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 Finance - Investments Sub-forum: Non-Actuarial Personal Finance/Investing

#31
02-11-2016, 10:30 AM
 whoanonstop Member Non-Actuary Join Date: Aug 2013 Location: Los Angeles, CA Studying for Spark / Scala College: College of William and Mary Favorite beer: Orange Juice Posts: 5,899 Blog Entries: 1

Quote:
 Originally Posted by Elinor Dashwood 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
02-11-2016, 10:36 AM
 nonlnear Member Non-Actuary Join Date: May 2010 Favorite beer: Civil Society Fresh IPA Posts: 30,932

Quote:
 Originally Posted by whoanonstop 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..
#33
02-11-2016, 10:41 AM
 whoanonstop Member Non-Actuary Join Date: Aug 2013 Location: Los Angeles, CA Studying for Spark / Scala College: College of William and Mary Favorite beer: Orange Juice Posts: 5,899 Blog Entries: 1

Quote:
 Originally Posted by nonlnear 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
02-11-2016, 10:46 AM
 exponentialpi Member SOA AAA Join Date: Nov 2008 Location: Po Studying for ACA College: Graduate of hard knocks Favorite beer: Cold Smoke Posts: 1,494

More intervention overnight in USDJPY. It appears the central bankers are losing control.
#35
02-11-2016, 10:53 AM
 whoanonstop Member Non-Actuary Join Date: Aug 2013 Location: Los Angeles, CA Studying for Spark / Scala College: College of William and Mary Favorite beer: Orange Juice Posts: 5,899 Blog Entries: 1

Quote:
 Originally Posted by exponentialpi 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
02-11-2016, 11:02 AM
 JUICE Member SOA AAA Join Date: Sep 2007 Favorite beer: Bell's Two Hearted Posts: 9,826

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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Quote:
 Originally Posted by Johann Wolfgang von Goethe Now and then the fable of the donkey recurs to me. Weary of liberty, he suffered himself to be saddled and bridled, and was ridden to death for his pains.
Quote:
 Originally Posted by Westley 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.
#37
02-11-2016, 11:10 AM
 Elinor Dashwood Member SOA AAA Join Date: Jul 2013 Posts: 1,507

Quote:
 Originally Posted by whoanonstop 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!
#38
02-11-2016, 11:13 AM
 Elinor Dashwood Member SOA AAA Join Date: Jul 2013 Posts: 1,507

Quote:
 Originally Posted by nonlnear 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.
#39
02-11-2016, 12:21 PM
 MathGeek92 Member Join Date: Jul 2004 Posts: 756

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.
#40
02-11-2016, 12:21 PM
 whoanonstop Member Non-Actuary Join Date: Aug 2013 Location: Los Angeles, CA Studying for Spark / Scala College: College of William and Mary Favorite beer: Orange Juice Posts: 5,899 Blog Entries: 1

Quote:
 Originally Posted by JUICE 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.

Quote:
 Originally Posted by JUICE 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.

Quote:
 Originally Posted by JUICE 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 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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