Negative Interest
Discussion
I thought that with the threat of negative interest rates looming, it would be useful to discuss the ramifications of it to us ‘ordinary folk’.
How will it affect our savings, investments, mortgages and pensions? How will it help the economy in the short and long term?
https://www.bankofengland.co.uk/-/media/boe/files/...
How will it affect our savings, investments, mortgages and pensions? How will it help the economy in the short and long term?
https://www.bankofengland.co.uk/-/media/boe/files/...
Well it almost certainly has, is and will cause people to drift away from old staid savings/premium bonds etc to something that at least will give a return.
Unfortunately what is 100% safe, nothing? Perhaps or perhaps holding cash is the worse case scenario as it gets deflated away. It all depends who you talk to, my 75 year old dad had spoken with a 60+ friend who was "telling him about this "Thing called Bitcoin". Nil in the bank, or doubled in Bitcoin in a few months!?
Then you have precious metals, some see these as a good inflation hedge or recovery stocks (stocks that haven't recovered from the 2020 March covid mini crash)
All these will fluctuate, some wildly, some could even just decline and go low or nil if you choose unwisely/unluckily.
There is no longer a steady bank interest payable as the money leant out to people is charged to them at such a low rate that after the banks margin there is no profit left to pay any with.
You'll have advocates of all asset classes and so it comes to research, personal choice etc just be aware that unlike savings of old none of these will have consistent steady increase and you need to be prepared for a reduction perhaps for a quite some time.
Arguably the time when the cautious are getting fed up of nil/negative returns is the riskier time to get into other assets that have had a surge and some people are talking of bubbles and crashes.
Your savings might be losing money but won't crash, so if you dabbled elsewhere then my advice would be do it gradually be don't be "all in" on one thing.
Unfortunately what is 100% safe, nothing? Perhaps or perhaps holding cash is the worse case scenario as it gets deflated away. It all depends who you talk to, my 75 year old dad had spoken with a 60+ friend who was "telling him about this "Thing called Bitcoin". Nil in the bank, or doubled in Bitcoin in a few months!?
Then you have precious metals, some see these as a good inflation hedge or recovery stocks (stocks that haven't recovered from the 2020 March covid mini crash)
All these will fluctuate, some wildly, some could even just decline and go low or nil if you choose unwisely/unluckily.
There is no longer a steady bank interest payable as the money leant out to people is charged to them at such a low rate that after the banks margin there is no profit left to pay any with.
You'll have advocates of all asset classes and so it comes to research, personal choice etc just be aware that unlike savings of old none of these will have consistent steady increase and you need to be prepared for a reduction perhaps for a quite some time.
Arguably the time when the cautious are getting fed up of nil/negative returns is the riskier time to get into other assets that have had a surge and some people are talking of bubbles and crashes.
Your savings might be losing money but won't crash, so if you dabbled elsewhere then my advice would be do it gradually be don't be "all in" on one thing.
Another earlier thread here: https://www.pistonheads.com/gassing/topic.asp?h=0&...
I still can't see nominal rates for retail/savings deposits going below zero, it would just cause a run on the banks as everyone flocks to withdraw cash - why pay to have cash on deposit when you can keep it under the bed? Of course real deposit rates have been negative for a while if you adjust for inflation - a point made in the paper OP posted.
I still can't see nominal rates for retail/savings deposits going below zero, it would just cause a run on the banks as everyone flocks to withdraw cash - why pay to have cash on deposit when you can keep it under the bed? Of course real deposit rates have been negative for a while if you adjust for inflation - a point made in the paper OP posted.
speech said:
many of us are prone to money illusion – considering the nominal value of payments, rather than the real value of goods and services they can purchase
You wouldn’t put more than a small amount under the bed, though. The risk from burglary would be too great.
Negative interest to keep your money secure in a bank would be little different from paying an insurance premium.
In practice, negative interest rates would see the stock market becoming even more frothy as people seek any sort of positive returns. We’re already at surprising highs given the current pandemic - I’m a feeling a bit nervous about the oncoming crash and wondering whether to move into cash for a bit. I won’t, though, as I know that objectively the risk of being out of the market is greater than being in it.
Negative interest to keep your money secure in a bank would be little different from paying an insurance premium.
In practice, negative interest rates would see the stock market becoming even more frothy as people seek any sort of positive returns. We’re already at surprising highs given the current pandemic - I’m a feeling a bit nervous about the oncoming crash and wondering whether to move into cash for a bit. I won’t, though, as I know that objectively the risk of being out of the market is greater than being in it.
