Early Retirement Extreme Forums

So I wanted to check up on using Certificates of Deposit as a way to 'inflation hedge' my cash.
Lo and behold I was greeted by the following when looking for the interest rates for CDs in Denmark: http://www.nationalbanken.dk/en/publica ... rates.aspx

I can tell from this experience that I need much more education in terms of economics. I really don't understand why this makes sense, and why there hasn't been a Bank Run.

For those not interested in clicking the link to read boring reports from the Danish National Bank: The interest rate on Certificates of Deposit is MINUS -0.75%

That's nuts!

It's just another currency war(*) strategy. The aim of a currency war is to make your currency cheaper than that of other countries so that you may benefit domestic industry (not domestic consumer but who cares about those, right?)

The traditional way, also called stimulus or quantitative easing, to do it is to buy back long bonds by printing (effectively just flipping digits on the banks' deposit with the central banks) credits. This puts credit on the banks balance sheet which they promptly flip around and buy other assets such as stocks. Hence why US stock markets have gone up whenever and only whenever there's been QE.

Another way is to peg your currency to your main trading partner. If your economy happens to do better, you currency should rise but that hurts your domstic industry, so to artificially maintain the exchange rate, your central bank has to sell your currency while buying the other currency. This [pegging] obviously gets expensive in the long run. As the Swiss found out.

Many other countries, not just Denmark learned from the Swiss lesson.

Another way to make other people pay for the peg is to ... introduce negative interest rates. This hurts people who are long your currency and thus induces them to sell your currency so that you [the central bank] don't have to.

Note that these rates stay pretty close to the financial sector (intrabank and in the currency markets). They are not pushed onto retail consumers as it is believed that consumers would be rather pissed and pull their money out en masse and put in under the mattress should that happen IOW a bank run. Consumers, most of whom have no savings, can and will do this. Large institutions who might have several billion on deposit can't do this and thus take the negative rates on the chin.

In countries where rates have been zero of close to that, but not negative, one of the first steps have been to a) reduce fees on money market accounts; b) close them down outright; and more dangerously c) relax the insurance terms on the deposits.

It's a brave new world.

(*) The collateral damage of which explains much of the current behaviour of the world's financial system.

jacob wrote:It's just another currency war(*) strategy. The aim of a currency war...
It's a brave new world...

I completely forgot to thank you for your response. I get the gist of it, mostly your answer made me realize that either:
a) you don't present arguments in their entirety
b) I need to learn a LOT more about macroeconomics to understand the full ramifications of currency wars.

Given the data I have so far, the answer is b. I have now been confronted with more known unknowns and I'll need to patch my knowledge gaps before I can truly appreciate your response.

I guess I'll have to bookmark this answer and come back when I'm smart enough to participate in the discussion

(a) && (b)

7:8 Confucius said: "If a student is not eager, I won't teach him; if he is not struggling with the truth, I won't reveal it to him. If I lift up one corner and he can't come back with the other three, I won't do it again."

An added "benefit" of the negative interest rate is for governments: They get paid for having a deficit.
Negative interest rates are also possible because in most northern EU countries pension funds are required to buy "stable" government funds. So there are forced bond buyers, who in effect buy at any negative rate.

simplex wrote:An added "benefit" of the negative interest rate is for governments: They get paid for having a deficit.
Negative interest rates are also possible because in most northern EU countries pension funds are required to buy "stable" government funds. So there are forced bond buyers, who in effect buy at any negative rate.

I sincerely hope that is not the case.
That would mean the government forces money out of the population's pension funds to cover their own deficit.
That HAS to be an oversimplification or heads (mainly politicians's) would roll.

That is the case. It is also the case here. The fed, though QE has dropped long term rates on bonds for years. A few years ago, Felix and I went round and round about this. Look up threads I started, they went forever.
In any case, I was sure we couldn't continue on this path as long as we have without a disaster, and clearly, I was wrong.
The Japanese model shows that the population will meekly accept the mass transfer of wealth from the general population to the political class, if they are patient.
I find it amusing that the biggest proponents of government interference in markets are also the ones most concerned by the concentration of wealth that results.
But take what I say with a grain of salt. As I said, I never believed we could go this far down this road.

Japan's central bank has now started a negative interest rate policy. Negative .1%. Not really surprising given their high savings rate and low growth numbers. Planners are getting desperate!

