- My Forums
- Tiger Rant
- LSU Recruiting
- SEC Rant
- Saints Talk
- Pelicans Talk
- More Sports Board
- Fantasy Sports
- Golf Board
- Soccer Board
- O-T Lounge
- Tech Board
- Home/Garden Board
- Outdoor Board
- Health/Fitness Board
- Movie/TV Board
- Book Board
- Music Board
- Political Talk
- Money Talk
- Fark Board
- Gaming Board
- Travel Board
- Food/Drink Board
- Ticket Exchange
- TD Help Board
Customize My Forums- View All Forums
- Show Left Links
- Topic Sort Options
- Trending Topics
- Recent Topics
- Active Topics
Started By
Message
Can someone with more financial knowledge than me explain negative interest rates?
Posted on 8/12/19 at 10:37 am
Posted on 8/12/19 at 10:37 am
For reference, Japan, the EU, and several nordic countries like Denmark have started doing this.
For those a few websites behind me: Negative bond rates mean that when you have $100, and loan it to someone, they only have to pay back $99, interest included. So You have $100, and you give it to someone, and a year later you have $99 back. Additionally, people who save money in the bank no longer get even the small fraction of money back as interest. Instead, they pay money to the bank for the privilege of having their money kept there. This makes no sense to me.
Borrowers get paid, and savers get penalized. This is supposed to stimulate the economy.
In practice though, it seems to do nothing but bad things: Causes catastrophic drops in consumer confidence, capital flight, market instability, and other unwanted effects. The positives seem to be exactly 0.
Here's what I can gather from the internet:
- The fed sets a negative rate for banks who hold/store money with them. They also set a negative rate for borrowing from the fed as the central bank.
- This encourages the bank first, to borrow more money (because you are literally getting paid for it) and secondly, to lend more because the added cost of holding on to money adds up.
- Sometimes, this even boils down to small depositors. Meaning your local bank charges you the same as the Fed is charging them, just to hold your money there.
- Thus, it encourages regular people to A) get a new mortgage or loan, and B) spend their money instead of hold on to it.
- Bonds then get offered for negative rates. This is the part I don't understand: Why would an investor buy a bond with a negative rate? You're forking over money for the privilege of then getting only a portion of principle back. Why wouldn't you just not buy this?
Is there some reason why sane, rational beings would do such a thing?
For those a few websites behind me: Negative bond rates mean that when you have $100, and loan it to someone, they only have to pay back $99, interest included. So You have $100, and you give it to someone, and a year later you have $99 back. Additionally, people who save money in the bank no longer get even the small fraction of money back as interest. Instead, they pay money to the bank for the privilege of having their money kept there. This makes no sense to me.
Borrowers get paid, and savers get penalized. This is supposed to stimulate the economy.
In practice though, it seems to do nothing but bad things: Causes catastrophic drops in consumer confidence, capital flight, market instability, and other unwanted effects. The positives seem to be exactly 0.
Here's what I can gather from the internet:
- The fed sets a negative rate for banks who hold/store money with them. They also set a negative rate for borrowing from the fed as the central bank.
- This encourages the bank first, to borrow more money (because you are literally getting paid for it) and secondly, to lend more because the added cost of holding on to money adds up.
- Sometimes, this even boils down to small depositors. Meaning your local bank charges you the same as the Fed is charging them, just to hold your money there.
- Thus, it encourages regular people to A) get a new mortgage or loan, and B) spend their money instead of hold on to it.
- Bonds then get offered for negative rates. This is the part I don't understand: Why would an investor buy a bond with a negative rate? You're forking over money for the privilege of then getting only a portion of principle back. Why wouldn't you just not buy this?
Is there some reason why sane, rational beings would do such a thing?
14
Posted on 8/12/19 at 10:38 am to cokebottleag
quote:
Can someone with more financial knowledge than me explain negative interest rates?
I am no expert by any means, but I believe the just of it is that with negative interest rates, you are PAYING a bank to hold your money in a savings account
Posted on 8/12/19 at 10:40 am to cokebottleag
quote:
Instead, they pay money to the bank for the privilege of having their money kept there. This makes no sense to me.
It's pretty much how all of swiss banking is done. You pay to be part of a bank that will protect your privacy.
Posted on 8/12/19 at 10:41 am to cokebottleag
The way I understand it is if for example the savings interests rate is -1%:
- You deposit $100 into your bank account.
- After one year that $100 becomes $99.
You effectively paid the bank $1 to hold your initial $100 deposit.
Meanwhile, the bank took your $100 and loaned it out for 3% ten times.
- You deposit $100 into your bank account.
- After one year that $100 becomes $99.
You effectively paid the bank $1 to hold your initial $100 deposit.
Meanwhile, the bank took your $100 and loaned it out for 3% ten times.
Posted on 8/12/19 at 10:44 am to cokebottleag
I guess if your only options are to lose money you'll take the option that loses the least money? 
