Coming Soon to the US: Negative Yields?
August 7, 2019 1:25 PM   Subscribe

“There may come a time in the not-too-distant future when investors don’t expect to collect fixed interest payments from sovereign debt obligations, nor do they expect to earn anything from parking their cash in a savings account.” Brian Chappatta of Bloomberg explains a blog post by Joachim Fels proposing “It is no longer absurd to think that the nominal yield on U.S. Treasury securities could go negative.”
posted by sallybrown (35 comments total) 20 users marked this as a favorite
 
Yes, what darkstar said. My savings account earned 7 cents on $9k in July. That's about $1 a year.
posted by The_Vegetables at 1:39 PM on August 7


My savings account earned 7 cents on $9k in July.

I do think we’d enter a different dimension, feelings-wise, if people were told the bank was taking 7 cents out of their savings accounts every month. Even compared to earning zero interest.
posted by sallybrown at 1:43 PM on August 7 [8 favorites]


I dont get Chappata's argument. He says:

The two choices are to invest in risky but potentially lucrative endeavors or to keep that money safe but have it erode slowly through zero or negative interest rates.

Isn't there a third alternative? Bury your retirement fund in a coffee can in the yard?

Obviously you'll lose purchasing power in all three scenarios, but if your only objective is preservation of principal for some portion of your portfolio, allocating to the safe in the wall or whatever seems obvious.
posted by stupidsexyFlanders at 1:59 PM on August 7 [5 favorites]


There are online savings accounts paying around 2%. I have some money in one (Citizens Bank) right now. How are they able to do that?

I recall these things being around in 2006-2007 or so, just before the....um...never mind.
posted by JoeZydeco at 2:00 PM on August 7 [1 favorite]


Isn't there a third alternative? Bury your retirement fund in a coffee can in the yard?

That's basically the same as zero interest, which is still a loss assuming inflation continues to exist. So while it would be better than negative interest, it's not necessarily better than zero interest and has potential downsides of its own (for example, what happens if someone finds your coffee can or cracks your safe). Plus, depending on how much money we're talking about, it might not be feasible to stash your wealth in this manner. Most of us are probably in the group that could potentially fit their life savings into a small wall safe, but I get the feeling the articles also describe (or even primarily describe) a second group for whom this is not true.

I feel like this applies generally; there's a large group of people who are just trying to save for retirement and are facing the potential of decades without significant employment income, who will be hurt by zero/negative interest bonds taking over the market (though potentially not by too much, if you're following conventional wisdom and switching to these "safe" investments only when you're close to retirement). But there's also that much smaller group of people that has a huge amount of wealth and is just shoving wealth into bonds to lock up capital without necessarily thinking that they'll need to rely on that capital for basic needs one day.

Chappata mentions that negative-interest bonds are essentially a wealth tax in some ways. If that's the case, this sounds like a pretty regressive form of taxation to me (in that it disproportionally hits those just saving for retirement, versus those with vastly more wealth), but admittedly I only know enough about personal finance to be a danger to myself and my vast fortune of old CDs and baseball cards from the 90s.
posted by chrominance at 2:11 PM on August 7 [6 favorites]


On of my roles at work is to report interest rates on our $1 Million + time deposits. Today I noted that the rate for two day deposits has fallen from 1.0200% on Monday to .4140% today. A trend? I don't know, but perhaps this is a sign of the impending collapse.
posted by Midnight Skulker at 2:12 PM on August 7 [5 favorites]


I do think we’d enter a different dimension, feelings-wise, if people were told the bank was taking 7 cents out of their savings accounts every month. Even compared to earning zero interest.

I'm not sure I agree. I mean, if savings account start earning negative amounts, then people will simply close them and they will cease to exist as a product. Is that what you mean? Regular bank accounts earn no interest, and people don't really seem to care. I couldn't even find explicit data which defines how many people even having a 'savings account' vs a money market or other safe funds like CDs.
posted by The_Vegetables at 2:14 PM on August 7


Wow, Midnight Skulker, that is... quite a change.

