Hacker News

Interest Rates: Naturally Negative?(blog.pimco.com)

93 pointstoomuchtodo posted 5 months ago146 Comments
bubble_talk said 5 months ago:

When I see people defend negative interest rates, I am reminded of this saying by Orwell: "One has to belong to the intelligentsia to believe things like that: no ordinary man could be such a fool."

>>One likely factor behind the savings glut and negative interest rates is negative “time preference.” Once upon a time, economic theory maintained that people always value today’s consumption more than tomorrow’s consumption – and thus display positive time preference.

An alternative theory: people's time preference is still very much positive, but becomes negative when presented with a set of equally bad options - negative interest rates plus high risk speculative investments plus a history of governments around the world unexpectedly seizing or devaluing wealth building assets. To me, these bad options seem to be the making of the governments and not naturally occurring scenarios.

beefield said 5 months ago:

Especially for rich people and for consumption (not investment) it looks obvious to me that they have negative time preference for consumption. Why? They could choose to consume all their money today to whatever they want (business jets, charity, space travel etc) and live rest of their lives in poverty if they face negative interest rates on their assets. That's what a positive time preference looks like. Of course, even when rates are negative, the rich people choose to live comfortably also in the future, even if their total consumption is slightly smaller. And as the wealth has been concentrating during the last decades more and more to the wealthy ones, the interest rate needs to reflect more and more the time preference of the wealthy ones. You want to get higher interest rates, you need to reverse the wealth concentration.

(All of the above is completely without source or further arguments or detailed analysis available, just my thoughts.)

pjc50 said 5 months ago:

To me this comes back to the "r > g" controversy: https://www.ft.com/content/e1b9254e-f476-11e3-a143-00144feab...

In order to earn a positive rate of return without simply taking wealth off others, the overall world economy has to grow. This growth appears to be slowing, and also significant concentrations of wealth are being stashed away (e.g. Chinese investers in Vancouver and other cities).

Not to mention the huge "negative growth" risks presented by climate change. There's going to be significant investment needed to reduce CO2 and/or mitigate the impacts of these, just to maintain the same level of economic output! An exogenous source of negative growth.

Basically the wealthy have to choose between negative interest rates, voluntary charity, wealth taxes, sudden confiscation, or invalidation of worth due to collapse. You can't take it with you, as the saying goes.

kromem said 5 months ago:

I've recently been thinking about how we often talk academically about the idea of the market being efficient, but not so much about the time frame for that efficiency.

In essence, the market is simply an economic manifestation of evolutionary theory.

But the same way if evolution took place for an organism with rapid mutations and a short life cycle across seasons, you'd potentially have most of the species adapting to cold weather and then suddenly dying off during summer, our short outlooks are probably creating market optimizations that are adaptive in the short term but maladaptive in the long term (as an obvious example, trying to cover up global warming instead of plan around its inevitability).

I keep seeing the market make changes that make sense if the world was going to end in the next five years, and dig itself into a deeper and deeper hole, continually confident in its wisdom.

caf said 5 months ago:

Your alternative theory doesn't make sense: being presented with options like negative interest rates ought to nudge people further towards current consumption (a positive time preference) rather than the opposite.

bubble_talk said 5 months ago:

Are we actually disagreeing? This seems to be a case of ambiguous terminology [1]. But either way, what you said here is exactly what governments want:

>>being presented with options like negative interest rates ought to nudge people further together (I think you meant towards) current consumption

[1] https://en.wikipedia.org/wiki/Time_preference

caf said 5 months ago:

So the point is that in the past, it didn't take negative interest rates in order to do that, because people overall seemed to naturally have a significant preference for current consumption (+ve time preference). Another way of putting this is that in aggregate, people wouldn't lend money even risk-free for less than a decent rate of interest (the idea of a 'natural rate of interest').

The hypothesis in the article is that the reason near-zero and even negative interest rates are seemingly required to give the same kind of nudge now is that the underlying preference for current consumption has weakened substantially. The other side of this coin being that people will now happily lend money for a much lower rate because they now value future consumption relatively more than was previously the case (the 'natural rate of interest' has gone down).

bubble_talk said 5 months ago:

OK, sorry, now I understand.

>>the underlying preference for current consumption has weakened substantially

I have a feeling this is a rabbit hole I don't want to go down :-) - but has the underlying preference for current consumption weakened substantially because of (the author's claim) that people are living longer after retirement, or is it because people feel current consumption isn't giving them their money's worth? When you hand in your dollar, you expect to receive something worth that dollar.

