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

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  #41  
Old 02-11-2016, 01:37 PM
JUICE JUICE is offline
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So in 2000, mom and dad planned for retirement assuming Xi% long-term return on ith asset class. In 2015, NIRP alerts mom and dad that their assumptions and planning are inadequate. Mom and dad begin to save more. I think there's more psychology involved, unfortunately no time to link, but in Europe, NIRP has caused increased savings for some population segments, who as you might guess tend to be older with higher incomes and assets.

Or... surprise, surprise, lowering accumulation rates on savings causes savings contributions to increase.

And, yes, it's speculative as CB policy decisions are opaque. However, the relevant point is that smaller banks utilize the "old" banking model - accept deposits, lend for economic investment, earn money on net interest margin - which subjects profits to some strain under NIRP. Bigger banks have their investment divisions whose profits actually increase as ZIRP/NIRP causes rush into risk assets.

Regardless of its veracity, the speculation is verifiable, at least at a cursory level. Either more smaller banks fail or are acquired by bigger banks after NIRP... or not.

I'll leave as exercise to reader to opine on whether financial sector consolidation after the various recent CB interventions is coincidental or not.
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  #42  
Old 02-11-2016, 02:04 PM
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http://blogs.wsj.com/moneybeat/2016/...-negative-4-5/

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How Low Can Interest Rates Go? Try Negative 4.5%

The Bank of Japan was not the first to introduce negative interest rates, but its move seems to have kicked the door wide open for other nations considering the move.

That has strategists and economists asking the question: Just how low can rates go?

J.P. Morgan Chase & Co. economists, led by Malcolm Barr, suggest the answer is very low. In theory, they say euro-area rates could drop to negative 4.5%. In the U.K., rates could go to negative 2.5%. In the U.S., negative 1.3%.

“Our analysis suggests that the nominal bound on the policy rate is probably a lot lower than people have thought,” the economists write in a report Tuesday.

Some investors are beginning to think of negative rates as the next big innovation in monetary policy. The idea is that charging financial institutions to hold their money at central banks would deter them from parking cash there, and instead inject money into the broader economy. It also comes with risks, such as the potential for pressuring bank profitability and spurring excessive risk-taking.

Some also say negative rates will do little to spur growth. William Poole, a former president of the Federal Reserve Bank of St. Louis, said in an opinion piece on Monday that such policies would simply be a distraction from the structural constraints on growth.

A good chunk of the world now uses negative rates. In addition to the Bank of Japan, the European Central Bank and Swiss National Bank both set their policy rates below zero. In fact, negative rates are used at banks that determine policy for more than a fifth of global domestic product.

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  #43  
Old 02-11-2016, 06:35 PM
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That 2.735% 30-year mortgage is looking less awesome now.
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  #44  
Old 02-11-2016, 07:19 PM
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That 2.735% 30-year mortgage is looking less awesome now.
Don't think 30 years are that low yet. 15s are.

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  #45  
Old 02-11-2016, 10:59 PM
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I agree with your interpretation. And I just want to add that both negative interest rates and deflationary environments are very.bad.things.


It's not just some media thing. People should read up on deflation. A lot of you read up one everything else statistical, spend a week reading up on deflation. The repercussions of a deflationary environment scares me.
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  #46  
Old 02-11-2016, 11:05 PM
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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?
Yes, it also means that it's better/easier to lay you off and hire a much cheaper replacement. The only people that deflation is good for, is for people that don't need a job or any income coming in to survive.

I thought this graphic did a pretty good job at simplifying it. Part 2 hasn't come out yet.
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  #47  
Old 02-12-2016, 12:04 AM
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It's not just some media thing. People should read up on deflation. A lot of you read up one everything else statistical, spend a week reading up on deflation. The repercussions of a deflationary environment scares me.
I guess I'm just willing to hedge that spending another week reading statistics will benefit me more than reading about deflation.

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  #48  
Old 02-12-2016, 09:22 AM
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I remember when interest rates were double digits. The big worry was disintermediation if rates continued to rise. But it did occur to me to think there might eventually be a problem should rates go down to the point where it was tough to meet contract guarantees. The basis for that worry was reading about WWII government controls that forced interest rates way down and led to some insurance companies having to strengthen reserves.

It's always appropriate to consider past nightmare scenarios when looking toward future risks. . . Sometimes bad history repeats itself (with variations).
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  #49  
Old 02-12-2016, 09:31 AM
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Sometimes bad history repeats itself (with variations).
So glad you used variation instead of variance.

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Old 03-03-2016, 05:17 PM
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http://knowledge.wharton.upenn.edu/a...ign=2016-03-02

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“Negative rates are a sign of desperation, a signal that traditional policy options have proved ineffective and new limits need to be explored,” the Bloomberg analysis said. “They punish banks that hoard cash instead of extending loans to businesses or to weaker lenders. Rates below zero have never been used before in an economy as large as the euro area.”

In other words, there’s not much history to indicate what will happen.

Negative rates are intended to produce an incentive to spend rather than save, and spending should help fire the economy and push prices up. Europe and Japan have resorted to negative rates to reduce the risk of deflation, which has many damaging effects such as making debt payments more burdensome over time.

Central banks have direct control only over short-term rates, such as those charged to financial institutions that keep overnight deposits on central bank books. But trimming short-term rates tends to ripple through the economy, causing a drop in long-term rates that are governed by supply and demand. In part, that’s because long-term rates on things like bonds or mortgages are based on views of what short-term rates will be in the future.

“Once you start affecting the cost of capital for banks, then this will affect the market price of assets they buy and the loans they make,” Goldstein says.

Lower interest rates also tend to reduce a currency’s value, since savers’ demand will drop as they shift to better-paying investments in other currencies. A devalued currency can boost exports and it can raise inflation by making imports more expensive. Japan’s turn to negative rates was largely an effort to devalue the yen — although it seems to be backfiring.

In practical terms, a slightly negative rate is not much different from the slightly positive rates that short-term savings have earned for years. After all, earning 0.1% is not much better than losing 0.1%. And after accounting for inflation — reflected in the so-called real interest rate — savers actually have been losing money for years.

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