The yield curve is totally inverted now, hold on to your pants.
posted by grumpybear69 at 2:14 PM on August 7 [1 favorite]


> Regular bank accounts earn no interest

Wait, say what? Like, not even the paltry fig leaf 0.05% my checking account pays, just nothing? Is that common now?
posted by RedOrGreen at 2:18 PM on August 7


Burying your money in the yard has a negative return as well, it's just hidden, though humans are not good about quantifying hidden risks. So people will probably do it when the rate of return in a bank goes negative, because we're dumb monkeys, but it's likely not a good idea.

First there are the actual costs of cashing out (driving to the bank and paying the account-closure fees, etc.), then there are the costs involved in buying a safe / coffee can / piece of PVC pipe / whatever, a shovel, and the opportunity cost of your time to bury it. You might not think that these things add up to very much, but they are nonzero and contribute to a negative rate of return. And you also need to factor in the cost to retrieve the money down the road.

Second, there's the risk inherent in having your money buried in the yard, or in a safe in the attic, or stuffed in the walls of your frozen-banana stand. You could forget where you buried it, or get hit on the head or something and be unable to recall it. There's the chance that it could get destroyed by the environment, or stolen, or burned up by one of your offspring in a fit of misplaced cathartic rage. (As one does.) Basically, there is a significant risk of catastrophic loss, of losing the entire sum. This might seem hard to quantify, but if you call up your homeowners or renters insurance company and tell them you'd like a policy rider for a couple hundred grand in cash that you're planning on keeping in your house, they will do all the math for you and cough up a number.

What you'll end up with, once you have safeguarded your horde to some reasonable degree of security (to that approaching a bank) is a rate of return that's significantly negative.

You see this problem crop up from time to time in gold-bug circles; there are costs associated with storing bullion or bars of precious metals in a depository, but as it turns out it's a real pain in the ass to keep it in your house. There are nontrivial costs associated with securing it, and then having it assayed and put back into the financial system as a tradable commodity. Basically, only morons and the insane (this covers almost all gold bugs) do it.

What I think is more likely to happen, if Treasury returns go negative, is that you'll see a lot of "hot money" go looking for anything that will preserve capital; you'll probably see yields go down on all sorts of corp bonds and bond-like instruments. Which is, I suppose, the point: it will dramatically decrease borrowing costs, and anyone with the most halfassed idea of how to make money will have investors shaking cash in their face. (Basically, like the situation in China, where individuals are desperate to get their money invested, rather than having investors shop around for investment money.)

It's possible though that the shift from 0.000001% APY to -0.000001% could have a very nonlinear effect, because psychologically people really hate losses more than they hate not making gains. So I would be very suspicious of any model that extrapolates from falling positive interest rates across the 0% threshold and claims to predict what would occur; they only tell you what rational economic actors will do, not what people will do.
posted by Kadin2048 at 2:27 PM on August 7 [19 favorites]


I do think we’d enter a different dimension, feelings-wise, if people were told the bank was taking 7 cents out of their savings accounts every month. Even compared to earning zero interest.

In Canada you get so hammered with bank service charges that you probably loose around 1-2% easy. That's a big part of how Canada avoided the financial crisis of '08. It was a trade. Rob us a little tiny bit all the time versus gamble wildly with our savings. The downside of the stability of bringing the robbery in-house is that there was no financial crisis induced housing market adjustment so if you didn't buy a house 20 years ago you are a poor and you are going to stay that way until your parents die and leave you money or a house (Hopefully you don't have too many siblings and your parents don't divorce/die and remarry)
posted by srboisvert at 2:36 PM on August 7 [10 favorites]


> I would be very suspicious of any model that extrapolates from falling positive interest rates across the 0% threshold and claims to predict what would occur; they only tell you what rational economic actors will do, not what people will do.

Yes, this. "Real" inflation-adjusted interest rates have been negative for quite a while, but nominal interest rates breaching the zero lower bound will have a huge psychological impact.