Posted on 8/12/19 at 10:47 am to cokebottleag
Wise men save
Government dont want you to be wise, they want you to be a pawn
seriously, this is a means to keep people from saving, and instead putting it into the economy, this benefits the government
Government dont want you to be wise, they want you to be a pawn
seriously, this is a means to keep people from saving, and instead putting it into the economy, this benefits the government
Posted on 8/12/19 at 10:48 am to HailToTheChiz
quote:
you are PAYING a bank to hold your money in a savings account
Even though they dont actually "hold" it, they loan it out sevral times which makes them interest money.
Posted on 8/12/19 at 10:48 am to HailToTheChiz
quote:
am no expert by any means, but I believe the just of it is that with negative interest rates, you are PAYING a bank to hold your money in a savings account
Yup. Cash is king and everyone with some brainpower dumps checking/savings accounts and does all transactions in cash.
This is a great reason to avoid going all electronic when it comes to currencies. You go all electronic and negative interest rates get pushed and you have no options.
Posted on 8/12/19 at 10:49 am to GeeOH
quote:
Even though they dont actually "hold" it, they loan it out sevral times which makes them interest money.
Correct
I predict many mattresses will be filled with cold hard cash in the future
Posted on 8/12/19 at 10:50 am to KeyserSoze999
quote:
seriously, this is a means to keep people from saving, and instead putting it into the economy, this benefits the government
Just wait until the Treasury goes cashless so we get to watch our money dissapear before our very eyes on our computers because you can't hold cash.
Posted on 8/12/19 at 10:51 am to KeyserSoze999
quote:
seriously, this is a means to keep people from saving, and instead putting it into the economy, this benefits the government
I wish more people understood this. We've been artificially inflating the economy for decades now. At some point, it will all come crashing down.
Posted on 8/12/19 at 10:54 am to wutangfinancial
quote:
Just wait until the Treasury goes cashless so we get to watch our money dissapear before our very eyes on our computers because you can't hold cash.
Isn't it already effectively cashless? The treasury owes the FED 22 trillion. I doubt there is 22 trillion dollars in currency sitting in bank vaults all over the world.
Posted on 8/12/19 at 10:55 am to keks tadpole
quote:
Isn't it already effectively cashless? The treasury owes the FED 22 trillion. I doubt there is 22 trillion dollars in currency sitting in bank vaults all over the world.
no. they mean when physical bills are no longer produced and all transactions must be executed electronically.
Fiat or not, right now you can still hold your money in cash.
Posted on 8/12/19 at 10:57 am to keks tadpole
quote:No, it doesn't.
The treasury owes the FED 22 trillion.
Posted on 8/12/19 at 10:57 am to notsince98
quote:
Fiat or not, right now you can still hold your money in cash
All of us at the same time?
(LOL we're all broke so we probably can)
quote:
No, it doesn't
Explain, with all due respect.
This post was edited on 8/12/19 at 11:01 am
Posted on 8/12/19 at 11:00 am to keks tadpole
If all of us were in 100% cash right now, that would imply a massive asset and debt repricing and a run on the banking system.
Posted on 8/12/19 at 11:16 am to cokebottleag
When your only means of generating economic expansion is via low interest rates, eventually, people demand an even lower rate to expand. At some point, that turns negative.
The US isn't there yet. But the fact that people are afraid that even returning to average interest rates, would put the economy into a ditch, is something that should concern everyone.
If you are afraid that investing $100 in the stock market will return $80, the investing $100 in a bond market to return $99 isn't a terrible idea.
What I don't understand is, why don't people just sit in cash instead of doing either? Perhaps these people feel that these bonds are safer than cash? If so, that's a huge problem.
The US isn't there yet. But the fact that people are afraid that even returning to average interest rates, would put the economy into a ditch, is something that should concern everyone.
quote:
Bonds then get offered for negative rates. This is the part I don't understand: Why would an investor buy a bond with a negative rate? You're forking over money for the privilege of then getting only a portion of principle back. Why wouldn't you just not buy this?
If you are afraid that investing $100 in the stock market will return $80, the investing $100 in a bond market to return $99 isn't a terrible idea.
What I don't understand is, why don't people just sit in cash instead of doing either? Perhaps these people feel that these bonds are safer than cash? If so, that's a huge problem.
Posted on 8/12/19 at 11:23 am to HailToTheChiz
quote:
I predict many mattresses will be filled with cold hard cash in the future
I had relatives that lived through the Great Depression. They were farmers and didn't trust banks so there was money stashed all over the house. When they passed the house was searched top to bottom.
Posted on 8/12/19 at 11:23 am to LSUFanHouston
quote:
What I don't understand is, why don't people just sit in cash instead of doing either?
Hedge inflation? Buy a $100 bond that pays you $95 in five years or hold a $100 bill that is worth $93 in five years?
Posted on 8/12/19 at 11:24 am to LSUFanHouston
quote:In countries with negative interest rates "cash" accounts also have either negative rates,too, or they have fees that reduce the balance in the account.
What I don't understand is, why don't people just sit in cash instead of doing either?
The only alternative is to convert to physical currency notes. Can you imagine having 5 or 6 figures of currency in your house or safe deposit box?
Page 1 of 3
Popular
Back to top
Follow TigerDroppings for LSU Football News