ultra low / negative interest rates in Germany

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Libertarian666
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Re: ultra low / negative interest rates in Germany

Post by Libertarian666 » Fri Feb 12, 2016 6:40 am

Lang wrote: So far central banks have had little luck with preventing deflation...
Then they just aren't printing fast enough.

Anyway, the whole notion of being frightened by deflation is just political cover for inflation. Deflation is the result of inflation, and counteracts the distortions caused by the inflation so that the pattern of spending and investing is more in line with actual consumer preferences. To prevent this, central banks pile on more inflation, which merely prolongs and worsens the distortions.
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Re: ultra low / negative interest rates in Germany

Post by BearBones » Fri Feb 12, 2016 1:40 pm

Libertarian666 wrote: As Ben Bernanke noted some time ago (http://www.federalreserve.gov/boarddocs ... t.htm#fn18), central banks can prevent deflation in any country by printing money. Of course the eventual result of this policy will be the destruction of the currency, but they believe that they can stop in time to prevent that. In my opinion, people are starting to realize that printing money is exactly what the central banks are doing and will continue to do, which is why gold has started to move up recently.
My recollection from past threads is that central banks have a lot more control over inflation than deflation. "Printing money" does no good if there if the economy is stagnant (such as from fear, satiety, or the aging of a population) and the money does not go into circulation. And it does not necessarily result in inflation.

Do I remember correctly?
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Re: ultra low / negative interest rates in Germany

Post by economicsjunkie » Fri Feb 12, 2016 2:11 pm

ochotona wrote:
economicsjunkie wrote: Correct, the longer the duration the more volatile the bond. And?
The answer to your question is people will go to shorter duration in order to lower the volatility, because they may give up a tiny bit of coupon, but they avoid huge capital loss potential. You asked the question.
If I understand you correctly you're suggesting that the capital gains upwards are limited when rates are so low, so might as well go for a duration where the downside risk is reduced. Am I understanding you correctly?
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Re: ultra low / negative interest rates in Germany

Post by economicsjunkie » Fri Feb 12, 2016 2:16 pm

lordmetroid wrote: Because a 0,5% yield will be a heck of a lot better than gold who will depreciate in value thanks to cash becoming more and more scarce and valuable.
What historical evidence are you relying on when you say gold will depreciate during deflation? The Great Depression (granted, the gold price was fixed and changed by the government but so what), Great Recession (no price fixing), and Japanese deflation of the 90s off and on through now seem to contradict this theory.
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Re: ultra low / negative interest rates in Germany

Post by dualstow » Fri Feb 12, 2016 4:05 pm

Whether or not gold will depreciate, it is these low-yield times that make it easy for me to buy it. After all, the argument often goes that gold "just sits there." If my savings were earning 5%, I'd have to think hard about it, but right now my cash is just sitting there.
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Re: ultra low / negative interest rates in Germany

Post by ochotona » Fri Feb 12, 2016 5:53 pm

economicsjunkie wrote:
ochotona wrote:
economicsjunkie wrote: Correct, the longer the duration the more volatile the bond. And?
The answer to your question is people will go to shorter duration in order to lower the volatility, because they may give up a tiny bit of coupon, but they avoid huge capital loss potential. You asked the question.
If I understand you correctly you're suggesting that the capital gains upwards are limited when rates are so low, so might as well go for a duration where the downside risk is reduced. Am I understanding you correctly?
I can't speak for others, but for me, there seems to be an asymmetical risk to the downside when you get to tiny positive or negative coupon rates for long duration bonds. Unless you are prepared to sell out of your position very quickly, and you have specific targets for so doing, being long in long bonds as interest rates go negative can only end in tears.

It's like people who piled into stocks in May 2015... no difference. It's greed, and a willing disregard for downside risks.

