We'll see. But there's no other way to expand the banks loan books other than going subprime. Maybe using super as deposits to buy houses might delay the Minsky moment. But I don't see any other driver for income growth.
And what do you think negative interest rates for the holders of savings in banks 'next time 'round', might do?
PS: The fact that you don't see how something can happen doesn't convince me that it can't happen.
And what do you think negative interest rates for the holders of savings in banks 'next time 'round', might do?
PS: The fact that you don't see how something can happen doesn't convince me that it can't happen.
I do believe it can happen on our shores as Sweden, Denmark, and Switzerland have done it. If advanced Scandinavian countries can, Aussies can too.
The effect on savings, consumption and investment appear negligible though.
I think it's because someone living paycheck to paycheck, like the majority of people, couldn't be bothered putting their money under the mattress when it's only half of half a percent erosion. There's risks carrying cash and people spend their weekly paycheck long before NIRP can nip at their cash.
Negative Interest Rates Yield Positive Results—So Far By GREG IP March 4, 2015 12:17 p.m. ET
Challenging economic orthodoxy, central banks cut rates below zero without yet creating new problems
Interest rates can’t go below zero—or so says a longstanding rule of economics.
Savers would sooner hold cash, goes the logic, than lose money leaving it in the bank. Economists call this presumed floor the “zero bound.” It’s why many central banks, having cut rates to zero, have tried to revive growth with more-exotic tools, such as massive purchases of government bonds.
But as with so many other rules in recent years, the zero bound is being rethought as central banks push rates into negative territory to revive their slowing economies. The big question is whether this new monetary tool will be enough to resuscitate spending and push inflation back up in the many parts of the world where it’s sagging.
Sweden led the way below zero for a brief time in 2009 and 2010, followed by Denmark from 2012 to 2014. Last year, the European Central Bank introduced a negative interest rate. Largely in response, Switzerland and Denmark have since pushed a key policy rate to minus 0.75% and Sweden to minus 0.85%, unprecedented in modern times.
Individual savers have mostly been spared, but big customers aren’t so lucky: Some German banks are charging for large deposits, and in the U.S., J.P. Morgan Chase will do the same, though the Federal Reserve has stayed on the positive side of zero and looks set to raise rates this year. About 16% of the world’s government bonds now sport negative yields, meaning investors are paying to lend to those governments.
This is a potential game-changer for central banks. Normally, they stimulate spending by lowering the real interest rate, that is, the nominal interest rate minus inflation. With inflation now close to zero or lower in many countries, negative nominal rates make possible more negative real rates.
Interest rates are normally positive because it suits both savers and borrowers. It provides households with an incentive to save for tomorrow rather than spend their money today. Companies, meanwhile, are willing to pay to borrow because they plow the money into projects that promise higher returns.
These relationships, however, are not immutable. Worry over the future can drive people and companies to stash money away even if they receive nothing in return. Companies can have such low expectations about the viability of new projects that only zero or negative rates can entice them to borrow and expand. That seems to be the case now. Central banks have held real rates in negative territory since 2008 because of the moribund investment environment and very low inflation.
Historically, however, central banks have almost never pushed rates below zero. First, it wasn’t needed. Second, it might disrupt the financial system; For example, money-market mutual funds would close up shop if they couldn’t promise investors a positive return. Third, it could push depositors to simply take their money out as cash.
Europe’s experience has eased some of those worries. The Danish central bank found that after rates went negative in 2012, the money market continued to function normally, and there was no surge in demand for large-denomination krone notes. Rates today in Sweden, Denmark and Switzerland are more negative than they were in Denmark in 2012, yet none has yet seen a surge in currency demand.
There are several reasons why. Thanks to debit cards, online payments and smartphone wallets, physical cash has become relatively more burdensome and costly. An ECB study found cash 11 times as costly as checks for handling most transactions. In digitally savvy Sweden, currency in circulation has fallen by about 25% since 2009.
Moreover, small savers for the most part haven’t been hit. For big savers such as banks and investment funds, transporting and storing hundreds of millions of euros, dollars or francs, not to mention complying with anti-money-laundering laws, is expensive and time-consuming.
This all suggests the zero bound binds less than central bankers once thought. How much of a difference this makes depends on what they are trying to achieve. Denmark’s goal is to keep the krone pegged to the euro. Negative rates have accomplished this by deterring inflows of so-called hot money from foreign investors, which might push the krone up. The prospect of losing money on a super-safe government bond could be a powerful psychological spur driving money into stocks and commodities.
But what central banks would prefer is that households and firms spend more, and a barely negative interest rate is only a bit more of a stimulus than a rate of zero.
Getting a bigger bump may require a deeper dive into the negative, which would force banks to charge individual depositors, who would howl.
And at some point, a negative enough interest rate makes the hassles of handling millions of dollars of cash worthwhile. Someone, for example, could create an exchange-traded fund that invests in paper currency as an alternative to bank deposits. To deter such behavior would require phasing out paper currency, as Harvard’s Kenneth Rogoff has suggested, or taxing it, an idea first put forward a century ago by Silvio Gesell, a German businessman and economist.