In fact, I would bet that the Fed will find a way - maybe by finagling the definition of deposit insurance, or something, so that ordinary depositor accounts never experience negative rates.
posted by RedOrGreen at 2:38 PM on August 7 [5 favorites]


I might be taking a simple view here, but wouldn't negative savings rates (as minuscule as they might be) trigger a bank run? Seems like the Fed would have no other choice.
posted by JoeZydeco at 2:40 PM on August 7 [2 favorites]


It's possible though that the shift from 0.000001% APY to -0.000001% could have a very nonlinear effect,

That's possible, but I feel like people are going to be hesitant to abandon banks. Rates may go negative, but they won't go MUCH negative. Burying your 401(k) in a coffee can in the front yard comes with a non-trivial risk. If nothing else, a .1% fee per year to park your assets in a federally-insured account that won't disappear even if the bank gets robbed is a pretty good deal. (That obviously doesn't apply to the mega-rich, but I assume they all have their assets parked offshore anyway)
posted by Mayor West at 2:58 PM on August 7


I think there’s a non-trivial amount of people who would view a negative interest rate on a savings account as the bank “stealing” their money, in part because many people think of a savings account as a metaphorical coffee can buried in a safer place than the yard.
posted by sallybrown at 3:09 PM on August 7 [5 favorites]


I would bet that the Fed will find a way [...] so that ordinary depositor accounts never experience negative rates.

Strong agree. Given the lengths they went to a decade ago to ensure that consumer money market accounts—where in theory everyone who has money in one is prepared to lose principal—didn't "break the buck", I find it hard to believe they will let consumer savings accounts under a reasonable threshold (say $250k or whatever the FDIC limit is) lose money. It would be too big a confidence hit. Sort of an interesting hypothetical, though.

I could totally see the Fed coming up with a way to basically subsidize retail banks in a negative-rate environment, such that they could keep consumer savings accounts at or slightly above 0%. The mechanism for that, though, is a good question.

I also wonder if it's legal for a bank to suddenly start giving customers a negative yield in an FDIC-insured account. I mean, the whole point of FDIC insurance is to prevent loss of principal due to bank failures, but loss of principal in an insured account while the bank is still operating, and not due to fees or something else that the customer has presumably agreed to (and arguably has explicitly not agreed to; generally people assume savings accounts are safe), would be… new, as far as I know.

a .1% fee per year to park your assets in a federally-insured account that won't disappear even if the bank gets robbed is a pretty good deal

Agreed as well, that's a hell of a good deal; however, loss aversion is pretty well-documented and can cause people to do pretty irrational stuff. Given that the whole financial system basically rests on group psychology ("confidence" in the financial system), it might be better to just punt on the risk entirely.
posted by Kadin2048 at 3:09 PM on August 7 [7 favorites]


I also wonder if it's legal for a bank to suddenly start giving customers a negative yield in an FDIC-insured account.

It would make for an excellent lawsuit, that’s for sure.
posted by sallybrown at 3:11 PM on August 7


Read that the secret Swiss bank accounts do not give interest and have a pretty steep fee.
posted by sammyo at 3:31 PM on August 7 [2 favorites]


Isn't there a third alternative? Bury your retirement fund in a coffee can in the yard?

Pretty risky, though, compared to a FDIC account.

This article talks about what happened in other countries with negative yields.

In short, most banks did not actually end up presenting regular people with negative-interest-rate accounts, even when reserve interest rates fell below zero.

That is probably not sustainable over the long run, however.

In Japan there is some evidence of cash hoarding, but on the other hand cash saving has long been popular there as bank interest rates have been near zero for decades, and investment is much less common among regular people (no popular 401k equivalent, etc).
posted by thefoxgod at 4:13 PM on August 7 [2 favorites]


I'm not sure I agree. I mean, if savings account start earning negative amounts, then people will simply close them and they will cease to exist as a product.

Isn't that called a bank run?
posted by Reyturner at 4:50 PM on August 7 [3 favorites]


Some more interesting links on this topic sourced through Joe Weisenthal’s twitter:

A transcript of a conversation about Pablo Escobar’s negative interest rate of 10% of his buried cash due to rat-eating and other spoliation, and what that might mean for what negative interest rate consumers would accept.