In other words, if people suddenly woke up tomorrow and started accepting gold as currency, will the preference for current consumption be as weak? Or will it return to the previous levels because it is easier to see if you are getting your "unit of currency"'s worth? To be clear, I don't know the answer. But if it is the latter, then people's time preferences may not have really changed.

caf said 5 months ago:

Do people naturally have a better sense of what a gram of gold 'should' buy versus a $50 note? I'm only going on personal experience here, but I doubt it.

Here's another possibility, though: what if a lot of the consumption that was stimulated since the GFC was really capital expenditure brought forward - things like households upgrading and replacing their durable goods - replacing that dodgy fridge a little earlier than was planned, that sort of thing? Eventually that well will run dry, and households might well start saving instead of buying concert tickets or whatever.

Double_Cast said 5 months ago:

Time preference is a comparison between the present and future. So the relevant factor is the time differential, rather than the value at any particular point in time. The relevant question is not "does a dollar bill represent at least $1 of utility?". The relevant question is "does a dollar bill have more utility today than tomorrow?" Eg. suppose we're in the midst of hyperinflation. Any savings I have are practically worthless today, and also are worth less tomorrow than if I'd spent it today.

aalleavitch said 5 months ago:

The reason that there's a naturally negative interest rate isn't because "people are getting better at saving". The reason there's a naturally negative interest rate is because over half of the American population owns less than nothing; they have more debts than assets. Investors simply own too much wealth, and the general public owns too little. The economy is so lopsided that investment is yielding a negative rate of return, because the wealthy invest the majority of their money while the poor have to spend it just to survive, and a lesser and lesser proportion of wealth belongs to the poor.

allana said 5 months ago:

Money doesn't have high velocity in the upper echelons of society compared to in the bottom half. One dollar will pass through many hands if paid to a person in the lower half of our economy, while in the top 10% this same dollar barely makes it into one other person's hands, let alone multiple.

The economically disadvantaged chunk of society has grown as middle wage jobs have disappeared, while their wages have effectively dropped. This is terrible for economic growth IMO.

nootka said 5 months ago:

Another request if you have a paper or other source; not because I doubt it though! I'm interested in how velocity of money would properly be modeled and observed as a function of the Lorenz curve.

I'm pretty amateur when it comes to math, but I'm working on it.

thdxr said 5 months ago:

Do you have a source for your money velocity claim? Intuition implies it would be the opposite

qroshan said 5 months ago:

Huh? Give 10 bucks to Bill Gates and 10 bucks to the homeless person that you just saw and tell me who would spend it immediately?

remarkEon said 5 months ago:

How so? It checks with my intuition quite fine. Do you mean as a total volume of dollars earned?

refurb said 5 months ago:

Wealthy people are likely to invest any cash received immediately which would be invested or loaned out to businesses that purchase things and pay salaries.

They don't take their extra $100K and stick it under a mattress.

atq2119 said 5 months ago:

Investment is a problematic word because it has so many subtly different meanings.

Let's say you "invest" in the stock market. Does that actually cause any business to "invest" more? The answer is likely no. It'll drive up the stock prices of the company whose shares you buy, yes, but companies don't tend to make investment decisions based on their share price.

Conversely, companies do make investment decisions based on the demand for their products, so giving money to poor people who immediately spend it is likely to cause more (real world) investment than giving it to rich people who merely "invest" it.

imtringued said 5 months ago:

Even if you transferred the money directly into the bank account of those corporations they would just merely pay it out as a dividend or give the CEO a bonus. What then? "Invest" again?

A corporation doesn't need a third factory if no one is buying their products. Because of deflation it may even want to get rid of it's second factory.

aalleavitch said 5 months ago:

It’s like that comic with the dog holding the ball going “no take, only throw!”

“No purchase, only invest!”

At the end of the day the economy only works because it’s extracting profit from consumers, if the profit you’re extracting is money you lent them in the first place...where is the profit coming from? Hence the negative interest rates: you NEED them to take on more debt so they can even buy things from you to begin with. It’s the market itself saying “you need to give them more money”.

anon9001 said 5 months ago:

> companies don't tend to make investment decisions based on their share price

Isn't the whole point of a company to increase share price?

ptah said 5 months ago:

the trend is for corporations to keep large cash reserves, essentially they are "extreme hoarders" in the financial sense. it comes with all the negatives that physical hoarding comes with

orangecat said 5 months ago:

over half of the American population owns less than nothing

Median net worth is $97k, and between 80 and 90 percent of households are above zero: https://dqydj.com/net-worth-brackets-wealth-brackets-one-per...

aalleavitch said 5 months ago:

I'm basing that claim on this: https://www.peoplespolicyproject.org/2019/06/14/top-1-up-21-...


