. It's ok as a sort of introduction to the concept of money. I always enjoy light introductions to new subjects.

I plan on getting more into the Austrian School of Economics eventually since their theories are a bit simpler to follow. Like Jack Bogle, I'm definitely a follower of Occam's razor!

As far as recessions go, which three recessions were you referring to? Money definitely gets tight when things go bad. That's human nature. Would a typical person go out and buy an expensive car with an auto loan if they weren't sure there would receive a paycheck the next month?

People hoarding money doesn't seem to be the cause of recessions, rather it appears to be easy credit that leads to bubbles or malinvestment as the Austrian School of Economics calls it, like the subprime mortgages being sold off as investment-grade vehicles before 2008.
Hoarding money has caused many a recessions. 1907 and the 1930s are 2 classic examples. Why go out and spend or invest your money (which is gold) when your gold is earning 2% risk free in your vault? In fact, most of the recessions and asset bubbles during the 19th century turned on the lack of money.

There are 2 good examples in early American history. One was in TN, the other in New Orleans. In both cases the local economy was booming. There was a influx of population, productivity was increasing, and transportation links were established. The economy shifted from subsistence farming to cash crops. Tobacco in TN and cotton in NO.

The problem was that while the economy doubled the supply of gold, and hence currency, was fixed. Currency and Money - which are different - are a very different asset then other forms of wealth.

The solution is obvious. If currency is fixed, create your own money, because that is what money really is. Real Bills and Warehouse receipts of tobacco and cotton were common. So the lack of currency (gold), lead to a demand in alternative money (warehouse receipts), which lead to a increase demand in tobacco and cotton (for more warehouse receipts), which lead more people to come in a farm lands, etc. In short, an asset bubble. Until it popped.

Oh, and anyone who had gold could use the fractional reserve system of banking to leverage up their returns. The higher the leverage the juicier the returns. Each bank would issue its own paper currency based on its own gold supply. IIRC in the 1880s there were over 300 different currencies in circulation. this worked great - until there was a dip in the economy - then collapse.

There are other more complex historical examples. London had lots of issues with real bills and warehouse receipts. The value of money fell with the CA gold strike of 1849. And then increased until the South African Gold Strike of 1890(?). And the silver strikes. Etc.
You state that hoarding money caused recessions, but why would people hoard money if nothing is wrong? Something must happen to trigger people's defensive reaction to hoard their money. Otherwise they'd spend more of it as usual, right?

Thanks for giving the examples about warehouse receipt money. I was wondering what was common in the early 1800s as currency.

As far as the 1837 recession goes, Andrew Jackson made an executive order requiring purchases of government land to be in gold or silver.

https://en.wikipedia.org/wiki/Specie_Circular

If people were paying for land using paper money, like you mentioned, and asset prices kept going up and up in a frenzy, it makes sense that requiring land purchases in hard money (which is scarce) would pop the bubble. A recession follows after a bubble is popped, but I don't think hoarding is to blame.

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Re: Negative Interest Rates in U.S.

Post by 7eight9 » Sat Aug 31, 2019 5:25 pm

Now the number is $17 Trillion. Nice interactive feature in article below quoted below.

The global stock of negative-yielding debt is now in excess of $17 trillion as rising market volatility lends extra force to this year’s unprecedented bond rally.

Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss. Yet buyers are still piling in, seeking to benefit from further increases in bond prices and favorable cross-currency hedging rates—or at least to avoid greater losses elsewhere.


https://www.bloomberg.com/graphics/nega ... nd=premium
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Re: Negative Interest Rates in U.S.

