Negative interest rates

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Tortoise
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Re: Negative interest rates

Post by Tortoise » Sun Mar 08, 2020 4:34 pm

Kriegsspiel wrote:
Sat Mar 07, 2020 6:59 pm
I still don't see the point of intentionally lending people money and getting back less in return. Just don't lend them the money in the first place and you make a higher.... "return."
I totally agree for small amounts of cash. But for larger amounts, like nest eggs and large businesses, physical cash just isn’t practical. People and businesses need to park large sums of cash in non-physical forms.
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Re: Negative interest rates

Post by Kriegsspiel » Sun Mar 08, 2020 7:48 pm

Tortoise wrote:
Sun Mar 08, 2020 4:34 pm
Kriegsspiel wrote:
Sat Mar 07, 2020 6:59 pm
I still don't see the point of intentionally lending people money and getting back less in return. Just don't lend them the money in the first place and you make a higher.... "return."
I totally agree for small amounts of cash. But for larger amounts, like nest eggs and large businesses, physical cash just isn’t practical. People and businesses need to park large sums of cash in non-physical forms.
I was replying to doodle, IE, what can we do.
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Re: Negative interest rates

Post by Pkg Man » Sun Mar 08, 2020 8:19 pm

What about US savings bonds, for the cash portion? I have some EE and I bonds. Recently thought about dumping the I bonds since T bill rates were creeping up but now think I’ll just hang onto them. EE’s are the best since no matter what the rate at issue is they are guaranteed to double in 20 years, of course they could reneg on that promise. I’s have a zero bound no matter what the inflation rate is.
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Re: Negative interest rates

Post by dualstow » Sun Mar 08, 2020 8:45 pm

Pkg Man wrote:
Sun Mar 08, 2020 8:19 pm
What about US savings bonds, for the cash portion? I have some EE and I bonds. Recently thought about dumping the I bonds since T bill rates were creeping up but now think I’ll just hang onto them. EE’s are the best since no matter what the rate at issue is they are guaranteed to double in 20 years, of course they could reneg on that promise. I’s have a zero bound no matter what the inflation rate is.
Maybe they’ll let us buy even fewer savings bonds in the future.
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Re: Negative interest rates

Post by doodle » Sun Mar 08, 2020 9:33 pm

pmward wrote:
Sat Mar 07, 2020 8:40 pm
The low interest rates has also allowed companies to borrow dirt cheap to buy back shares
So imagine an environment where companies get paid to borrow money to buy back their shares... They win on both ends!

Negative interest rates (won't be harbinger of coming Deflation due to central bank intervention) I think they will however drive investment into other asset classes paradoxically driving up asset prices in nominal terms at least. Ultimately though it's anyone's guess what happens when the banking system is turned on it's head.

At some point though holding a negatively yielding 30 year bonds makes no sense....I can see holding it around 0 but as yield continues to decline it no longer makes any logical sense.

Presently 10 year rates under .5%....unbelievable.
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Re: Negative interest rates

Post by doodle » Sun Mar 08, 2020 9:44 pm

Pkg Man wrote:
Sun Mar 08, 2020 8:19 pm
What about US savings bonds, for the cash portion? I have some EE and I bonds. Recently thought about dumping the I bonds since T bill rates were creeping up but now think I’ll just hang onto them. EE’s are the best since no matter what the rate at issue is they are guaranteed to double in 20 years, of course they could reneg on that promise. I’s have a zero bound no matter what the inflation rate is.
Yes...unfortunately I think purchase sizes are limited to 10k a year???
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Re: Negative interest rates