>To derive this, I initially take the nominal net worth aggregates for each wealth group that are provided by the Federal Reserve and subtract out consumer durables. Consumer durables are things like cars and fridges that many academics who work on wealth distributions do not consider wealth. The average person in the top 1 percent owns around 32x as many consumer durables (in dollar terms) as the average person in the bottom 50 percent owns. So the subtraction of them reduces the inequality between the top 1 percent and bottom 50 percent.

From there, I adjust the 1989 figures to 2018 dollars using the CPI-U-RS price index. This is what the Federal Reserve also does to adjust wealth figures over time in its Survey of Consumer Finances reports.

What the final product reveals is a 2018 where the top 1 percent owns nearly $30 trillion of assets while the bottom half owns less than nothing, meaning they have more debts than they have assets. This follows from 30 years in which the top 1 percent massively grew their net worth while the bottom half saw a slight decline in its net worth.

YokoZar said 5 months ago:

> What the final product reveals is a 2018 where the top 1 percent owns nearly $30 trillion of assets while the bottom half owns less than nothing, meaning they have more debts than they have assets.

Does the bottom half own less than nothing when summed, or does every person in the bottom half own less than nothing?

refurb said 5 months ago:

Doesn't seem reasonable to suggest that someone who just bought $10K in durable consumer good for cash has a negative net worth.

Mathnerd314 said 5 months ago:

Say someone buys a used car for $10K. Typically that is their only car, that they use work. They can't sell it because then they'd lose their job and probably be unable to buy food etc. So where is the cash value?

IMO "net worth" is kind of fuzzy, e.g. people have organs that could be sold for profit but those aren't included in calculations. I'd rather look at income minus expenses.

imtringued said 5 months ago:

One can argue that owning a car saves you from the expense of buying a car. After your asset expires you have another $10k bill at the end. If your car is a super reliable prius and lasts twice as long as your old car then it may haved saved you money by reducing your transportation expenses.

aalleavitch said 5 months ago:

Cars are liabilities. Almost invariably they will break down and require repairs, which are generally expensive. The moment you buy a car you are losing money on it. You’re losing it slower than if you had thrown the money off of a bridge, but it’s not an investment. Any money saved by making a good vehicle purchase is more of a discount on a cost you’re paying anyway.

opportune said 5 months ago:

I understand why you would want to set interest rates negative if your central bank is going to buy up all that debt, but as an individual or institutional investor why would you ever want to hold something with negative interest instead of cash?

Why is there even a market for a bond with negative interest rates at all, since compared to a $X bond with negative interest, $X in currency seemingly carries less risk, more liquidity, and a higher rate of return?

darawk said 5 months ago:

When you deposit your money at the bank, the bank pays you an interest rate. Normally that rate is positive. They pay you that interest rate because they are investing your money somewhere (often in mortgages, which pay them an interest rate).

However, sometimes they have more money than their investment prospects can handle. Normally under those circumstances, they would buy treasuries from the federal reserve, which return the "risk-free rate". They always want to invest their money in things that return more than the risk-free rate, but sometimes they can't find enough stuff to invest in that they think will have a better return. In those cases, they're forced to buy treasuries.

Now, if the risk-free rate is negative, you might reasonably ask: Why doesn't the bank just keep cash? And the answer to that is that they're legally prevented from doing so. Banks have to maintain their capital reserves at the Fed, and the Fed pays them the "federal funds rate" on those reserves. So if they can't lend out the capital, they have to keep it with the Fed, where it earns whatever rate the Fed chooses to give them.

scott00 said 5 months ago:

> Now, if the risk-free rate is negative, you might reasonably ask: Why doesn't the bank just keep cash? And the answer to that is that they're legally prevented from doing so.

Some cursory research suggests this is not the case. The Federal Reserve website states: "Depository institutions must hold reserves in the form of vault cash or deposits with Federal Reserve Banks." [0]

[0] https://www.federalreserve.gov/monetarypolicy/reservereq.htm

darawk said 5 months ago:

Sorry, what I meant was that they cannot simply keep cash digitally without physically storing something.

krastanov said 5 months ago:

This is fascinating news to me! Could you elaborate on how (legislatively) the banks are required to keep their reserves with the Fed? What would be a good source to read more?