A paper by Warren Mosler and Matthew Forstater from 2004 asserting the natural rate of interest is zero.
posted by sallybrown at 5:53 PM on August 7 [1 favorite]


I suspect the immediate fears are well overblown. This is another example of the Republicans holding the world hostage. The only reason rates are going negative is because of the persistent disinflation caused by a lack of demand. Had they allowed a more appropriate stimulus package in '09 or allowed further Keynesian demand induction through government spending, inflation would not remain so low.

Until something soaks up the excess reserves, which absolutely requires demand (unless the dollar is allowed to devalue fairly drastically, which the rest of the world will not allow to happen), we will remain in the trap. It doesn't actually have to be government action, though. Corporations could stop hoarding cash or basically only using it to inflate stock prices with excessive dividends and buybacks and instead make massive new productive investments that would themselves induce demand and do the same thing. A trillion or two would certainly do the trick. $500 billion would probably be enough to get us enough above water to eventually return to something like the status quo ante, if it is not wasted on pure finance.

That's the problem, though, nobody wants to make big investments in actual useful stuff that generates value over the long term and the government refuses to be the demand generator of last resort.
posted by wierdo at 6:33 PM on August 7 [6 favorites]


To put it more plainly, our problem monetarily is solely one of too much saving and not enough spending. Draining excess reserves would restore that balance. Cutting taxes on the wealthy and corporations has literally exacerbated the problem and is a significant (possibly even controlling) factor in the persistent stagnation in the real economy.
posted by wierdo at 6:59 PM on August 7 [8 favorites]


Sorry to keep tacking on, but I think it's very important to note that Trump's petulant trade war is sawing off one of the legs of the chair that holds up the entire world's financial system, and the fall will hurt us (meaning people whose assets are primarily dollar denominated) most of all. The US dollar's special status is the biggest thing keeping everything from falling off the cliff and that is but one way he is directly, not as a side effect of his man baby tantrums, but directly attacking the system that keeps it there.

He is quite literally, no shit, actively working to destroy the United States as a functional entity of any kind, not just culturally. He is pretty much the Manchurian Candidate. I'm really not joking. Once is simply chance. Twice is just coincidence. Three times is enemy action.

The man was put in office by means of Russian interference in our elections, but most of the country (in all parts of the political spectrum) refuses to acknowledge that fact. Between ideological blinders, the media's failure to inform the public of the relevant facts, and continuing trolling and propaganda attacks that keep people distracted and unable to assemble events into a coherent narrative or even accept it if they do figure it out. He has literally been working to enact Putin's agenda since before day one of his Presidency. What will it take for people to acknowledge what is now plainly obvious?
posted by wierdo at 7:54 PM on August 7 [13 favorites]


It would make for an excellent lawsuit, that’s for sure.

Unfortunately no (at least from the consumer point of view), because, even if it were a breach of contract, you would only experience a nominal loss if you failed to mitigate by withdrawing the funds.
posted by praemunire at 11:15 PM on August 7


Some more interesting links on this topic sourced through Joe Weisenthal’s twitter:

here's @TheStalwart's thread on the topic, which boils down to this: "Negative yields are basically the market's way of taxing people who oppose fiscal stimulus because they don't want to be taxed."[1,2,3]
This probably all ends when rich people find that @ewarren-style 2% wealth taxes offer a better return than holding money in a bank.

Member Of The Investor Class: "These negative yields are penalizing me for saving and are worse than communism."

Me: "Well, maybe we should boost growth by stepping up public investment"

MOTIC: "But why should I have to pay for that?"

Me: ...
also btw, re: capital preservation/storage costs :P

oh and a qz writeup...
Are negative interest rates unusual, natural, or both?

This is another example of the Republicans holding the world hostage... Cutting taxes on the wealthy and corporations has literally exacerbated the problem and is a significant (possibly even controlling) factor in the persistent stagnation in the real economy.

