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  #21  
Old 02-10-2016, 11:40 AM
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Heck, the NAIC had to scramble on nonforfeiture when the interest rates dropped low and stayed low. Kinda hard to force insurers to keep crediting 3% under those conditions.
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  #22  
Old 02-10-2016, 11:48 AM
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My understanding (someone please jump in if I'm way off here) is that negative interest rates are a side effect of a deflationary environment, so they don't seem extremely unreasonable.

For example, if I'm a lender with $100, a -1% interest rate, and a -2% deflation environment, I can lend $100 to someone, and get back $99 at the end of the year, or I can hold on to that $100 and have $98 at the end of the year.

I know it seems weird to think of it this way, but I think it's just a psychological limit due to how we perceive interest.

Any other ideas that support negative interest rates? I'm pretty much spitballing here to see if I can justify anything else.

-Riley
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Old 02-10-2016, 12:25 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.
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Old 02-10-2016, 12:38 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.
Well, if negative interest rates are just a response to deflation, then negative interest rates themselves aren't necessarily "bad". On the other hand, a deflationary environment has always been thought of as "bad". I'm not fighting that it isn't, just wondering if you have a firm reason to believe so, or if it mostly comes from the media. Know what I'm saying?

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Old 02-10-2016, 01:05 PM
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Well, if negative interest rates are just a response to deflation, then negative interest rates themselves aren't necessarily "bad". On the other hand, a deflationary environment has always been thought of as "bad". I'm not fighting that it isn't, just wondering if you have a firm reason to believe so, or if it mostly comes from the media. Know what I'm saying?

-Riley
A little bit of context for your first sentence. For those of us who rely on our investments, low interest rates are bad. Negative interest rates are very bad. Maybe not so much for the rest of the world, I will admit.

As for the rest, I guess I'm agnostic about it, but from what I've read about the 1930s, it seems that in that time frame, deflation was just one part of a very bad circumstance for a lot of people. https://en.wikipedia.org/wiki/Depression_(economics)
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  #26  
Old 02-10-2016, 01:13 PM
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A little bit of context. For those of us who rely on our investments, low interest rates are bad. Negative interest rates are very bad. Maybe not so much for the rest of the world, I will admit.
Well, if we're associating low interest rates with a deflationary environment, would it make a difference? I'm not sure how some life/retirement products are designed, so I'm fairly naive, but let's say the case was simple:

Besides some small differences, the rate of return on a 7% interest rate in a 2% inflation scenario would be similar to a 2% interest rate in a -3% inflation (deflation) scenario, no?

-Riley
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Old 02-10-2016, 01:19 PM
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My understanding (someone please jump in if I'm way off here) is that negative interest rates are a side effect of a deflationary environment, so they don't seem extremely unreasonable.

For example, if I'm a lender with $100, a -1% interest rate, and a -2% deflation environment, I can lend $100 to someone, and get back $99 at the end of the year, or I can hold on to that $100 and have $98 at the end of the year.

I know it seems weird to think of it this way, but I think it's just a psychological limit due to how we perceive interest.

Any other ideas that support negative interest rates? I'm pretty much spitballing here to see if I can justify anything else.

-Riley
I would say you have it "close". It depends upon the specific situation you are talking about.

If you are a lender/Bank, the thought behind the central banks charging interest instead of crediting interest on the reserves held at the fed is that "Why would a bank pay us to hold them"... Deflation is one reason. but a bigger reason is there are not enough credit worthy lenders to lend to. So instead of placing excess reserve on deposit with the central bank at -0.25%.. I'll buy a UST at -0.10%.. better to get back 99.9% of my capital instead of 99.75% which is better than risking my capital on a borrower (meaning i run the risk of losing even more of assets).

If deflation is occurring (or likely to occur) then cash is king (or interest bearing assets). The real rate of return is what is important not nominal. If you are living on a fixed income and goods 1 year from now are 2% cheaper then getting a 0% return on cash means you are 2% wealthier.

Its hard for many people to get this, but that is reality. The problem is 2% deflation may not hit the things "you" spend you money on (say retirees and health care costs).

In the fixed income market, real rates of return are the primary driver. the costs of negative nominal rates are simply passed on to consumers in the banking sector with higher fees.
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  #28  
Old 02-10-2016, 01:22 PM
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Well, if we're associating low interest rates with a deflationary environment, would it make a difference? I'm not sure how some life/retirement products are designed, so I'm fairly naive, but let's say the case was simple:

Besides some small differences, the rate of return on a 7% interest rate in a 2% inflation scenario would be similar to a 2% interest rate in a -3% inflation (deflation) scenario, no?

-Riley
insurance with guarantees are a different story. Nominal levels matter because of the guarantees in place.

Banking is different

Real rates of return in this example above is still 5%, so yes you are correct. If a 2% yielding bond exists and we are experiencing 3% deflation you will buy it, and a lot of it... driving up the price and decreaing the 2% nominal yield even further
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  #29  
Old 02-10-2016, 01:43 PM
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Nothing will make Chicago pensions collapse quicker than negative interest rates. So maybe it's not entirely bad!
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  #30  
Old 02-11-2016, 09:49 AM
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My understanding (someone please jump in if I'm way off here) is that negative interest rates are a side effect of a deflationary environment, so they don't seem extremely unreasonable.

For example, if I'm a lender with $100, a -1% interest rate, and a -2% deflation environment, I can lend $100 to someone, and get back $99 at the end of the year, or I can hold on to that $100 and have $98 at the end of the year.

I know it seems weird to think of it this way, but I think it's just a psychological limit due to how we perceive interest.

Any other ideas that support negative interest rates? I'm pretty much spitballing here to see if I can justify anything else.

-Riley
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?
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