Post by Valuethinker » Sun Sep 01, 2019 7:29 am

willthrill81 wrote:
Mon Aug 26, 2019 9:56 pm
index2max wrote:
Mon Aug 26, 2019 9:24 pm
I plan on getting more into the Austrian School of Economics eventually since their theories are a bit simpler to follow.
As an aside, I agree with the 'micro-level' idea of Austrian economics because it is simply logical to me that all economic activity is simply the cumulative result of many individual decisions. The notion that economics can only be studied in a meaningful way from a macro perspective just seems completely absurd to me. Like many phenomena, I believe that we can examine them from a micro or a macro perspective.
Welcome to the Real Business Cycle school of macroeconomics aka "the Freshwater School" because of its dominance at Chicago, Carnegie Mellon, Rochester, Minnesota etc.

Unless you focused on international economics it's been very hard to get a job in macroeconomics for the last 30 years without "rigorous microfoundations " to your PhD thesis or to get published in leading macro journals.

You could not publish a macro paper which did not start w a complex mathematical model scaling up from idealized individuals to the whole economy. Expectations were assumed to be totally rational and governments and central banks ineffective unless they could totally surprise markets and even then this would only have short run effects.

Markets were assumed to trend towards full employment equilibrium in all cases.

We got to the point where in 2008 09 it became obvious that many academics had *no idea what Keynes had actually said* -- as opposed to Milton Friedman where everyone had read him and knew the RBC critiques of his lack of rigour.

It turns out that the approach is not very useful empirically. You had someone seriously defending the notion in 2008 that the US recession was caused by an exogenous shift in working hours preference by American workers.

That's right. Their models told them that the reason we had the 08-09 recession was American workers decided to work fewer hours.

Those who had studied economic history, international economics especially that of international economic crises, simply smiled. Because that knowledge told you that there was an x factor, Keynes Animal Spirits if you will, that separates macro economics from simply being an aggregation of idealized microeconomic firms & consumers.

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Re: Negative Interest Rates in U.S.

Post by Valuethinker » Sun Sep 01, 2019 7:35 am

index2max wrote:
Mon Aug 26, 2019 9:24 pm
alex_686 wrote:
Mon Aug 26, 2019 1:00 pm
index2max wrote:
Sat Aug 24, 2019 11:38 am
I'm going to need to keep reading more about how the Federal Reserve does its bookkeeping. Thanks for trying to explain it!

I'm a simple man. I can understand how an inflexible money supply that's backed by something scarce like gold works.

The only part of fractional banking I've understood so far is that the increase of money through a series of deposits and lending follows a geometric series.
I think you have a simplistic and idealized view of a historical past that never existed. The value of money bounded around a lot under the gold standard. There was a recession or 3 in the US because there was not enough money. The West had commodities that the East wanted to buy, the East had manufactured goods that the West wanted to buy, and Wells Fargo literally could not haul gold back and forth fast enough.

Next, banking requires the use of fractional reserves. This is even more true under the gold standard than the current standard. I will point out that most of the money (note - not currency) is “near money” (think commerical paper) that is outside of the Fed system.

So I would skip reading up on the Fed and instead read up on Basel III. As others have noted, the Fed is playing a smaller role in money creation. The real action is around Basel. But that is even more technical.

A better place to start would be Money: The Unauthorized Biography by Felix Martin. It is a light popular read.
Thanks for the suggestion. I'm still trying to finish "The Ascent of Money" by Niall Ferguson. It's ok as a sort of introduction to the concept of money. I always enjoy light introductions to new subjects.

I plan on getting more into the Austrian School of Economics eventually since their theories are a bit simpler to follow. Like Jack Bogle, I'm definitely a follower of Occam's razor!

As far as recessions go, which three recessions were you referring to? Money definitely gets tight when things go bad. That's human nature. Would a typical person go out and buy an expensive car with an auto loan if they weren't sure there would receive a paycheck the next month?

People hoarding money doesn't seem to be the cause of recessions, rather it appears to be easy credit that leads to bubbles or malinvestment as the Austrian School of Economics calls it, like the subprime mortgages being sold off as investment-grade vehicles before 2008.
Simple of course does not mean correct.