@michaelxpettis: "With weak demand, soaring debt, interest rates at historic lows, and American companies swimming in cash, how could anyone believe that tax cuts that transfer income from high-consuming households to the high-savings rich would ever boost investment?"

@AndrewYang: "The biggest lie in America today is that we don't have the money. We bailed the banks out for $4 trillion and gave big companies a $1.5 trillion tax cut. Our GDP is $20+ trillion up $5 trillion in 12 years. We are the richest society in history and can easily afford a dividend."

speaking of which: supervision!
...here is a fascinating new paper by Lev Menand on “The Monetary Basis of Bank Supervision.” Menand traces the history of safety-and-soundness supervision and argues that it derives from banks’ role as issuers of money. Historically banks, unlike other businesses (but like the government), are in the business of creating money, originally by issuing bank notes but in recent centuries mostly by issuing deposits and letting people pay for stuff with them. Most people pay for a lot of their stuff without ever touching government-issued currency; they use checks and debit cards and electronic bank transfers to move bank deposits from one place to another. Those deposits are money issued by banks, and at least at the origins of this system, it was pretty clear to everyone that the banks were doing that with a sort of franchise from the government. And because this was a state power that was delegated to the banks, the state kept the ability to supervise the banks’ use of it, and to make sure that the money they issued was “safe and sound.”

[...]

There is a lot of fun history in the paper, including some Modern Monetary Theory from Alexander Hamilton (“Every loan which a bank makes is in its first shape a credit given to the borrower on its books”)...

There were good historical reasons for governments to charter banks to provide the money supply, but it is not totally obvious that those reasons still apply. The Federal Reserve has computers now, and will offer real-time payment processing by, um, 2024. One could at least imagine a world in which the Fed just let everyone keep a bank account at the Fed, rather than effectively franchising banks to provide deposit money. And people have imagined that world. We have talked a few times, for instance, about TNB USA Inc., a “narrow bank” that would just take customers’ money and deposit it directly at the Fed. (Ironically it can’t seem to get a government franchise to do this.) In fact Menand has imagined it; we talked last year about a proposal by Ricks, John Crawford and Menand to give “the general public—individuals, businesses, and institutions—the option to have a bank account at the Federal Reserve.” If the essential concern of bank supervision is the soundness of the currency, then offering an unlimited amount of perfectly sound Federal Reserve money to anyone who wants it would seem to solve most of the problem.[4,5,6,7]
posted by kliuless at 12:12 AM on August 8 [7 favorites]


My savings account earned 7 cents on $9k in July.

Fed funds rate went below 1% in October 2008 and stayed there until June 2017. Great for speculators, ghastly for savers. I'd like to see William Greider take a crack at this.
posted by BWA at 7:15 AM on August 8


Those Very Rich People And Companies Who Are Hoarding Cash are also moving their Giant Cash Reserves out of equities and into safe havens like real estate and gold. A lot of it is fear, certainly - I haven't met anyone who hasn't been waiting for the economy to tank over the last 4-5 years - and there is likely also a certain portion of the monied cohort that actively wants the market to tank so they can use that cash to swoop in and buy up large swaths of undervalued assets while those who went underwater are in dire straits.
posted by grumpybear69 at 7:50 AM on August 8


and there is likely also a certain portion of the monied cohort that actively wants the market to tank so they can use that cash to swoop in and buy up large swaths of undervalued assets while those who went underwater are in dire straits.

In my opinion this is like at least 75% of the people begging for the economy to tank - so they can get back at their financially reckless friends and copy the vulture financial activities of the top percent they deem guilty of wrecking the economy in the first place.