We already have (effective) negative interest rates, we have 0.1% base rate and they are printing money to wallpaper over the (now very) large subsidence cracks (common trick to sell your house in the 80s). We have been falling towards this for well over a decade, really we had a succession of people trying to just kick the can down the road.
It they go negative on retail deposits, people will withdraw their money and there will be a huge bank run... That won't end well. There is evidence people are already withdrawing (why not if they are only paying you 0.1%), it wasn't so long ago there were long queues outside Northern Rock, with depositors withdrawing every penny they could. Given current cuts in savings rates due to money printing (QE) it looks like bank-runs are on the cards again, after all the cuts haven't hit many yet.
We are stuck in a cycle of synchronous recessions across the developed world, with everyone trying to cut rates to try and weaken currency to sell manufactured goods abroad (cos that is what you do in a recession), which won't work in a global recession as everyone else is doing that too.
The young are in a bad position as they will be paying higher taxes to pay back the Covid debt (as will their children, and so on...) are funding the (state) pensions of the elderly (not a funded scheme), housing is taking up a large proportion of their income, so they can't afford to spend like the baby boomers did, the deck is stacked against them.
Summed up best by Chuck Prince “But as long as the music is playing, you’ve got to get up and dance.” His quote was often misunderstood, and I imagine he wish he never said it, but the principle still stands, and most people don't really don't want to see how bad things are; until the brown stuff hits the wall, then it is obvious to all.
Perhaps a Politicians will (eventually) join with other politicians across the globe and accept we have all backed ourselves into a corner and to get out we need to stop spending and consuming, and accepting a lower quality of life. We all know that won't happen, as few would vote for them.
My guess is that stimulus packages will do what they normally do; add loads more debt, selected "friends" will do very well out of them, there will be some temporary jobs boost with very few long term benefits etc but as Keynes said "in the long term we are all dead" they will tell us it is OK as interest rates are low (which is "not" entirely due to the BOE printing money and buying gilts....) but at least the BOE is independent!!!
Don't have nightmares
It they go negative on retail deposits, people will withdraw their money and there will be a huge bank run... That won't end well. There is evidence people are already withdrawing (why not if they are only paying you 0.1%), it wasn't so long ago there were long queues outside Northern Rock, with depositors withdrawing every penny they could. Given current cuts in savings rates due to money printing (QE) it looks like bank-runs are on the cards again, after all the cuts haven't hit many yet.
We are stuck in a cycle of synchronous recessions across the developed world, with everyone trying to cut rates to try and weaken currency to sell manufactured goods abroad (cos that is what you do in a recession), which won't work in a global recession as everyone else is doing that too.
The young are in a bad position as they will be paying higher taxes to pay back the Covid debt (as will their children, and so on...) are funding the (state) pensions of the elderly (not a funded scheme), housing is taking up a large proportion of their income, so they can't afford to spend like the baby boomers did, the deck is stacked against them.
Summed up best by Chuck Prince “But as long as the music is playing, you’ve got to get up and dance.” His quote was often misunderstood, and I imagine he wish he never said it, but the principle still stands, and most people don't really don't want to see how bad things are; until the brown stuff hits the wall, then it is obvious to all.
Perhaps a Politicians will (eventually) join with other politicians across the globe and accept we have all backed ourselves into a corner and to get out we need to stop spending and consuming, and accepting a lower quality of life. We all know that won't happen, as few would vote for them.
My guess is that stimulus packages will do what they normally do; add loads more debt, selected "friends" will do very well out of them, there will be some temporary jobs boost with very few long term benefits etc but as Keynes said "in the long term we are all dead" they will tell us it is OK as interest rates are low (which is "not" entirely due to the BOE printing money and buying gilts....) but at least the BOE is independent!!!
Don't have nightmares
How does this affect bond prices?
We talk about diversifying and spreading the risk when making investments. So in your portfolio, you have a small % of bonds which tends to go the opposite way of shares, so its a form of hedge.
What with negative interest rates and quantitive easing, does this still work. What negative interest rates just blow this whole concept out.
So is it worth having any bonds in a diversified portfolio at all?
We talk about diversifying and spreading the risk when making investments. So in your portfolio, you have a small % of bonds which tends to go the opposite way of shares, so its a form of hedge.
What with negative interest rates and quantitive easing, does this still work. What negative interest rates just blow this whole concept out.
So is it worth having any bonds in a diversified portfolio at all?
Gary C said:
What about inflating our way out of the debt ?