That sounds sensible to economists but reprehensible to the public, which is why it won’t happen. There’s still a boundary below which rates cannot go, even if it’s no longer zero.
I do believe it can happen on our shores as Sweden, Denmark, and Switzerland have done it. If advanced Scandinavian countries can, Aussies can too.
The effect on savings, consumption and investment appear negligible though.
I think it's because someone living paycheck to paycheck, like the majority of people, couldn't be bothered putting their money under the mattress when it's only half of half a percent erosion. There's risks carrying cash and people spend their weekly paycheck long before NIRP can nip at their cash.
Negative Interest Rates Yield Positive Results—So Far By GREG IP March 4, 2015 12:17 p.m. ET
Challenging economic orthodoxy, central banks cut rates below zero without yet creating new problems
Interest rates can’t go below zero—or so says a longstanding rule of economics.
Savers would sooner hold cash, goes the logic, than lose money leaving it in the bank. Economists call this presumed floor the “zero bound.” It’s why many central banks, having cut rates to zero, have tried to revive growth with more-exotic tools, such as massive purchases of government bonds.
But as with so many other rules in recent years, the zero bound is being rethought as central banks push rates into negative territory to revive their slowing economies. The big question is whether this new monetary tool will be enough to resuscitate spending and push inflation back up in the many parts of the world where it’s sagging.
Sweden led the way below zero for a brief time in 2009 and 2010, followed by Denmark from 2012 to 2014. Last year, the European Central Bank introduced a negative interest rate. Largely in response, Switzerland and Denmark have since pushed a key policy rate to minus 0.75% and Sweden to minus 0.85%, unprecedented in modern times.
Individual savers have mostly been spared, but big customers aren’t so lucky: Some German banks are charging for large deposits, and in the U.S., J.P. Morgan Chase will do the same, though the Federal Reserve has stayed on the positive side of zero and looks set to raise rates this year. About 16% of the world’s government bonds now sport negative yields, meaning investors are paying to lend to those governments.
This is a potential game-changer for central banks. Normally, they stimulate spending by lowering the real interest rate, that is, the nominal interest rate minus inflation. With inflation now close to zero or lower in many countries, negative nominal rates make possible more negative real rates.
Interest rates are normally positive because it suits both savers and borrowers. It provides households with an incentive to save for tomorrow rather than spend their money today. Companies, meanwhile, are willing to pay to borrow because they plow the money into projects that promise higher returns.
These relationships, however, are not immutable. Worry over the future can drive people and companies to stash money away even if they receive nothing in return. Companies can have such low expectations about the viability of new projects that only zero or negative rates can entice them to borrow and expand. That seems to be the case now. Central banks have held real rates in negative territory since 2008 because of the moribund investment environment and very low inflation.
Historically, however, central banks have almost never pushed rates below zero. First, it wasn’t needed. Second, it might disrupt the financial system; For example, money-market mutual funds would close up shop if they couldn’t promise investors a positive return. Third, it could push depositors to simply take their money out as cash.
Europe’s experience has eased some of those worries. The Danish central bank found that after rates went negative in 2012, the money market continued to function normally, and there was no surge in demand for large-denomination krone notes. Rates today in Sweden, Denmark and Switzerland are more negative than they were in Denmark in 2012, yet none has yet seen a surge in currency demand.
There are several reasons why. Thanks to debit cards, online payments and smartphone wallets, physical cash has become relatively more burdensome and costly. An ECB study found cash 11 times as costly as checks for handling most transactions. In digitally savvy Sweden, currency in circulation has fallen by about 25% since 2009.
Moreover, small savers for the most part haven’t been hit. For big savers such as banks and investment funds, transporting and storing hundreds of millions of euros, dollars or francs, not to mention complying with anti-money-laundering laws, is expensive and time-consuming.
This all suggests the zero bound binds less than central bankers once thought. How much of a difference this makes depends on what they are trying to achieve. Denmark’s goal is to keep the krone pegged to the euro. Negative rates have accomplished this by deterring inflows of so-called hot money from foreign investors, which might push the krone up. The prospect of losing money on a super-safe government bond could be a powerful psychological spur driving money into stocks and commodities.
But what central banks would prefer is that households and firms spend more, and a barely negative interest rate is only a bit more of a stimulus than a rate of zero.
Getting a bigger bump may require a deeper dive into the negative, which would force banks to charge individual depositors, who would howl.
And at some point, a negative enough interest rate makes the hassles of handling millions of dollars of cash worthwhile. Someone, for example, could create an exchange-traded fund that invests in paper currency as an alternative to bank deposits. To deter such behavior would require phasing out paper currency, as Harvard’s Kenneth Rogoff has suggested, or taxing it, an idea first put forward a century ago by Silvio Gesell, a German businessman and economist.
That sounds sensible to economists but reprehensible to the public, which is why it won’t happen. There’s still a boundary below which rates cannot go, even if it’s no longer zero.
Considered and thoughtful post Createdby - Appreciated - Ta.
Ah, just realised you are basically quoting from a link - My bad - But goodo - At least you are considering the possibility also.
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