Financial conditions around the world are in uncharted waters. Nobody has a clear idea of what is going to happen.
Negative real interest rates are not too unusual: 1958, 1975, and especially 1980 were all periods when real rates were negative, and the FedFunds target rate has been mostly negative in real terms since the 2008 crisis.
But those are “real” interest rates. In September 1980, the FedFunds rate was a whopping 10.9% but that was a negative 3.5% in “real” terms because the inflation rate was 14.4%. (10.9 - 14.4 = -3.5)
The Fed Funds rate was held close to zero through the Obama Administration, but inflation was about 2%, so the FedFunds rate was minus 2% in “real” terms.
But what we’re seeing in Japan and Europe today are negative nominal rates. AFAIK, this is completely unprecedented. The German government is unable to sell its negative-yielding bonds so just buys them itself. (IIUC, the U.S. Fed has also reversed course and is increasing its own balance sheet.)
Some people seem to blithely assume that negative nominal rates are no problem; that lowering the interest rate from 0.2% to -0.2% is similar to lowering it from 0.6% to 0.2%. Some of the people in this video disagree. (Most of the video is boring, but comments beginning halfway through may be interesting.) Lowering already-negative rates doesn’t have the same stimulative effect of lowering positive rates. Jim Bianco claims that the European negative-rates are kept afloat by their investing in the positive-yielding dollar, but this backstop will go away if U.S. yields drop further. Larry Summers speaks of zero rates as a “black hole,” a trap it may be hard to escape from. David Solomon, CEO of Goldman Sachs, thinks that when future historians write the chapter on negative rates, he’s “not sure that will be a good chapter.”
I searched for a thread already on this topic and found only a one-post thread in MPSIMS:
It does seem paradoxical that with world finances awash in debt and fiat money, interest rates and inflation remain low. I, for one, do not think now is a good time to be buying bonds.
If no one wanted to buy the bonds, the interest rate would be high, not negative.
German yields are low because demand for those bonds is so strong, not weak.
Don’t have a huge amount of time right now but I think a quick point I can make here is the 30-year yield. Go to “max” time frame on the 30-year, and look at it drop and drop for four decades. Part of that (the eighties) is largely about getting inflation under control, but the rest is just a persistent long-term downward trend that is getting conflated with business cycle concerns. For rather absurd historical and mathematical reasons, a lot of monetary models focus on interest rates rather than spending.
Rates are low now because that’s the trend everywhere in low inflation countries. That shouldn’t be conflated with central bank policy, but central banks backed themselves into a corner by communicating with rates rather than with spending.
The Fed does “move” rates in the short term, yes. But in the long term, it’s riding the wave itself. The Fed and other central banks are forced to move rates based on what’s happening in the economy.
I am obviously no expert. That’s why I found the comments in the video interesting: Larry Summers, Jim Bianco, etc. ARE experts. One claim did strike me as odd, and it would be nice to have a better cite: But I was reporting on expert commentary, not making it up myself:
You quoted a sentence from me, but managed to completely miss its obvious meaning! :smack: Well done, I guess!
According to the opinion in the video, the German government bonds are kept low-yielding because the Central Bank bids and buys themselves.
False? Maybe. But at least respond to claims made.
Doesn’t it seem disingenuous to start with a major inflationary epoch, followed by the Clinton Boom years, and extrapolate from that to conclude that the trend toward low interest rates is peculiarly modern? Sure, negative interest rates are a new idea — I said so in OP — ***but in the early 1950’s AAA corporate bonds yielded less than they do now!
Of course you were stuck with a data series that didn’t go back before the 1970’s inflation. Here, I fixed that for you.
It is unfortunate that I missed the “obvious meaning”.
So when you wrote that “the German government is unable to sell its negative-yielding bonds”, I took that to mean that you believed that the German government is not able to sell its bonds. Apparently that was my mistake. And when you wrote “so [the German government] just buys them itself”, I took that to mean that you believed that the German government sells bonds to itself as an alternative to selling to others, since it is “unable to sell” its bonds to others. But again, apparently I am misreading this somehow.
But supposing, for a moment, that I interpret the words on my screen as are actually there, rather than some other “obvious meaning” that I inexplicably and unpardonably missed, I want to be clear.