But if your investment policy is to let the PP's allocation take care of those risks, then I can't really criticize. That's your personal choice. We all make differing calls.
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Re: ultra low / negative interest rates in Germany

Post by Libertarian666 » Fri Feb 12, 2016 8:58 pm

dualstow wrote: Whether or not gold will depreciate, it is these low-yield times that make it easy for me to buy it. After all, the argument often goes that gold "just sits there." If my savings were earning 5%, I'd have to think hard about it, but right now my cash is just sitting there.
With savings "earning" negative rates, it's really hard to come up with an argument against gold, which pays a big fat 0% (before storage fees, but still...).
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Re: ultra low / negative interest rates in Germany

Post by economicsjunkie » Fri Feb 12, 2016 9:16 pm

Libertarian666 wrote:
dualstow wrote: Whether or not gold will depreciate, it is these low-yield times that make it easy for me to buy it. After all, the argument often goes that gold "just sits there." If my savings were earning 5%, I'd have to think hard about it, but right now my cash is just sitting there.
With savings "earning" negative rates, it's really hard to come up with an argument against gold, which pays a big fat 0% (before storage fees, but still...).
The relative cost benefit calculations of rational investors should certainly favor gold the more these ultra low rates approach gold's yield (0% lol), and at a dose dependent rate one would think. This is why I tend to believe that deflation can be a huge push for gold prices. We'll probably see the answer unravel before us over the coming years.
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Re: ultra low / negative interest rates in Germany

Post by ochotona » Sat Feb 13, 2016 8:43 am

economicsjunkie wrote: The relative cost benefit calculations of rational investors should certainly favor gold the more these ultra low rates approach gold's yield (0% lol), and at a dose dependent rate one would think. This is why I tend to believe that deflation can be a huge push for gold prices. We'll probably see the answer unravel before us over the coming years.
Yes, maybe the value of gold is a concave-upward parabolic curve, with the ends anchored in inflation and deflation. But we have only thought of it as an inflation-anchored sloping line, because deflation has been pretty rare...
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Re: ultra low / negative interest rates in Germany

Post by BearBones » Sat Feb 13, 2016 10:04 am

Libertarian666 wrote:
dualstow wrote: Whether or not gold will depreciate, it is these low-yield times that make it easy for me to buy it. After all, the argument often goes that gold "just sits there." If my savings were earning 5%, I'd have to think hard about it, but right now my cash is just sitting there.
With savings "earning" negative rates, it's really hard to come up with an argument against gold, which pays a big fat 0% (before storage fees, but still...).
It has and always will pay 0%. Only benefit is its value vs the currency, right? You two are betting that gold increases (again) rather than decreases in a severe and/or sustained deflationary environment. It may. Or it could be that its price has been severely inflated by central banks' sustained policies of low interest (the world has been pushed out of cash and bonds so as to ignite growth and prop up otherwise sick economies), and it will drop in value just like real estate, equities and virtually everything else we own.
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Re: ultra low / negative interest rates in Germany

Post by Lang » Sat Feb 13, 2016 10:53 am

Citi sees Canada, the Czech Republic, Israel and Norway possibly adopting negative interest rates this year:
http://business.financialpost.com/news/ ... -citi-says
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Re: ultra low / negative interest rates in Germany

Post by Libertarian666 » Sat Feb 13, 2016 1:24 pm

BearBones wrote:
Libertarian666 wrote:
dualstow wrote: Whether or not gold will depreciate, it is these low-yield times that make it easy for me to buy it. After all, the argument often goes that gold "just sits there." If my savings were earning 5%, I'd have to think hard about it, but right now my cash is just sitting there.
With savings "earning" negative rates, it's really hard to come up with an argument against gold, which pays a big fat 0% (before storage fees, but still...).
It has and always will pay 0%. Only benefit is its value vs the currency, right? You two are betting that gold increases (again) rather than decreases in a severe and/or sustained deflationary environment. It may. Or it could be that its price has been severely inflated by central banks' sustained policies of low interest (the world has been pushed out of cash and bonds so as to ignite growth and prop up otherwise sick economies), and it will drop in value just like real estate, equities and virtually everything else we own.
If its price has been severely inflated, then this must be one of the cases of hidden inflation that everyone is always whispering about, since given the enormous increase in central bank balance sheets in the last 10 years or so, gold doesn't look severely inflated to me.
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Re: ultra low / negative interest rates in Germany

