17 thoughts on “Negative Interest Rates”

  1. There’s nothing magical about the negative sign. If government is afraid that some weird effect (like the banks borrowing infinite amounts and holding it as cash) will happen at negative rates, then they can always limit the amount of money borrowed at that rate, say with auctions of fixed amounts of loan, say like they do now with bonds.

  2. Nothing magical? This is the equivalent of free money. Why stop with money? Pay me to fill my tank with gas. Pay me to eat at your restaurant.

    Limit it to a fixed amount? How could you not? The ultimate limit being when you have nothing left to give away.

    It reminds me of a friend that wanted to keep the cost of a building down for his brother-in-law. So he charged him less than the monthly interest… meaning he would never own the building.

    There are points which you do not go… except as a gimmick.

  3. If government is afraid that some weird effect (like the banks borrowing infinite amounts and holding it as cash) will happen at negative rates, then they can always limit the amount of money borrowed at that rate

    Which would have the same effect on supply and demand as charging a non-negative interest rate, so why bother with the negative interest rate in the first place?

    I think the point of a negative interest rate is that supply and demand for currency has gotten upside down and people with money are actually trying to get rid of it. In short, it is less than worthless.

    Under those circumstances, I really wouldn’t be worried about people or institutions hoarding dollars. I’d have other things on my mind.

  4. > Nothing magical? This is the equivalent of free money.

    As the article points out, negative interest is actually somewhat common.

  5. The examples tend to be of negative interest rates on -deposits-. They also throw around the word “nominal.”

    Any regular non-interest bearing checking account that has a yearly fee is a “nominally negative interest rate.”

    But if you’re stating a negative interest rate on loans, random people are going to want to borrow as much money as possible. And rules about limits are going to be tough to enforce. Forming a bank is more difficult that a random person forming a company, but if you’ve got a shot at being -paid- to take a loan….

    This is “We’ll -pay- you to borrow our money.” It only makes sense if you feel there’s a major collapse of the currency printing market.

  6. Well, hell. For some reason I was thinking Fed Funds rate on the loans going -out- of the Fed. Not the deposits.

    Reducing the rate of return on T-bills or the rate of -deposits- in the Fed is something else entirely. From that side, it isn’t exciting at all. It is just saying “Stop giving us your money, do something more interesting with it!”

    I thought the Fed Funds rate was the same for deposits -and- loans though, and offering loans with a negative interest rate is asking for insanity.

  7. Nothing magical? This is the equivalent of free money. Why stop with money? Pay me to fill my tank with gas. Pay me to eat at your restaurant.

    It’s free money only if the risk-free rate of return is higher than the interest rate of the loan. It’s possible to have a negative risk-free rate of return. That’s precisely what happens during a serious bout of deflation. Some investments like cash or US bonds might still have a positive rate of return, but most investments would not.

  8. It’s free money only if the risk-free rate of return is higher than the interest rate of the loan.

    No. It’s free money period. The fact that the value of the money itself changes is immaterial.

    If I borrow $1000 and you pay me $50 to do it. Then at the end of the loan I’ve paid you $950 and gained $50. It doesn’t matter what that $50 is actually worth. It’s still free money.

  9. negative interest is actually somewhat common

    Andy, I had to reread the article to find what you meant. So here’s what I found…

    on certain U.S. Treasury repurchase agreements
    This sounds like a form of penalty to me.

    several foreign-owned banks in Japan have paid negative nominal interest rates on yen deposits
    Now we’re talking about currency exchange I believe.

    the Swiss central bank imposed negative interest rates on Swiss franc deposits by foreigners
    Again, currency exchange.

    Treasury bill rates were sometimes negative in 1940 and 1941
    Because of a special case related to property tax exemption.

    All in all, I wouldn’t call that common.

  10. If I borrow $1000 and you pay me $50 to do it. Then at the end of the loan I’ve paid you $950 and gained $50.

    Not if in the meantime you lost $100. Then it wouldn’t be free money. You’d have lost $50.

  11. Interest rates already went negative on Treasuries early this year. Very slightly, but on the south side of zero nonetheless.

  12. Not if in the meantime you lost $100.

    Where exactly? The thousand you borrowed was money you didn’t have and is returned to the lender. The fifty is money the lender is giving you over the period of the loan. Show me a loss anywhere in this transaction. You could only do that if you could show negative money as well as negative interest. Nobody deals in negative money.

  13. Not if in the meantime you lost $100.

    What does that have to do with the loan and the interest? If it isn’t directly related to the loan transaction it can’t be accounted to it that way.

  14. > All in all, I wouldn’t call that common.

    We’ve gone from “impossible” to “not common”.

    I note that lenders can impose conditions.

    For example, “I’ll loan you $1000 and you only have to pay me $900 back, but only if you spend that $1000 on gummy bears.”

    Anthony might argue that the lender is getting value from satisfaction of the conditions, but is that really different from positive interest with no conditions?

    Lenders ALWAYS want return. The fact that they usually get it from interest does not imply that interest must always be positive.

  15. I’ll loan you $1000 and you only have to pay me $900 back, but only if you spend that $1000 on gummy bears.

    Not quite the same transaction when you add gummy bears or some other conditions.

    Without gummy bears… Borrow until the lender is broke, then find more money for the lender to loan (govt. grants or another lender foolish enough to give this guy money) then see if you can get the lender to make the term of the loan about 10 seconds and have a pile of loan forms and pens ready.

    With gummy bears… depends on how much you like gummy bears.

  16. We’ve gone from “can’t happen” to “has happened” and now to “but those are conditions”.

    Interestingly enough, conditions can address all of Anthony’s attempts to argue that it can’t be done.

    FWIW, a given entity can’t loan more money than it has, regardless of the interest rate.

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