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  #31  
Old 02-11-2016, 10:30 AM
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Originally Posted by Elinor Dashwood View Post
Wait, I'm confused. In a deflationary environment, if you put a $100 bill under your mattress, wouldn't it be worth $102 in a year in real terms?

Whereas if you lend it out and the guy repays you $99 at the end of the year, then that $99 would be worth 99 * 1.02 = $100.98 in real terms.

Or am I not thinking about this correctly?
You're correct and I agree with your edit changes from 97.02/98 to 100.98/1.02 (I was actually thinking backwards on the deflation part myself ). I will admit that I stared at this trying to figure out where I had gone wrong, but I think MathGeek has a better explanation. Mine is wrong and I'm glad you pointed it out.

As someone with a $100 bill, I'm better off to hide the money in a box somewhere and it's purchase power will be higher in the future ($102). There is no reason for me to lend this out in this situation. The cost for me to carry that $100 is negligible.

However, in a bank's position, they may be better off lending at a negative rate if the cost to hold it themselves is greater. I'm going to assume the cost to carry a very large amount of money is not negligible and that is why it is hard to compare it on a personal level. I can store $100, but I don't have room for my $1B under my mattress, so I'm likely to deposit it or lend it out since I don't want to hire a security guard to live at my house.

-Riley
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  #32  
Old 02-11-2016, 10:36 AM
nonlnear nonlnear is offline
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Originally Posted by whoanonstop View Post
You're correct and I agree with your edit changes from 97.02/98 to 100.98/1.02 (I was actually thinking backwards on the deflation part myself ). I will admit that I stared at this trying to figure out where I had gone wrong, but I think MathGeek has a better explanation. Mine is wrong and I'm glad you pointed it out.

As someone with a $100 bill, I'm better off to hide the money in a box somewhere and it's purchase power will be higher in the future ($102). There is no reason for me to lend this out in this situation. The cost for me to carry that $100 is negligible.

However, in a bank's position, they may be better off lending at a negative rate if the cost to hold it themselves is greater. I'm going to assume the cost to carry a very large amount of money is not negligible and that is why it is hard to compare it on a personal level. I can store $100, but I don't have room for my $1B under my mattress.

-Riley
The other thing to consider is that if rates go negative enough, the only way to make the system work is to flip bank reserve rules on their head and cap how much cash reserves banks are allowed to hold, or else they would just borrow mountains of cash at negative rates and sit on it.

So in a world of protracted significantly negative rates, the safest assumption IMO is that the bank does not have the option of holding onto an additional $100, because they would always hold their maximum allowed cash.

Last edited by nonlnear; 02-11-2016 at 10:40 AM..
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  #33  
Old 02-11-2016, 10:41 AM
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The other thing to consider is that if rates go negative enough, the only way to make the system work is to flip bank reserve rules on their head and cap how much cash reserves banks are allowed to hold, or else they would just borrow mountains of cash at negative rates and sit on it.
I would not be surprised if rules changed on that and I think that has been a suggestion what I've been reading of late.

If banks start sitting on a lot of money, I might have to quit my day job and start robbing banks again.

-Riley
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  #34  
Old 02-11-2016, 10:46 AM
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More intervention overnight in USDJPY. It appears the central bankers are losing control.
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  #35  
Old 02-11-2016, 10:53 AM
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More intervention overnight in USDJPY. It appears the central bankers are losing control.
http://blogs.wsj.com/moneybeat/2016/...bank-of-japan/

URL for info on this if anyone is interested.

-Riley
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  #36  
Old 02-11-2016, 11:02 AM
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Lol a bunch of actuaries throwing around irrelevant theoretical ideas.

Negative rates don't necessarily mean lower lending rates. See Switzerlands recent example. Negative rates raised Swiss banks' cost of business, can you guess how they responded?

Yes, Swiss banks RAISED lending rates into a negative interest environment.

Oh, consumers also respond to negative rates by saving more, which is exactly the opposite of the ostensible intention.

But the ostensible intention isn't correct. Negative rates aren't about helping the economy or staving off deflation, rather it's a desperate move by Central Banks, at the behest of their private bank owners, to further consolidate the banking industry.

Negative rates hurt your small credit union way more than JP Morgan.

So let's review: TARP, QE, NIRP. They're all subsidies to large banks.
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The thing about a JUICE troll is I'm not always sure if it's troll or serious. It's truly a thing of beauty. This thread is amazing, I honestly don't know if he means it or not.
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  #37  
Old 02-11-2016, 11:10 AM
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I agree with your edit changes from 97.02/98 to 100.98/1.02
I was hoping no one saw that before I fixed it!
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  #38  
Old 02-11-2016, 11:13 AM
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So in a world of protracted significantly negative rates, the safest assumption IMO is that the bank does not have the option of holding onto an additional $100, because they would always hold their maximum allowed cash.
OK, I guess that makes sense.
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  #39  
Old 02-11-2016, 12:21 PM
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Negative interest rates are pure and simple a desparate attempt by central bankers to prevent deflation and prop up asset prices.. That's exactly why the EU did it.

Worldwide, deflation is real in numerous economies.. deflation can spill over into other economies bery easily especially when it's a G7 economy.

Negative rates are meant to "force" people to spend , take out even more debt "because it's so cheap", or force them into more risk assets to prop up prices....

But when the costs of negative rates creeps into the consumers wallet they have less to spend on crap. Absent wage growth/inflation and economic expansion/demand... deflation is a natural outcome. It that scenario, capital preservation is more important that return on capital.
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  #40  
Old 02-11-2016, 12:21 PM
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Originally Posted by JUICE View Post
Lol a bunch of actuaries throwing around irrelevant theoretical ideas.
Glad you could join us! Trust me, there are plenty of people in the banking industry doing the same.

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Originally Posted by JUICE View Post
Negative rates don't necessarily mean lower lending rates. See Switzerlands recent example. Negative rates raised Swiss banks' cost of business, can you guess how they responded?

Yes, Swiss banks RAISED lending rates into a negative interest environment.
Let's make it more clear what we're talking about. Negative deposit rates don't necessarily mean lower lending rates. Pulling up information at the time of the Swiss implementation, it is clear that lending rates rose.

Spoiler:


You can see the little dip early on is roughly the time they went negative. As for the German scenario:

Spoiler:


It isn't as clear cut that the same thing is happening here. It doesn't surprise me that lending rates would actually increase, but I'd expect that it might be more likely to affect borrowing costs in general, not necessarily the interest rate alone.

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Originally Posted by JUICE View Post
Oh, consumers also respond to negative rates by saving more, which is exactly the opposite of the ostensible intention.
We're talking about outside of the bank savings right? It's very possible that banks would pass on deposit fees to those who are storing money with them.

Quote:
Originally Posted by JUICE View Post
But the ostensible intention isn't correct. Negative rates aren't about helping the economy or staving off deflation, rather it's a desperate move by Central Banks, at the behest of their private bank owners, to further consolidate the banking industry.

Negative rates hurt your small credit union way more than JP Morgan.

So let's review: TARP, QE, NIRP. They're all subsidies to large banks.
This seems highly speculative. I'm not saying it is wrong, but what is the underlying reason as to why Central Banks would want to consolidate the banking industry beyond "peer pressure"?

-Riley

P.S. - Sorry for some reason my spoiler links aren't working because I can't access any image sharing here at work lol.
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