How does what you said mesh with the notion that keeping cash might be riskier / more cumbersome than investing in the "risk-free" treasury bonds?

darawk said 5 months ago:

Sure: https://en.wikipedia.org/wiki/Excess_reserves

Banks are required by law to keep a portion of their assets on deposit in reserve. So if a bank has say, 1 billion in deposits, they might be required to maintain a balance with the Fed of 100 million.

What I think you're asking though is "why don't they just not keep the cash at the federal reserve". And the answer is that that's just not a thing you can do. Your bank maintains an account with the Fed - that's how it actually "stores" money. It can also physically store cash, but that comes with carrying costs (protecting it, etc.). Those carrying costs are one form of a negative interest rate.

At the end of the day, someone is storing the money somewhere. And the root-level money storer in the economy is the Fed. If the Fed wants to charge you 0.5%/year to store your money, what are your alternatives? You could keep physical cash. But then you have to protect it. You could invest in other assets, like stocks/bonds/mortgages, but those have risks. If you can't find any investments you like, and you don't want to physically store the cash, you don't really have any other choice.

lbotos said 5 months ago:

Not GP, but at someone else on HN's suggestion, I've been following Khan Academy's banking course: https://www.khanacademy.org/economics-finance-domain/core-fi...

scott00 said 5 months ago:

I don't think it's actually true. See my response to GP.

JumpCrisscross said 5 months ago:

> they're legally prevented from doing so

No, they’re not. They must hold certain quantities of reserves with the Fed. But banks are free to hold the rest as cash in their vaults.

This is why many countries with negative rates still have zero deposit rates.

darawk said 5 months ago:

Sorry, what I meant was that banks cannot simply keep cash digitally, without physically storing cash and thereby incurring costs associated with doing that.

pbk1 said 5 months ago:

If I expected interest rates to go even more negative, buying a negative yielding bond in anticipation of a capital gain is a rational trade.

Also banks and certain investors are mandated to purchase debt with certain ratings - in the absence of positive-yielding appropriately rated bonds they have no choice but to accept the negative yield.

programmertote said 5 months ago:

Could you elaborate on this a bit more? How could one gain anything from buying negative yielding bond?

rossriley said 5 months ago:

Because the bond pays out at the end of the term, but you can sell it at any point of the term for whatever the market price is.

So for example let's say you bought a -0.1% yield, but newly issued bonds are now only offering a -0.5% yield you can now actually sell your bonds paying out -0.1% at a profit, since even if they paid you a 3.5% premium on the price you paid, it would still be more attractive than the rate on offer for new bonds.

pbk1 said 5 months ago:

Piggy backing off of this followup, bond prices move inversely with yields. Ceteris paribus, a -0.5% yielding bond commands a higher price than a -0.1% yielding bond. Bonds are quoted in yields but traded on a dollar price (typically as a percentage of par) hence the capital gain I implied above being realized with the higher price should yields/rates fall further.

toomuchtodo said 5 months ago:

> but as an individual or institutional investor why would you ever want to hold something with negative interest instead of cash?

There are no effective ways besides these bonds to hold tens or hundreds of millions of dollars as cash, even if you hire a warehouse, security, and store pallets of fiat (which has been attempted). You are paying a premium for principal safety.

You either make this choice voluntarily as an asset manager, or because you are required by regulation or other means to hold a percentage of your portfolio in this asset class.

dfischer said 5 months ago:

The latter is the biggest reason. Institutional funds are required to purchase these “low risk” items and many would argue is artificial demand so it ends up doing more harm than good.

somebodythere said 5 months ago:

Also cash can be made illegal.

said 5 months ago:
rubbingalcohol said 5 months ago:

Technically but likely not functionally.

kingo55 said 5 months ago:

True, but they can always impose greater restrictions such as how much you can spend with cash. Cash transaction limits have been decreasing for some time.


samsonradu said 5 months ago:

This, coupled with the pure speculation that before the bonds mature there will be a 'bigger investor' paying more (pushing the yield lower and the value higher).

said 5 months ago:
opportune said 5 months ago:

I'm clearly no expert but banks seem to be able to do this somehow, no?

wcoenen said 5 months ago:

Banks are special because they can deposit money with the central bank. The central bank won't disappear, and like most money it's just numbers in a database (nothing "backing" them) so there's no risk associated with these deposits.