Post by pmward » Mon Mar 09, 2020 9:02 am

doodle wrote:
Sun Mar 08, 2020 9:33 pm

At some point though holding a negatively yielding 30 year bonds makes no sense....I can see holding it around 0 but as yield continues to decline it no longer makes any logical sense.
Logical sense left the building ages ago. The big league pitching thrown by markets is tough to hit these days. Selling at 0 could very well be the biggest mistake you ever make. Volatility will increase, but there is a chance that those long term bonds you're getting scared of could be the only thing that save your ass... I mean look at what's happening to oil right now? We are in full on deflation mode at this point. Strap in your seatbelt...
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Re: Negative interest rates

Post by I Shrugged » Mon Mar 09, 2020 10:24 am

There is a reason the Fed types have the term "the zero bound". Sure, things can go negative. It has happened in non-US markets. But as discussed above, as a practical matter it probably can't last too long. If nothing else, it would inflame dangerous sentiments with consequences hard to forsee. That's my opinion any way.

I guess I expect the Fed to buy a lot of stocks.
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Re: Negative interest rates

Post by pmward » Mon Mar 09, 2020 10:59 am

I Shrugged wrote:
Mon Mar 09, 2020 10:24 am
There is a reason the Fed types have the term "the zero bound". Sure, things can go negative. It has happened in non-US markets. But as discussed above, as a practical matter it probably can't last too long. If nothing else, it would inflame dangerous sentiments with consequences hard to forsee. That's my opinion any way.

I guess I expect the Fed to buy a lot of stocks.
Cancel that, the Fed stopped using the words "zero lower bound" after their rate hiking cycle failed in Dec 2018, and these days all their minutes refer to the "effective lower bound", which is well below zero. They are also on record discussing negative interest rates and how they believe they would have helped in the financial crisis. 0 is seen as an arbitrary number to them these days. They would have no qualms going negative. It's all on public record in their minutes, and you can look them up for yourself.
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Re: Negative interest rates

Post by I Shrugged » Mon Mar 09, 2020 3:22 pm

At least then, they realize there is a point at which it won't work. More importantly it will backfire. I suspect that will happen if they hit zero, and I bet some Fed people feel the same.
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Re: Negative interest rates

Post by doodle » Mon Mar 09, 2020 3:37 pm

But then what? Too late to walk it back...seems like zero interest rates are like a trap.
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Re: Negative interest rates

Post by pmward » Mon Mar 09, 2020 4:16 pm

doodle wrote:
Mon Mar 09, 2020 3:37 pm
But then what? Too late to walk it back...seems like zero interest rates are like a trap.
The same thing that always happens then. The debt eventually gets inflated away. Eventually (this is likely years or even decades away) we wind up at a point where rates are able to go back up again. It's not the negative rates that are the trap, it's the deficit that is the trap. Until that's inflated away sufficiently, rates are extremely limited in how much higher they can go. Like I said, this is likely to be a long process, as the negative rates will encourage the government to borrow more... prolonging the cycle. It's only when inflation eventually takes hold that they will start to check their spending.

The only other option, and God help us all if they go this route, is to try to run a surplus to pay the deficit down. If the government runs a surplus, it means that households and corporations necessarily have to run an equally large deficit. That's when all of our lives get really miserable.
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Re: Negative interest rates

Post by Tortoise » Mon Mar 09, 2020 5:21 pm

pmward wrote:
Mon Mar 09, 2020 4:16 pm
The only other option, and God help us all if they go this route, is to try to run a surplus to pay the deficit down. If the government runs a surplus, it means that households and corporations necessarily have to run an equally large deficit. That's when all of our lives get really miserable.
Care to elaborate? Couldn't the government run a surplus by just spending less while collecting the same amount of revenue in taxes and bonds? If that were to happen, why would households and corporations be miserable?