The great virtue of Keynesian models is that they work. Despite lacking all the consistent underpinnings of more theoretically elegant ones.

IS-LM is a great framework. Even though Amy first year economics textbook has it and you can solve it with linear algebra.

Austrian? You need a "natural interest rate". To do that you have to have an underlying mathematical model. Pretty quickly you are in to Freshwater School macroeconomics and heavy math.

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Negative Rates, theoretical effect on Asset prices?

Post by TomCat96 » Tue Sep 03, 2019 1:27 pm

[Thread merged into here, see below. --admin LadyGeek]

The question here is what are the long term effects of negative rates on asset prices?
-Stocks, Real Estate, Commodities.

There's many ways to parse this question however. Slightly negative rates of sovereign debt, used as a control mechanism to influence the spread of yields may well have little to no effect at all. Moreover, there is some possibility that it will increase cash holdings because at least the nominal yield of cash is zero as opposed to negative. We also know that negative rates in the immediate short term may provoke cash investments in the economy, which is likely what central banks want.

I want to avoid those scenarios because we are already in them.

The question then asks you to assume, 1) relatively large negative yield at all points of the curve--banks charge negative rate on accounts. 2) General Cash Ban (holding large sums in cash is either intractable or denied by the Sovereign state) 3) relatively long period.

In other words you live in a world where every bank, every CD, every money market fund pays a negative yield over time, and where you cannot place your assets in cash for all practical purposes.

I speculate the following will occur:

1) Relatively large negative yield creates an "inflationary force". Your money is losing value over time, this time nominally and real by extension.

2) Real Estate has been known to follow inflation in the very long run. At the very least, all real assets have an "inflationary component" to their prices.


3) Real Estate Asset prices will track the new inflationary force and may actually decline in price over time.

If a house rises from 300k to 400k over a 15 year period, that is very slow and may reflect inflation rather than actual gain in real value.
If new "inflation" is reflected as an actual drop in nominal price, it could mean that in the future, the proper reflection of the above forces looks like
300k to 225k over a 15 year period.

Ironically, the drop in the nominal price of real property over time may not mirror inflation. It may well be that a house may "gain" in real value
because the nominal drop in home prices is not "fast enough"

Any other thoughts on how negative rates may affect asset prices in the long term?

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Re: Negative Rates, theoretical effect on Asset prices?

Post by MotoTrojan » Tue Sep 03, 2019 3:15 pm

I would assume it will (as it has) continue to move folks towards equities, driving up valuations, and reducing expected return.

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Re: Negative Interest Rates in U.S.

Post by LadyGeek » Tue Sep 03, 2019 3:50 pm

I merged TomCat96's thread into the on-going discussion.
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Re: Negative Interest Rates in U.S.

Post by Elam » Tue Sep 03, 2019 4:08 pm

.
Interesting info about devaluing cash in a negative interest rate environment from Feb 2019 Bloomberg article:

"... economists at the International Monetary Fund wrote on the group's blog. Cash, which can be held interest free, offers a way around negative rates, but electronic money issued by a central bank can't be stuffed under any mattress.

IMF economists Ruchir Agarwal and Signe Krogstrup said that dividing the monetary base into two separate currencies - cash and electronic money - could allow rates to be cut even deeper below zero. E-money would pay whatever the policy rate is and cash would have an exchange rate against the e-cash, they wrote.

The key is the conversion rate since that would let cash depreciate at the same pace as the negative interest rate on e-money. Shops would also start advertising prices in e-money and cash separately.