It is not true.
The German government is having no problems selling its bonds.
The German government does not buy from itself the bonds it sells from itself.
If you want to know who is eager to buy German bonds, there have been articles about that. It is not “the German government” buying the bonds. The European Central Bank does buy German bonds (along with bonds of other eurozone members), but the ECB very far from the only buyer, and it is not part of the German government.
Are you aware that the international monetary regime from the end of WWII until the 1970s was the Bretton Woods system in which the dollar was pegged, internationally, to gold and could be redeemed for gold by foreign finance ministries and central banks?
I’m not sure what point you want to make comparing a quasi-gold standard regime with the modern fiat regime. One reason I picked that particular 30-year bond was because the time series starts with near the end of Bretton Woods, and its associated high inflation (and therefore high nominal rates). While I don’t think it’s “disingenuous” to use a longer time series that combines different monetary regimes, I think it’s worth pointing out that the era was different. Direct comparisons between Bretton Woods and modern central banking are a little dicey. Not impossible, but dicey.
But more than that.
If you want to say that the Clinton boom brought down nominal rates, then what of the Great Recession, which also brought down nominal rates? You seem to think it’s somehow disingenous for me to have cited over four decades of time series data from the modern fiat era, but the entire point of those four decades is that in times of booms – such as the Clinton era, like you mentioned – rates tended to fall, but also in times of crisis like the Great Recession, rates continued to fall. The long-term trend is downward within the current monetary regime, for pretty much the entirety of that regime after central banks figured out how to get inflation under control (which I, specifically, mentioned).
This is why interpreting monetary policy using interest rates is so confusing. It tends to obscure more than it illuminates.
The claim that Germany’s central bank made up a shortfall in a bond auction by buying the bonds itself, puzzled me also, but it was a claim made in the linked newscast. Another interesting claim in the newscast was that positive rates in the U.S. were somehow propping up Europe and allowing them to maintain a negative rate regime — does that make sense?
And Hellestal’s own cite shows
But we still don’t have answers to the questions in thread title: Will U.S. interest rates go negative? [And if so,] what will the result be?
The questions in thread title are topical, especially given comments by Potus and the recent action by FRB. Yet the prior thread drew zero response, and this one has attracted response only from Hellestal. (Thank you Hellestal. Sorry if my reply seemed almost snarky; your expertise is always appreciated.)
Do people see negative nominal interest rates as flabbergasting? For a typical retail bank customer, paying to safe-guard his cash is plausible: Dishing out 0.5% may be thriftier than investing in a wall safe and/or a handgun. (Anyway aren’t some of the negative-interest countries contemplating laws against banknote hoarding?) But what about, from Hellestal’s linked article, this
… One central bank that has lapped up euro zone assets — especially German debt — is the Swiss National Bank which central bank-watchers say buys Bunds whenever it ramps up interventions to curb Swiss franc strength.
To protect its export-heavy economy, the SNB has been crediting the sight deposits of Swiss banks with newly created francs in exchange for foreign currency, usually euros. These deposits expanded to 471 billion as of the end of June, compared with 56 billion francs in July 2011.
Surely it would cheaper for the Swiss to buy banknotes, haul them in via armored truck, and stash them in one of their famous vaults. Humidifiers, mouse traps and pesticides might have been needed to preserve the banknotes for 30 years — and maybe Germany could be persuaded to ease the SNB’s overhead by reissuing €500 notes (or better yet €50000 notes) — but even in worst scenarios the transportation and storage hassles would seem cheaper for SNB than to pay 0.4% annually on long-term bonds of such huge total amount.
But the Swiss are taking the loss for political and economic reasons — they’re deliberately propping up Germany, and the Euro more generally.
I’d be flabbergasted at negative nominal interest rates if applied to the Dollar, and am already flabbergasted that more people aren’t flabbergasted about the idea.
(This may not necessarily imply that authorities have made obvious blunders — though that is an important subtopic — world finance just seems to have entered uncharted and puzzling terrain.)
I think they are absurdly wrong. To explain why they are wrong would take a very long time, though.
These are good questions.