Hypothetically, let's say the government reduced spending mainly by cutting way back on "defense" (i.e., offense). A lot of people employed in the defense industry and related industries would probably have to find employment elsewhere, which implies a certain amount of suffering for them, but what about everybody else?
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Re: Negative interest rates

Post by pmward » Mon Mar 09, 2020 5:43 pm

Tortoise wrote:
Mon Mar 09, 2020 5:21 pm
pmward wrote:
Mon Mar 09, 2020 4:16 pm
The only other option, and God help us all if they go this route, is to try to run a surplus to pay the deficit down. If the government runs a surplus, it means that households and corporations necessarily have to run an equally large deficit. That's when all of our lives get really miserable.
Care to elaborate? Couldn't the government run a surplus by just spending less while collecting the same amount of revenue in taxes and bonds? If that were to happen, why would households and corporations be miserable?

Hypothetically, let's say the government reduced spending mainly by cutting way back on "defense" (i.e., offense). A lot of people employed in the defense industry and related industries would probably have to find employment elsewhere, which implies a certain amount of suffering for them, but what about everybody else?
It's how a balance sheet works. The entire country is like one giant balance sheet. The governments (and corporations) deficit expansion post financial crisis is what allowed the households to delever so efficiently. Household debt in the U.S. is now the best it's been in decades! You cannot change one side of the equation without an equal opposite change effecting the other side.
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Re: Negative interest rates

Post by Tortoise » Mon Mar 09, 2020 5:49 pm

pmward wrote:
Mon Mar 09, 2020 5:43 pm
The entire country is like one giant balance sheet. The governments (and corporations) deficit expansion post financial crisis is what allowed the households to delever so efficiently. Household debt in the U.S. is now the best it's been in decades! You cannot change one side of the equation without an equal opposite change effecting the other side.
Okay, so if one entity reduces the size of its deficit, another entity (or entities) must increase the size of its deficit by an equal amount? So the size of the total deficit remains fixed over time?

So the total size of the current deficit has always been as large as it currently is, and always will be?
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Re: Negative interest rates

Post by pmward » Mon Mar 09, 2020 5:53 pm

Tortoise wrote:
Mon Mar 09, 2020 5:49 pm
pmward wrote:
Mon Mar 09, 2020 5:43 pm
The entire country is like one giant balance sheet. The governments (and corporations) deficit expansion post financial crisis is what allowed the households to delever so efficiently. Household debt in the U.S. is now the best it's been in decades! You cannot change one side of the equation without an equal opposite change effecting the other side.
Okay, so if one entity reduces the size of its deficit, another entity (or entities) must increase the size of its deficit by an equal amount? So the size of the total deficit remains fixed over time?

So the total size of the current deficit has always been as large as it currently is, and always will be?
Money is debt in the U.S. Debt can go up and increase money supply, or debt can go down and decrease money supply. That debt can come from the government, the corporations, and the households. If the government pays it's debt down, it removes money from the supply... which tightens liquidity... which forces someone somewhere to have to take out more debt. Total debt overtime tends to go up (as does money supply). But it is better for the government to run a deficit so the households and corporations can run a surplus. The government has no default risk after all, they can just print it away if they need to (which is still a way of creating more debt on the Fed's balance sheet).

EDIT: I do want to add that this is a generalization, and there is definitely a thing as too much government debt. I'm mainly saying it is a balancing act, but in general terms, the government running a responsible deficit is a good thing.
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Re: Negative interest rates

Post by Tortoise » Mon Mar 09, 2020 6:01 pm

pmward wrote:
Mon Mar 09, 2020 5:53 pm
If the government pays it's debt down, it removes money from the supply... which tightens liquidity... which forces someone somewhere to have to take out more debt.
Not if they choose to spend less instead of take on more debt, right?

To take an extreme example, consider someone who goes completely "off the grid" by living in a shack somewhere in the wilderness, growing their own vegetables and hunting their own meat. Their debt and spending are both rather low, aren't they?
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Re: Negative interest rates

Post by pmward » Mon Mar 09, 2020 6:06 pm

Tortoise wrote:
Mon Mar 09, 2020 6:01 pm
pmward wrote:
Mon Mar 09, 2020 5:53 pm
If the government pays it's debt down, it removes money from the supply... which tightens liquidity... which forces someone somewhere to have to take out more debt.
Not if they choose to spend less instead of take on more debt, right?

