Author Topic: Negative interest rates? How does that work?  (Read 553 times)

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Offline Fishrrman

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Negative interest rates? How does that work?
« on: August 27, 2019, 12:29:33 PM »
https://www.christianpost.com/voice/negative-interest-rates-how-does-that-work.html

Negative interest rates? How does that work?
Christian Post
8/27/2019
By Gordon C. Boronow

Over $17 trillion dollars’ worth of global debt is now “earning” an interest rate below 0%. Negative interest rates are infecting developed countries such as Germany, Switzerland and Japan. I read an article recently that said there are negative interest rate mortgages available in Denmark. Just trying to think about negative interest rates makes one’s head explode.

From a practical perspective, the mechanics of negative interest rates are clear enough. The borrower guarantees to pay, say, $1000 in a year. The lender then agrees to give the borrower $1020 (for a negative 2% yield) for the guaranteed payment. Voila, negative interest! You might point out that the lender would be better off just holding onto the cash, but that’s another story. A negative interest rate mortgage is even more cool. Each payment the borrower makes on the mortgage reduces the principal balance by more than the amount of the mortgage payment. How cool is that?

What has happened to interest rates that they are so low for so long? What does it mean for the economy in the United States and elsewhere? I certainly do not know, nor does anyone else. Interest rates are a price signal in the economy; the price of postponing consumption to a later period. Persistently low interest rates are a puzzle to economists and policymakers. Standard economic theory would expect that interest rates should be high enough to convince consumers to save something and not spend it all today and low enough that businesses can borrow and invest and still make a profit. In any case, economic theory does not expect negative interest rates.

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Offline Fishrrman

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Re: Negative interest rates? How does that work?
« Reply #1 on: August 27, 2019, 12:34:31 PM »
Hmmmm....

Folks, forgive me, I'm dumb.
But...

Suppose that a major USA bank announced that they would now charge you for depositing your money there.

And also suppose that there remained OTHER banks that did not, and advertised that fact.

If I had money in the bank that was going to charge me for my deposits, THE VERY FIRST THING I would do is close my account at such bank and move the money somewhere else.

Sumthin' tells me that most others would do the same.

What would YOU do...?

Offline Cyber Liberty

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Re: Negative interest rates? How does that work?
« Reply #2 on: August 27, 2019, 12:36:47 PM »
We need to re-coin the expression, "Press Bias" to "Media Bigotry."
I will NOT comply.
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Offline Sanguine

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Re: Negative interest rates? How does that work?
« Reply #3 on: August 27, 2019, 04:19:41 PM »
The fact that interest rates are so low should be a good thing, I would think. 

Offline Cyber Liberty

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Re: Negative interest rates? How does that work?
« Reply #4 on: August 27, 2019, 04:38:00 PM »
The fact that interest rates are so low should be a good thing, I would think.

Not if you have CDs.
We need to re-coin the expression, "Press Bias" to "Media Bigotry."
I will NOT comply.
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Offline Sanguine

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Re: Negative interest rates? How does that work?
« Reply #5 on: August 27, 2019, 04:39:50 PM »
Not if you have CDs.

True, but money is available so that businesses can get started and grow.  If CSs don't do it, may be a better place to put my money.

Offline thackney

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Re: Negative interest rates? How does that work?
« Reply #6 on: August 27, 2019, 04:50:25 PM »
If I got a mortgage with negative interest, how long would they allow me to make interest only payments delaying the loan payback?
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Online Hoodat

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Re: Negative interest rates? How does that work?
« Reply #7 on: August 27, 2019, 04:58:29 PM »
How nice!  The monetary policy that failrd so utterly in Japan in the 90s is now being adopted by the rest of the world.

Here's a better idea.  Get the federal government the hell out of it, and let businesses create wealth on their own without interference.  And please please please STOP TAXING MONEY ENTERING THE COUNTRY FROM ABROAD.
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Online Absalom

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Re: Negative interest rates? How does that work?
« Reply #8 on: August 27, 2019, 10:31:55 PM »
Mechanics aside while ignoring brokerage fees and taxes, consider:
A saver buys (invests in) $50,000 worth of Bonds sold by a Corporation;
for an interest yield of $2,000, so the Bonds gave him a positive return of 4% on his investment.
If the Bonds had a negative return he would receive nothing on his investment.
 

Offline InHeavenThereIsNoBeer

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Re: Negative interest rates? How does that work?
« Reply #9 on: August 27, 2019, 10:36:22 PM »
If I got a mortgage with negative interest, how long would they allow me to make interest only payments delaying the loan payback?

Wouldn't that be take interest payments?
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Offline InHeavenThereIsNoBeer

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Re: Negative interest rates? How does that work?
« Reply #10 on: August 27, 2019, 10:42:20 PM »
It seems impossible at first, but it's really just the greater fool theory.  You buy a bond worth $500 for $505, because you think you can sell it to someone else later for $510.

Not really much different from the stock market the last several years, except with bonds there's an absolute limit on when it must blow up.
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Offline thackney

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Re: Negative interest rates? How does that work?
« Reply #11 on: August 28, 2019, 07:38:38 AM »
Wouldn't that be take interest payments?

Yes.
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