"Cash would thereby be losing value both in terms of goods and in terms of e-money, and there would be no benefit to holding cash relative to bank deposits," Agarwal and Krogstrup said. "This dual local currency system would allow the central bank to implement as negative an interest rate as necessary for countering a recession, without triggering any large-scale substitutions into cash."

more at link

https://www.bloomberg.com/news/articles ... tive-rates

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The end of money as we know it - Axios

Post by bizkitgto » Tue Sep 10, 2019 2:48 pm

[Thread merged into here, see below. --admin LadyGeek]
The basic principles of investment are being upended, perhaps irreversibly, as the world enters an era of ultra-low and even negative interest rates.
The big picture: The low-to-negative interest rate environment poses a major problem for people looking to save for retirement. The traditional 60/40 portfolio (60% stocks and 40% bonds) that fund managers have used to craft retirement accounts for decades doesn't work in the long-term if bonds yield nothing or have negative rates.
https://www.axios.com/the-end-of-money- ... ed266.html
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Re: The end of money as we know it - Axios

Post by ohai » Tue Sep 10, 2019 2:52 pm

The lord created UPRO for a reason.

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Re: The end of money as we know it - Axios

Post by oldcomputerguy » Tue Sep 10, 2019 2:56 pm

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Re: Negative Interest Rates in U.S.

Post by LadyGeek » Tue Sep 10, 2019 3:14 pm

Upon further review (and receiving a PM), bizkitgto's thread is unlocked and merged into the on-going discussion.

Please stay on-topic, which is focused on negative interest rates.
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Re: Negative Interest Rates in U.S.

Post by LadyGeek » Wed Sep 11, 2019 7:23 am

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Re: Negative Interest Rates in U.S.

Post by bbmuppy » Thu Sep 12, 2019 12:26 pm

Interesting discussion. Not really sure how the financial system would actually fare under negative interest rates. Thinking about not paying off my mortgage any faster than I have to with the prospect of negative interest rates, though. Perhaps can refinance to an even lower rate or perhaps the housing market is juiced further? Anyone else taking the prospect of neg interest rates into account when their home/real estate investments?

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Re: Negative Interest Rates in U.S.

Post by MotoTrojan » Thu Sep 12, 2019 2:05 pm

bbmuppy wrote:
Thu Sep 12, 2019 12:26 pm
Interesting discussion. Not really sure how the financial system would actually fare under negative interest rates. Thinking about not paying off my mortgage any faster than I have to with the prospect of negative interest rates, though. Perhaps can refinance to an even lower rate or perhaps the housing market is juiced further? Anyone else taking the prospect of neg interest rates into account when their home/real estate investments?
Netherlands has a -0.5% mortgage for qualified lendees right now!

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Re: Negative Interest Rates in U.S.

Post by Hector » Thu Sep 12, 2019 3:23 pm

MotoTrojan wrote:
Thu Sep 12, 2019 2:05 pm
bbmuppy wrote:
Thu Sep 12, 2019 12:26 pm
Interesting discussion. Not really sure how the financial system would actually fare under negative interest rates. Thinking about not paying off my mortgage any faster than I have to with the prospect of negative interest rates, though. Perhaps can refinance to an even lower rate or perhaps the housing market is juiced further? Anyone else taking the prospect of neg interest rates into account when their home/real estate investments?
Netherlands has a -0.5% mortgage for qualified lendees right now!
Housing prices must have increased a lot then in Netherlands. Is it?

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Re: Negative Interest Rates in U.S.

Post by bck63 » Thu Sep 12, 2019 5:31 pm

bgf wrote:
Sun Aug 11, 2019 11:32 am
if rates go to zero, then stocks are very cheap.
Or as Warren Buffett has said, "ridiculously cheap."

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Re: Negative Interest Rates in U.S.

Post by bbmuppy » Thu Sep 12, 2019 8:58 pm

MotoTrojan wrote:
Thu Sep 12, 2019 2:05 pm
Netherlands has a -0.5% mortgage for qualified lendees right now!
Incredible. What would stop me from taking on as many mortgages as possible in this setting? Don't see how this is sustainable.

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Re: Negative Interest Rates in U.S.