To take an extreme example, consider someone who goes completely "off the grid" by living in a shack somewhere in the wilderness, growing their own vegetables and hunting their own meat. Their debt and spending are both rather low, aren't they?
Sure in that utopia it would work. But, how many people in the U.S. are willing to volunteer to take one for the team and decrease their standard of living so the rest can stay the same? Generally speaking, a large scale decrease in standard of living, like what happened in the wake of the 2008 financial crisis or the Great Depression, is a very painful and scarring event for the public. Matter of fact, in 2008 it was the governments deficit (I'm lumping the Fed in with the government by the way) that saved the day and allowed a quick rebound, and in turn allowed Main Street to bounce back in much shorter accord than in the Great Depression when the government compounded the issue by trying to fight it with austerity. If the tea party in the early 2010's would have gotten their way and we would have went the austerity route once again, the last 10 years would not have been as pleasant. It is better for the government to run a deficit to prevent these things.
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Re: Negative interest rates

Post by pmward » Mon Mar 09, 2020 6:12 pm

By the way, Ray Dalio's book "Navigating Big Debt Crisis" does a really in depth study on both the 2008 financial crisis and the Great Depression. It goes really deep into these things. Ray describes them much better and more in depth than I am capable. Highly recommend that book for anyone interested in this idea.
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Re: Negative interest rates

Post by barrett » Tue Mar 31, 2020 11:24 am

We had a bunch of T-Bills mature at Fidelity today. I replaced those will more T-Bills with maturities between six and 12 months out. The interest on these was ever so slightly positive. Has anyone else been buying individual treasuries as opposed to a fund like SHY?
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Re: Negative interest rates

Post by dualstow » Tue Mar 31, 2020 11:56 am

barrett wrote:
Tue Mar 31, 2020 11:24 am
We had a bunch of T-Bills mature at Fidelity today. I replaced those will more T-Bills with maturities between six and 12 months out. The interest on these was ever so slightly positive. Has anyone else been buying individual treasuries as opposed to a fund like SHY?
Oh yes. Not since the market & yield crash, but fairly recently. Some are due next month.
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Re: Negative interest rates

Post by jhogue » Tue Mar 31, 2020 3:36 pm

I am letting the balance of my T-bills mature and not renewing them at negative nominal yields. Proceeds are currently split between my treasury money market fund (FDLXX) and my annual I bond purchase. I think that it helps to remember that while the real yield on Cash is slightly negative, the yield of my barbell -- consisting of short term Treasurys + T-bonds is certainly positive.

I am trying to avoid buying into a negative real yield on Cash (as I would do with any asset), but I am also reminded that the HBPP requires the investor to hold all four assets simultaneously.
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Re: Negative interest rates

Post by Tortoise » Tue Mar 31, 2020 3:45 pm

Given that inflation (as measured by CPI) is currently 2.3%, that means a zero-yielding Treasury has a real yield of -2.3%.

Yet, for a lot of investors, a nominal negative yield of, say, -0.2% (a slightly lower real yield of -2.5%) is just a bridge too far.

Investor psychology is an interesting thing. :)
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Re: Negative interest rates

Post by dualstow » Tue Mar 31, 2020 4:16 pm

They didn't read The Mandibles. O0
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Re: Negative interest rates

Post by pmward » Tue Mar 31, 2020 4:20 pm

Tortoise wrote:
Tue Mar 31, 2020 3:45 pm
Given that inflation (as measured by CPI) is currently 2.3%, that means a zero-yielding Treasury has a real yield of -2.3%.

Yet, for a lot of investors, a nominal negative yield of, say, -0.2% (a slightly lower real yield of -2.5%) is just a bridge too far.

Investor psychology is an interesting thing. :)
CPI is backward looking, yields are forward looking.
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