Post by ochotona » Sat Feb 13, 2016 2:11 pm

Libertarian666 wrote: If its price has been severely inflated, then this must be one of the cases of hidden inflation that everyone is always whispering about, since given the enormous increase in central bank balance sheets in the last 10 years or so, gold doesn't look severely inflated to me.
Gold is not severely inflated? Relative to what baseline? Relative to 2001, the CAGR is 11%. That's a big step up over a long period of time. Now, I have no earthly idea what it's going to do in the next year, may it goes up more, but to say it isn't inflated where it is now is a pretty bold claim.
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Re: ultra low / negative interest rates in Germany

Post by BearBones » Sat Feb 13, 2016 2:20 pm

Libertarian666 wrote: If its price has been severely inflated, then this must be one of the cases of hidden inflation that everyone is always whispering about, since given the enormous increase in central bank balance sheets in the last 10 years or so, gold doesn't look severely inflated to me.
Can you explain more?

Sure wish I had a better understanding of economics. Wonder what the MMT folks would think the of the consequence of the "enormous increase in central bank balance sheets in the last 10 years or so." Does it do anything if it doesn't make it into consumer's pockets? Anyone want to comment? Moda, Stone, Gumby around?

Hidden inflation. Or perhaps just an aggressive attempt to prevent deflation that would have happened otherwise. With resultant artificially inflated values of such things as equities, real estate and, perhaps, gold. If this fails, as I am beginning to think it might, then the values of such things will decline, perhaps severely.

But, hey, could be wrong. BullBones, my nemesis, sure thinks I am!
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Re: ultra low / negative interest rates in Germany

Post by Libertarian666 » Sat Feb 13, 2016 6:04 pm

ochotona wrote:
Libertarian666 wrote: If its price has been severely inflated, then this must be one of the cases of hidden inflation that everyone is always whispering about, since given the enormous increase in central bank balance sheets in the last 10 years or so, gold doesn't look severely inflated to me.
Gold is not severely inflated? Relative to what baseline? Relative to 2001, the CAGR is 11%. That's a big step up over a long period of time. Now, I have no earthly idea what it's going to do in the next year, may it goes up more, but to say it isn't inflated where it is now is a pretty bold claim.
And relative to 1/1/2013, the CAGR is -9.26%, so gold must be wildly underpriced!

My point, of course, is that you can get almost any number you want if you cherry-pick the date range.
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Re: ultra low / negative interest rates in Germany

Post by Libertarian666 » Sun Feb 14, 2016 9:08 am

BearBones wrote:
Libertarian666 wrote: If its price has been severely inflated, then this must be one of the cases of hidden inflation that everyone is always whispering about, since given the enormous increase in central bank balance sheets in the last 10 years or so, gold doesn't look severely inflated to me.
Can you explain more?

Sure wish I had a better understanding of economics. Wonder what the MMT folks would think the of the consequence of the "enormous increase in central bank balance sheets in the last 10 years or so." Does it do anything if it doesn't make it into consumer's pockets? Anyone want to comment? Moda, Stone, Gumby around?

Hidden inflation. Or perhaps just an aggressive attempt to prevent deflation that would have happened otherwise. With resultant artificially inflated values of such things as equities, real estate and, perhaps, gold. If this fails, as I am beginning to think it might, then the values of such things will decline, perhaps severely.

But, hey, could be wrong. BullBones, my nemesis, sure thinks I am!
I'm an Austrian economist, so what I think about money is different from what the MMT and other "new" schools of economics teach. But this is getting somewhat off-topic so I'll post my comments on that separately.
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Re: ultra low / negative interest rates in Germany

Post by lordmetroid » Sun Feb 14, 2016 6:12 pm

This is why bonds, even at 1% is good.
https://www.youtube.com/watch?v=PHe0bXAIuk0
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Re: ultra low / negative interest rates in Germany

Post by economicsjunkie » Tue Feb 16, 2016 12:37 pm

BearBones wrote: Wonder what the MMT folks would think the of the consequence of the "enormous increase in central bank balance sheets in the last 10 years or so." Does it do anything if it doesn't make it into consumer's pockets? Anyone want to comment? Moda, Stone, Gumby around?
If you print a bunch of money and bury it in your backyard, does it do anything? I think not.