And I don't see any value in tanking the economy because the economy is people, some of which I like and know would be crushed by the tank due to issues way outside their sphere of control. I'll take $1 a year in my savings account over a crashed economy because earning $1 a year doesn't actually hurt me even if isn't an optimal personal outcome.
posted by The_Vegetables at 8:42 AM on August 8


Another related development: negative or zero mortgage rates (at least in Denmark).
posted by sallybrown at 10:14 AM on August 8


Coming in late here, but wanted to make a point about the difference between bond yields and your bank savings account. If you are banking at a big national bank with a lot of brick and mortar locations, your interest rate on your savings account has likely been between 0.01% and 0.03% for several years now. A bank economist explains why this is happening in a Forbes column:

The problem is that banks don’t have much need for deposits. Sure, they are making loans, but they still have plenty of money left over. Banks have substantially more deposits than loans now, so they are not anxious for savers to walk in the doors. They like the relationship with depositors, which provides the potential to make loans and sell other services, but the deposit itself isn’t worth much.

If you are using an on-line bank, and have shopped around, you are more likely seeing something above 2%.
posted by kovacs at 5:21 PM on August 8 [1 favorite]


I still can't believe the original article blamed the glut of money on people saving more for longer retirements. Bloomberg had another negative rate article this morning that I can't find that mentioned inequality, but here's another Bloomberg from today that says it's demographics. They sure are pumping out articles on this.

The savings glut is clearly, without any doubt, due to extreme inequality. It's the elephant graph in the room. Art and rare car prices aren't skyrocketing due to an aging population. Ordinary people aren't buying multi-million-dollar flats to not live in. They don't need to save more for retirement when life expectancy is dropping. How fuck did the elites get so elite when they're this willfully ignorant?

This 40-year squeezing of the global middle-upper class (the western middle/lower-middle class) is what's causing this stag-deflation. If businesses simply paid their employees more, every cent would be spent. Instead they refund it to their investors and every cent goes looking for more money. It's like the elites read the tale of the golden goose, and thought the goose owners were foolish for trying to get all the gold at once because they didn't grind up the goose and use chemical extraction methods on its corpse. They would be so much richer if the western middle class was thriving.

Maybe it's a good thing for the planet that all this money is tied up doing nothing, but if we're not going to get more stuff anyway, could we all just slack off a little and enjoy what we have instead of running faster and faster to run up someone else's score? Billionaires: you won, we get it. Can't you just chill instead of going all Altered Carbon on us?
posted by netowl at 8:05 PM on August 8 [3 favorites]


They sure are pumping out articles on this.

here's @TheStalwart's writeup: The Non-Weirdness of Negative Interest Rates - "Savers in Europe are having to pay to store their wealth. That's not so crazy when saving is all too plentiful."
Thanks to ever-increasing wealth concentration and meager growth across the developed world, you have some people sitting on incredible piles of cash and a shortage of people with robust opportunities to borrow and use that cash...

Consider: Why is it totally normal to pay a “2 and 20”—that is, 2% a year and 20% of profits—to some portfolio manager for the service of hedging your wealth against fluctuations in the market and the economy, but it’s bizarre to pay 0.1% to the German government to hold a bond that historically has done a great job of hedging your wealth against fluctuations in the market and the economy?

...There are things we could do... Another possibility for German savers is that the government spends more money, invigorating growth throughout Europe, thus enabling more opportunities for the productive lending of capital. Politically, German savers may not want to pay for that. But then, they’re paying already.
posted by kliuless at 6:32 AM on August 9 [2 favorites]


Consider: Why is it totally normal to pay a “2 and 20”—that is, 2% a year and 20% of profits—to some portfolio manager for the service of hedging your wealth against fluctuations in the market and the economy, but it’s bizarre to pay 0.1% to the German government to hold a bond that historically has done a great job of hedging your wealth against fluctuations in the market and the economy?

Well the theoretical idea behind the 2 & 20 is that hedge fund managers are earning at least the market and what should be an excess vs a bank account which is paid for through things like a supporting a stable government, deposit insurance (which people & businesses are paying for currently indirectly, at least in the US. Paying the 2 & 20 is only something for the extremely wealthy and/or financially ignorant though, it is certainly not required to pay that to invest in the market.
posted by The_Vegetables at 7:40 AM on August 9


Hitler finds out about negative interest rates :P (via; also btw! "From each according to their ability, to each according to his need. For everything else, there's #Marxcard.")
posted by kliuless at 1:56 PM on August 9 [1 favorite]


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