US yields went negative, on the shortest bonds, during the Great Recession. So in a certain sense, it’s already happened. What’s interesting about Germany right now is that rates are negative along the entire yield curve. That is unprecedented.
If you’re asking whether the Fed will deliberately engage in a policy regime of negative interest rates, for example, negative interest on excess reserves (essentially a fee that private banks pay to hold cash), then I believe that’s possible. I think they have the authority, now, to do this. If things get bad, I think they’ll use that authority. Let’s ask a different question: Will the 10-year yield go negative?
Only if the Fed fucks up. Which is possible. A negative 10-year yield means they’ve fucked up badly, and it’s certainly possible that that will happen.
Next question: What will the result be?
I think that question is a little backwards. Yields are prices. The best way to look at the economic system as a whole is to view prices as effects, not causes. Supply and demand are causes. Price and quantity are effects.
The core of my disagreement with people like Larry Summers is based on this. Yes, the Fed “changes the interest rate”. But it does so with its control both over the supply of money, and almost as directly and just as importantly, also through its influence on our demand for money, based on our expectations about future supply. If the Fed is paying interest on excess reserves at a certain rate, it can do so because it can create money. If it “changes the rate”, what it is fundamentally doing is changing the amount of new money it expects to create.
So from my perspective the question is not: What will negative interest rates do? What will negative interest rates cause? No. The causation is reversed there.
Rather the question is: What in the world is the cause of these negative rates? What in the world has happened to supply and demand in this market that has pushed the equilibrium price of bonds so high, and therefore their yield so low? If people are bidding up the price of bonds through stronger demand – especially long bonds – then one implication of that is that they don’t fear the inflation cost of those long bonds over extended time horizons.
Why do they not fear a severe inflation penalty for holding bonds? Well, probably because they don’t think inflation will be so high. The penalty won’t necessarily be there. (Or it will be less than the penalty of holding other assets…)
Why do they believe inflation won’t be high? Probably because they believe that the Fed and other major central banks will – once again – fail to hit their own ostensible targets. This is why I say a 10-year yield that goes negative is a sign of a major fuck-up. If inflation were at its target rate of 2% every year, then a person holding a 0% or negative yield bond would be losing 2% annually. At minimum. Long bond yields should not go to 0% when central banks are hitting their legally mandated targets.
I think the primary concern of the Swiss is the Swiss.
What they don’t want is people afraid of the eurozone bidding up the strength of the franc. Price is the result of the interaction of supply and demand. People are bidding up the price of Swiss francs by buying Swiss assets, and the Swiss are (appropriately) responding to that surge in demand by a corresponding surge in supply. Maybe buying pure cash would be cheaper, as you say, at their current level of purchases. But I think the negative real loss of holding German bonds is completely insignificant compared to the broader loss to their economy if they don’t meet this demand for Swiss assets directly and at force, with a surge of supply. That is the really interesting part of this equation.
I agree that the Swiss are helping the eurozone with their purchases, but maybe not in the way you expect.
I think the Swiss are, with full justification, doing their best to help their own economy. and I think a stronger Swiss economy – and the good example of a sensible central bank, of which there are too few right now – are in turn helping the eurozone countries.
There is not a lot of genuine argument in my post here.
This post is, mostly, empty assertions. I know this.
But the genuine argument takes time. It has to start with some set of principles that, I would hope, most people would agree with. And then it has to build from those first principles into a very long logical pathway that most people don’t have the patience to follow. I don’t think it’s really possible to talk about money by starting with a talk about money. We have to talk about money by starting with a talk about supply and demand, why they work the way they do, what moves them, what influences them. Then we need to build the vocabulary and basic insights of macroeconomics. And THEN we can start applying those insights to money and bonds, and see why I believe that negative interest rates, on long bonds, are a sign of a major central bank failure.
Humidifiers, mouse traps and pesticides might have been needed to preserve the banknotes for 30 years — and maybe Germany could be persuaded to ease the SNB’s overhead by reissuing €500 notes (or better yet €50000 notes) — but even in worst scenarios the transportation and storage hassles would seem cheaper for SNB than to pay 0.4% annually on long-term bonds of such huge total amount.