If I understand the MMT folks correctly they would argue that when demand for credit is saturated the Fed can't enact monetary policy by means of bank reserves, since those are only available for interbank settlements. Mainstream economists still think that banks get the reserves first, and then loan it out and via multiplier the money supply rises throughout the economy. But empirical evidence shows banks lend money first, and then later on borrow the reserves to meet legal requirements.

I've heard some of them say the Fed should not get involved in interbank loans and just let the rate fall to 0% as it would naturally (in the interbank lending market that is, not everywhere!).

I believe they would argue the only entity that could enact effective monetary policy would be the Treasury by means of spending money on hiring the unemployed.

I'm not a Keynesian and ultimately consider myself an Austrian as well philosophically, but I think it's hard to argue that it would be preferable to put people to work instead of sending them welfare/unemployment checks.
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Re: ultra low / negative interest rates in Germany

Post by Lang » Tue Feb 16, 2016 1:57 pm

QE has also increased bank deposits, not just reserves, because the Fed bought a lot of government bonds and mortgage-backed securities from pension funds and other investors.
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Re: ultra low / negative interest rates in Germany

Post by economicsjunkie » Tue Feb 16, 2016 3:52 pm

Lang wrote: QE has also increased bank deposits, not just reserves, because the Fed bought a lot of government bonds and mortgage-backed securities from pension funds and other investors.
Can you provide a reference regarding this?
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Re: ultra low / negative interest rates in Germany

Post by Pfanni » Wed Feb 17, 2016 2:50 am

I can't speak for others, but for me, there seems to be an asymmetical risk to the downside when you get to tiny positive or negative coupon rates for long duration bonds. Unless you are prepared to sell out of your position very quickly, and you have specific targets for so doing, being long in long bonds as interest rates go negative can only end in tears.
I fully agree with that.
Personally I swapped the ponzi scam (EUR bonds) for the cleanest of all the dirty shirts (USD treasuries).
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Re: ultra low / negative interest rates in Germany

Post by Lang » Wed Feb 17, 2016 4:04 am

economicsjunkie wrote:
Lang wrote: QE has also increased bank deposits, not just reserves, because the Fed bought a lot of government bonds and mortgage-backed securities from pension funds and other investors.
Can you provide a reference regarding this?
Yeah. For example:

http://libertystreeteconomics.newyorkfe ... rowth.html
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Re: ultra low / negative interest rates in Germany

Post by economicsjunkie » Wed Feb 17, 2016 12:55 pm

Lang wrote:
economicsjunkie wrote:
Lang wrote: QE has also increased bank deposits, not just reserves, because the Fed bought a lot of government bonds and mortgage-backed securities from pension funds and other investors.
Can you provide a reference regarding this?
Yeah. For example:

http://libertystreeteconomics.newyorkfe ... rowth.html
Thanks!
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Re: ultra low / negative interest rates in Germany

Post by economicsjunkie » Wed Feb 17, 2016 7:11 pm

Lang wrote:
economicsjunkie wrote:
Lang wrote: QE has also increased bank deposits, not just reserves, because the Fed bought a lot of government bonds and mortgage-backed securities from pension funds and other investors.
Can you provide a reference regarding this?
Yeah. For example:

http://libertystreeteconomics.newyorkfe ... rowth.html
OK, I've read it. I'm going to literally quote your article to emphasize where it makes exactly my point:

"In this post, we show that we can attribute most, but not all, of the recent high money growth rate of M1 to low current interest rates as well as the growth in bank reserves that has resulted from the Fed’s asset purchase programs."

They explain how the increase in bank reserves may have contributed to an increase in bank deposits, but suggest the Fed's asset purchases under QE have no other direct effect than to increase bank reserves.
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Re: ultra low / negative interest rates in Germany

Post by Lang » Thu Feb 18, 2016 4:36 am

Well, yes, but there are indirect effects.
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