Forgive my ignorance: Central banks set interest rates at a slightly negative rate to discourage people just keeping their money in the bank. Ok, so people take their money out of the bank and put it somewhere else (invest, mattress, etc). Doesn't that mean that banks will need to up their reserves? And because the yields are horrible, no one will want to put their money in the bank again... so the bank has to raise the rates it gives to people for holding their money, thus negating the negative interest rate policy anyway, right??

I know I don't understand the logic behind all of this. Is it because this is a currency devaluation thing rather than a 'punishing savers' kind of thing? In any case, if it IS because of currency devaluation, why wouldn't the bank reserve issue I mention above counter-balance the central bank's goals? How much real power do the central banks have over these things? Please excuse my lack of sophistication here, I only took Econ 101 at a state school

I always wondered if/when the BOJ and Japanese fiscal stewards will resort to outright money distribution. If their goal is a certain rate of inflation, say 2%, then they might try something that has the effect of transferring cash directly to all or a majority of citizens. They could start with a small amount, sent once a month and then calibrate the amounts until they get to their desired inflation goal. This should effectively reduce their debt, and eliminate deflation. It might also depreciate the currency to the point where they would be a more competitive exporter. Also if they were transferring cash to the parents on behalf of children they might start breeding at a solid growth rate which would be good given their strong stance against immigration and current non-replacement birth rates. What would the tradeoffs be? Possible hyperinflation, maybe some lost goodwill in the International banking system and with creditors, loss of productivity?

@bsog - You got the right idea. However, central banks only deal with other banks directly by getting paid for reserves that banks hold with them due to NIRP and through their open market operations where they might print money to buy bonds or equity from whoever sells them anyone. The central bank's interest rate doesn't not directly affect the "people" because people don't hold their monies with the central bank.

So far retail banks have not been willing to send the negative rates on to the consumers (the "people"). And because of NIRP banks are not willing to make long-duration loans with the money they have (if rates rise, the banks will be stuck with a serious loser), so the cash is just sitting there on their account with the CB (the bank's bank account) slowly getting drained instead of getting lent out. Where it could have an effect but apparently hasn't would be in dragging the entire yield curve down. This would make bonds more expensive and thus make it more likely for bond holders to sell them if they need money. But because new rates are so long and NIRP is public, maybe people like to hang on to their higher paying bonds.

The problem the world has is that there's way too much cash out there. At least NIRP has the effect of destroying some of that cash. Whenever banks pay the CB interest for storing their money, the CB simply smokes that money and it goes back into the nothing from it came. At -0.25% that's a really slow process. So what CBs are really hoping for is some inflation.

I suspect that the amount of malinvestment caused by cheap money (see shale oil and China) has caused enough structural misalignment in the general economy (unemployment and such ... there are now fewer people employed in the US than seen in a long time ... unemployment rates are low too .. but what matters for consumption demand is how many people are actually working. A lot of people how downsized and found they can live decent lives without working. Hence perhaps all why minimalism is so trendy.) Hence, the overall lack of inflation as well. What the world is waiting for is either a bunch of supply destruction to make the deflation go away or the next great idea.

jacob wrote: What the world is waiting for is either a bunch of supply destruction to make the deflation go away

Supply destruction of what though? Housing (in cities) is already bumping up against the supply curve. Everything else is made in China and if that all disappeared tomorrow we could replace it for $2.99 shipped.

Energy and commodities (<= which are mostly priced by energy anyway), but especially energy.

Curous why the central bank never considered purchasing/selling oil futures or similar derivates then. Interest rates -->borrowing-->capacity utilitzation-->inflation can take a while for the full cycle to conclude. Similarly Energy price-->price level of most items-->inflation would take a while to work through the system, but would be more direct?

The probably don't have the mandate. The Feds don't have the mandate to buy stocks, for example; they can only buy "risk-free" treasuries. However, some other central banks can. The Swiss National Bank is the most famous one for this.

The other problem is that with leverage, traders have more power than central banks. Soros is famous for bringing down the Bank of England. The reason that the Swiss cancelled their Euro peg was also that the the SNB couldn't stay liquid as long as they could stay irrational.

Buying oil futures to pump up the oil price in a world that's flooded with world seems extremely irrational.

Hmm I suppose they might just end up with actual deliveries in that case.