tag:blogger.com,1999:blog-6704573462403312459.post6055333257162754859..comments2024-03-27T08:14:24.828-04:00Comments on Moneyness: John Cochrane is too grumpy about negative ratesJP Koninghttp://www.blogger.com/profile/02559687323828006535noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-6704573462403312459.post-15381509277746008962015-04-23T05:33:41.987-04:002015-04-23T05:33:41.987-04:00A very simple example of the symmetry at higher ra...A very simple example of the symmetry at higher rate levels:<br /><br />Starting at a high level of rates, when the Fed or the Bank of Canada drops their administered funds rate, that will force down market rates in general, which in turn forces commercial banks to compete with their own lending rates. Banks will respond in addition to that by dropping their administered liability rates (savings accounts, term deposits, etc.). They do this to preserve core net interest margins.<br /><br />That's the same kind of directional liability management defensiveness that is required in zero bound territory.<br /><br />To the extent that we all tend to have a carved out net interest margin of sorts, we all behave like banks.<br /><br />For that reason, I was underwhelmed by the linked post on IRS behavior.JKHhttps://www.blogger.com/profile/06322177539880818556noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-41124659678587934132015-04-20T09:14:49.873-04:002015-04-20T09:14:49.873-04:00Dan, I wish I knew the answer. But there is no fun...Dan, I wish I knew the answer. But there is no fundamental reason that a reversal needs to occur. As long as inflation stays low, and even turns to deflation, and bonds continue to become more like cash, then rates can keep falling for much longer.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-7924974360011458882015-04-20T03:12:26.970-04:002015-04-20T03:12:26.970-04:00Ok, thanks JP, so do you have any thoughts about h...Ok, thanks JP, so do you have any thoughts about how this thing will end? What will make the 36 years or so trend of falling interest rates stop and reverse? Dan https://www.blogger.com/profile/14228383423254118263noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-63707801817550611002015-04-19T13:18:03.362-04:002015-04-19T13:18:03.362-04:00All things staying the same, a negative interest r...All things staying the same, a negative interest rate dissuades a producer from lending to a bank. The producer will want to keep less deposits, or reduce their net long position in deposits. That same negative interest rate encourages a producer to borrow from the bank. In other words, they will want to increase their net short position in deposits. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-14575352813973979132015-04-19T13:13:11.842-04:002015-04-19T13:13:11.842-04:00A negative interest rate policy is designed to tri...A negative interest rate policy is designed to trigger people into taking those escapes. People will retreat into houses, gold, consumption goods, education, etc. JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-36282301923211755552015-04-19T11:58:38.574-04:002015-04-19T11:58:38.574-04:00Wouldn't the real escape just be any assets th...Wouldn't the real escape just be any assets that will hold value and hasn't it already been happening for a while? Dan https://www.blogger.com/profile/14228383423254118263noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-42550419415915635192015-04-18T12:05:14.696-04:002015-04-18T12:05:14.696-04:00Maybe I am confused.
I expect to have interest pa...Maybe I am confused.<br /><br />I expect to have interest paid on my bank deposits. This would be positive interest rates, and I would report the interest to the government as income.<br /><br />If there was negative interest rates on my deposits, I expect that I would pay the bank for holding my account. That would be an expense and I would report that expense to government to reduce my taxable income.<br /><br />So why would negative interest rates be positive to me as a producer? Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-35521607040570321322015-04-18T11:37:11.317-04:002015-04-18T11:37:11.317-04:00I'm not following you. Assuming negative inter...I'm not following you. Assuming negative interest rates, our producer has more incentive to go to a lender, not less, since they are being paid to take on the loan.JP Koninghttps://www.blogger.com/profile/02559687323828006535noreply@blogger.comtag:blogger.com,1999:blog-6704573462403312459.post-17999034003458924472015-04-18T10:48:02.467-04:002015-04-18T10:48:02.467-04:00I think the negative interest rate discussion need...I think the negative interest rate discussion needs some re-framing.<br /><br />Consider a producer of a product, who is an employer.<br /><br />Assuming positive interest rates, our producer can go to a lender with the following offer: "Loan me some money and I will share the results of my business with you.".<br /><br />Assuming negative interest rates, our producer would have less incentive to go to a lender. Instead, he would go to his laborers and suppliers and say something to the effect of "I am paying a TAX to the bank every time I hold money. You have the same problem. Let's use as little money as possible. With your approval I will pay you only as much as you must have for unavoidable expenses."<br /><br />So, whoa on the whole idea of negative rates. The banks would want to lend early and lots, so someone else would take the capital loss. The borrower would be discouraged from borrowing early because he would take a capital loss on any idle funds. The receiver of money for labor or services would want to unload the money (a foolish thing to do) so, unless he needed the money, he would urge delay of payment. Negative rates begin a march away from unrestricted use of money for transactions.Roger Sparkshttps://www.blogger.com/profile/01734503500078064208noreply@blogger.com