Post by MotoTrojan » Thu Sep 12, 2019 9:09 pm

bbmuppy wrote:
Thu Sep 12, 2019 8:58 pm
MotoTrojan wrote:
Thu Sep 12, 2019 2:05 pm
Netherlands has a -0.5% mortgage for qualified lendees right now!
Incredible. What would stop me from taking on as many mortgages as possible in this setting? Don't see how this is sustainable.
Deflation for one. Also I don't see how owning a home and getting paid 0.5% is that appealing if you don't even want the home. You can get 4x that in the US in a money market fund.

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Re: Negative Interest Rates in U.S.

Post by willthrill81 » Thu Sep 12, 2019 9:29 pm

MotoTrojan wrote:
Thu Sep 12, 2019 9:09 pm
bbmuppy wrote:
Thu Sep 12, 2019 8:58 pm
MotoTrojan wrote:
Thu Sep 12, 2019 2:05 pm
Netherlands has a -0.5% mortgage for qualified lendees right now!
Incredible. What would stop me from taking on as many mortgages as possible in this setting? Don't see how this is sustainable.
Deflation for one. Also I don't see how owning a home and getting paid 0.5% is that appealing if you don't even want the home. You can get 4x that in the US in a money market fund.
IIRC, there were fees associated with those mortgages that basically brought the interest rate back to zero or close.
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Re: Negative Rates, theoretical effect on Asset prices?

Post by typical.investor » Thu Sep 12, 2019 10:06 pm

TomCat96 wrote:
Tue Sep 03, 2019 1:27 pm
[Thread merged into here, see below. --admin LadyGeek]

The question here is what are the long term effects of negative rates on asset prices?
-Stocks, Real Estate, Commodities.

There's many ways to parse this question however. Slightly negative rates of sovereign debt, used as a control mechanism to influence the spread of yields may well have little to no effect at all. Moreover, there is some possibility that it will increase cash holdings because at least the nominal yield of cash is zero as opposed to negative. We also know that negative rates in the immediate short term may provoke cash investments in the economy, which is likely what central banks want.

I want to avoid those scenarios because we are already in them.

The question then asks you to assume, 1) relatively large negative yield at all points of the curve--banks charge negative rate on accounts. 2) General Cash Ban (holding large sums in cash is either intractable or denied by the Sovereign state) 3) relatively long period.

In other words you live in a world where every bank, every CD, every money market fund pays a negative yield over time, and where you cannot place your assets in cash for all practical purposes.

I speculate the following will occur:

1) Relatively large negative yield creates an "inflationary force". Your money is losing value over time, this time nominally and real by extension.

2) Real Estate has been known to follow inflation in the very long run. At the very least, all real assets have an "inflationary component" to their prices.


3) Real Estate Asset prices will track the new inflationary force and may actually decline in price over time.

If a house rises from 300k to 400k over a 15 year period, that is very slow and may reflect inflation rather than actual gain in real value.
If new "inflation" is reflected as an actual drop in nominal price, it could mean that in the future, the proper reflection of the above forces looks like
300k to 225k over a 15 year period.

Ironically, the drop in the nominal price of real property over time may not mirror inflation. It may well be that a house may "gain" in real value
because the nominal drop in home prices is not "fast enough"

Any other thoughts on how negative rates may affect asset prices in the long term?
These are good points as to why real estate may not rise. That said, if money has nowhere for it to earn a return (meaning bonds are not an option), then some will surely look at real estate for a steady return without considering these points.

So if money flows from what would have been bond investments into real estate that is following inflation and losing value, then yeah - who knows how much the flows in that are pushing the price up is offsetting the drop in home prices.

In any case, I don’t think negative rates has much to do with economic stimulus to promote growth. That effect is very weak. Having a weaker currency though is great for exporters and foreign companies that want to operate in the US.

I think there would be flows out of both treasuries and US stocks if US rates go to zero. And maybe out of real estate too if foreign investors perceive the dollar will plunge.

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Re: Negative Interest Rates in U.S.

Post by LadyGeek » Fri Sep 13, 2019 7:32 am

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