We really have seemed to avoid at all costs from doing that since 2008 but is it inevitable now ?
Inflating your way out of debt is already happening, (have a look how they calculate inflation, it is shocking...) but those in power are racking up the debt quicker and quicker... so the debt isn't going down in real or nominal terms We really have seemed to avoid at all costs from doing that since 2008 but is it inevitable now ?
leef44 said:
How does this affect bond prices?
We talk about diversifying and spreading the risk when making investments. So in your portfolio, you have a small % of bonds which tends to go the opposite way of shares, so its a form of hedge.
What with negative interest rates and quantitive easing, does this still work. What negative interest rates just blow this whole concept out.
So is it worth having any bonds in a diversified portfolio at all?
The government bond prices are artificially high under a QE policy as there is always a willing buyer (the central bank) ready to pay any amount for the bonds. The corporate bonds are anyone's guess, share prices should be a function of performance, but everyone is looking for a home for their money as savings rates have been annihilated by ZIRP and QE for the last 10 years, so I think reality is being stretched a little for some (but that is just my opinion and I am not an adviser).We talk about diversifying and spreading the risk when making investments. So in your portfolio, you have a small % of bonds which tends to go the opposite way of shares, so its a form of hedge.
What with negative interest rates and quantitive easing, does this still work. What negative interest rates just blow this whole concept out.
So is it worth having any bonds in a diversified portfolio at all?
Under previous QE it has shown to suffer from diminishing returns, but as I said above, in an environment where everyone is using QE we are in uncharted territory.
Is it worth having bonds? That would constitute advice...
Edited by GrizzlyBear on Sunday 17th January 00:12
Anyone with an interest in (US) bonds probably already reads Hoisington's quarterly updates.
If you haven't yet, here is the latest
https://hoisington.com/pdf/HIM2020Q4NP.pdf
TLDR conclusion
In sum, considering economic destruction placed on individuals and small businesses by the virus and its resultant shutdowns, the fact that fiscal
expenditures have a negative multiplier on macroeconomic conditions, the debilitating impact on growth of excessive debt and the restriction of the zero bound on monetary stimulus, a secular inflation cycle is not at hand. Since inflation is the primary determinate of the yield on long dated U.S. government debt, it remains our judgement that the bull run in 30-year U.S. Treasurys is continuing.
If you haven't yet, here is the latest
https://hoisington.com/pdf/HIM2020Q4NP.pdf
TLDR conclusion
In sum, considering economic destruction placed on individuals and small businesses by the virus and its resultant shutdowns, the fact that fiscal
expenditures have a negative multiplier on macroeconomic conditions, the debilitating impact on growth of excessive debt and the restriction of the zero bound on monetary stimulus, a secular inflation cycle is not at hand. Since inflation is the primary determinate of the yield on long dated U.S. government debt, it remains our judgement that the bull run in 30-year U.S. Treasurys is continuing.
JPJPJP said:
Anyone with an interest in (US) bonds probably already reads Hoisington's quarterly updates.
If you haven't yet, here is the latest
https://hoisington.com/pdf/HIM2020Q4NP.pdf
TLDR conclusion
In sum, considering economic destruction placed on individuals and small businesses by the virus and its resultant shutdowns, the fact that fiscal
expenditures have a negative multiplier on macroeconomic conditions, the debilitating impact on growth of excessive debt and the restriction of the zero bound on monetary stimulus, a secular inflation cycle is not at hand. Since inflation is the primary determinate of the yield on long dated U.S. government debt, it remains our judgement that the bull run in 30-year U.S. Treasurys is continuing.
I read that as 'Everything is too f*cked for anything else to go wrong'.If you haven't yet, here is the latest
https://hoisington.com/pdf/HIM2020Q4NP.pdf
TLDR conclusion
In sum, considering economic destruction placed on individuals and small businesses by the virus and its resultant shutdowns, the fact that fiscal
expenditures have a negative multiplier on macroeconomic conditions, the debilitating impact on growth of excessive debt and the restriction of the zero bound on monetary stimulus, a secular inflation cycle is not at hand. Since inflation is the primary determinate of the yield on long dated U.S. government debt, it remains our judgement that the bull run in 30-year U.S. Treasurys is continuing.
thekingisdead said:
Any drop in rates should / will increase the value of bonds, pushing yields even further lower.
What if rates go higher?If inflation can’t be controlled then stocks pop and bonds go pop from what I can see.
Current bonds will be making nowt, and all those in shares for yield will return money to bank accounts.
