WiseOne wrote: ↑Tue Nov 12, 2019 5:47 pm
I imagine that the stock market would go wild. People would switch from cash to stocks for the (non-negative) dividends. This kinda did happen after 2009....dividend stocks have been bid up to absurd P/E ratios. Also, holders of long bonds whose price goes through the roof when the interest rates drop would rejoice. I expect gold would tank.
I don't get why Trump is still calling for negative interest rates when the economy and stock market are both looking GOOD. That is just bizarre. Why would the Fed reduce interest rates in this scenario?
If enough people bid down the interest rate because they think the world is becoming deflationary, you would eventually progress past 0% and get into negative rates. People would be asking the government to take their $1,000 and give them back $995, instead of the $990 it would have deflated to for some reason. If the market (people) thought this was plausible, it would be a rational movement towards negative rates. I don't think this is the case, so it must be:
The government sets the interest rate in the negative by fiat. Since people like you and me don't
have to buy negative-rate instruments if we don't think they'll "beat" deflation, we can skip them. But big financial companies and corporations do seem to have to use them since AFAIK you can't open a checking account with $100 billion in it. Therefore, they're a form of corporate taxation, since the government can take their free loan and do whatever with it, then give back less money. But in any case, once people find a way out of giving the government money (they stop buying negative bonds), it will exert market pressure on interest rates upward. Or they could resist those market signals and wind up with no deficit, since nobody will be lending them money
Trump's logic seems to be that since the US is the entity that everyone in the world wants to lend money to, we should be able to offer the lowest interest rate. Since other countries who are worse borrowers than us are able to borrow at lower interest rates, and some are able to
borrow take at
negative rates, we should be even more negative, which should let us expend resources as if
lenders givers were simply giving them to us.
So, it's kind of a kink in the hose for us normal people who are used to Treasuries, but you can still loan money to other entities and get a return on it. Pretty much what you said. There is no economic law that says we "deserve" a risk-free return. Marc Andreesen wrote an article about that a while ago, but I haven't been able to find it again (he might have deleted it?). Anyways, that's kinda how I see it.
You there, Ephialtes. May you live forever.