Inflation is everywhere from a decade of money creation. Decent food, roof over head, energy.
But hey, cars and tellys are cheaper than ever after hedonic adjustments... after all, these are what people need to survive.
Just salaries haven’t kept up.
Supply and demand. Covid19 policy is crushing lots of supply and yet demand for many goods hasn’t dropped.
Don’t write off inflation, slow and then very fast.
Or being “safe” in cash. It could just be taken for “the greater good” and returned in new Bison Dollars
IMO although some businesses (Amazon, Sainsburys etc) have been making a packet out of Covid many others have got their backs against the wall (airlines, restaurants, car manufacturers etc). Once the pandemic subsides they will have no choice but to push up prices. Also government will have to pay for it all somehow so we could easily see a jump to 25% VAT as well. The combined effect would likely give a significant lift to inflation.
NickCQ said:
GrizzlyBear said:
have a look how they calculate inflation, it is shocking
Shocking how?This ensure that inflation is maintained at a stable steady level and artificially kept low. State pensions are amongst costs which are inflated based on the statistic. If those "outliers" were kept in the basket then budget deficit would be much higher. Clever political manipulation.
Mr Whippy said:
thekingisdead said:
Any drop in rates should / will increase the value of bonds, pushing yields even further lower.
What if rates go higher?If inflation can’t be controlled then stocks pop and bonds go pop from what I can see.
Current bonds will be making nowt, and all those in shares for yield will return money to bank accounts.
Inflation is everywhere from a decade of money creation. Decent food, roof over head, energy.
But hey, cars and tellys are cheaper than ever after hedonic adjustments... after all, these are what people need to survive.
Just salaries haven’t kept up.
Supply and demand. Covid19 policy is crushing lots of supply and yet demand for many goods hasn’t dropped.
Don’t write off inflation, slow and then very fast.
Or being “safe” in cash. It could just be taken for “the greater good” and returned in new Bison Dollars
Over the last decade or so, bonds must have been issued with very low interest rates. This means even when inflation takes hold and equity prices drop, there isn't much room for bonds to go up.
I wouldn't diss the inflation indices without reason - I've always understood the UK measures to be amongst the most rigorously constructed indices. Obviously it's a difficult task to keep on top of substitution effects and improvements in 'quality' of goods (streaming replaces cinemas, TV licence etc, how do they account for multi-buy offers etc?) but I'm sure they do the best they can. The table in Section 4 gives the broad composition https://www.ons.gov.uk/economy/inflationandpricein...
A single index can't hope to be representative of any particular household. So many variations in spending patterns according to family size, affluence etc. (Personally I'm amazed at the high % on clothes and shoes and low % on healthcare.) They've tried in a few times in the past to bring out more specific indices, eg Pensioner RPI with more emphasis on coal or whatever old people buy! Lockdowns must have been challenging for the index constructors eg when travel halved and outdoor spend fell off a cliff.
That said, an awful lot of finance is predicated on the robustness of the UK indices - ILG payments, almost all public and private pensions, utility price caps and payments to producers........
A single index can't hope to be representative of any particular household. So many variations in spending patterns according to family size, affluence etc. (Personally I'm amazed at the high % on clothes and shoes and low % on healthcare.) They've tried in a few times in the past to bring out more specific indices, eg Pensioner RPI with more emphasis on coal or whatever old people buy! Lockdowns must have been challenging for the index constructors eg when travel halved and outdoor spend fell off a cliff.
That said, an awful lot of finance is predicated on the robustness of the UK indices - ILG payments, almost all public and private pensions, utility price caps and payments to producers........
deggles said:
Another earlier thread here: https://www.pistonheads.com/gassing/topic.asp?h=0&...
I still can't see nominal rates for retail/savings deposits going below zero, it would just cause a run on the banks as everyone flocks to withdraw cash - why pay to have cash on deposit when you can keep it under the bed? Of course real deposit rates have been negative for a while if you adjust for inflation - a point made in the paper OP posted.
That hasn’t happened elsewhere and I don’t think it will happen here.I still can't see nominal rates for retail/savings deposits going below zero, it would just cause a run on the banks as everyone flocks to withdraw cash - why pay to have cash on deposit when you can keep it under the bed? Of course real deposit rates have been negative for a while if you adjust for inflation - a point made in the paper OP posted.
speech said:
many of us are prone to money illusion – considering the nominal value of payments, rather than the real value of goods and services they can purchase
As you say we’ve had real negative rates for a while and that will be the case for a long time.
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