But in the EU, the deposit rate set by the ECB is -0.40%. So that would explain why EU banks would be willing to buy negative yielding bonds instead to hold in reserve, as long as the yields on those are less negative.

But then the yield on German bunds is actually even lower, hitting -0.60% recently, so it's not just that.

DennisP said 5 months ago:

Because if interest rates drop even lower, you can get capital gains on your bonds, especially if there's a lot of time left before they mature.


AnimalMuppet said 5 months ago:


I have a hard time seeing interest rates continuing to drop, however. (On the other hand, I never thought I'd see them this low. But they can't keep going lower forever... can they?)

caseysoftware said 5 months ago:

It depends on how badly you want to drive "growth".

If you have $1000 today and can either spend it now or put it in the bank and withdraw $999 a year from now, what would you do? I suspect some would spend it now.

But what if that number goes down to $990 or $975? More and more people will be willing to spend it now instead of savings therefore "growing" the economy now.

caseysoftware said 5 months ago:

Denmark has introduced a negative interest rate mortgage. That's an interesting one because if you borrow $200k today and only owe $195k in 10 years, what happens?

First, since you don't have to make payments, you can't default.

If you can't default, why bother with qualification?

If you don't have to qualify, is there an upper limit to how much you can/should borrow?

If there's no upper limit and you never have to pay, it doesn't matter whether the seller charges $100k or $1M or $10M.. it demonstrates that the entire system is entirely made up.

Lukasa said 5 months ago:

You can definitely default on a negative rate mortgage, by not paying your monthly payment. You cannot pay nothing each month. Instead, the principal reduces each month by more than the amount you paid. You still have a term over which you have to pay the mortgage off. No-one is offering (or will offer) a negative interest rate _interest only_ mortgage.

Negative interest rates make sense if you consider them as a lender trading current cash-on-hand for future cash flow. That is, the bank has $200k today, but it would rather see that broken up into payments over 10 years, even if it has to pay you to do it.

When viewed through this lens, it becomes clear that the factor driving this is likely that the bank is being disincentivised from storing the cash directly.

AnimalMuppet said 5 months ago:

No, I'm pretty sure there's going to be an upper limit, and it's going to be somewhat less than 100% of the purchase price. It's not carte blanche to borrow unlimited amounts of money.

In fact, I would be surprised if you could get away with no payments (a balloon payment loan, as it were). I would be rather shocked if they were offering such loans.

Absent data that they are actually offering such loans (balloon and/or untethered to the price of the property), I find your conclusions unwarranted.

caseysoftware said 5 months ago:

It's not all the way there but the first steps are occurring:

"In Denmark, the ultra-low interest rate environment has in turn caused home prices to increase as borrowers could afford pricier homes."

Ref: https://www.msn.com/en-us/finance/markets/a-danish-bank-is-o...

gnopgnip said 5 months ago:

It is about risk adjusted return. There is risk and costs associated with stuffing your money in a mattress, or keeping it in other kinds of accounts. Really it is the same as asking why people would buy a treasury bond instead of a CD, or junk bond that pays more in interest.

gpm said 5 months ago:

I would argue that the reason is simply that physically holding cash has a negative interest rate since you have to pay for a place to keep it, people to protect it, and accept the risk that it gets damaged, lost, or stolen.

This applies whether you are a person with a wallet/mattress, or a bank with a high security vault.

ErikAugust said 5 months ago:

Yes, and due to inflation.

gruez said 5 months ago:

>and due to inflation.

That happens regardless of the interest rate and affects both cash and bond/treasuries.

wefarrell said 5 months ago:

It makes no sense for an individual, since you can keep your money in an FDIC insured account and earn a positive interest rate.

Institutions don't have that luxury - the government doesn't insure large amounts of cash. If they keep it in a bank and the bank goes under, they lose their money. So they keep their money in national governments, which are far safer than banks.

gst said 5 months ago:

> Institutions don't have that luxury - the government doesn't insure large amounts of cash. If they keep it in a bank and the bank goes under, they lose their money. So they keep their money in national governments, which are far safer than banks.

Due to the low interest rates German insurance companies are already considering to store cash in their own vaults instead of buying bonds: https://translate.google.com/translate?hl=&sl=de&tl=en&u=htt...

Slightly negative interest rates work because physically storing cash is going to be more expensive than buying bonds (especially if you factor in costs for security, insurance, etc.). But if interest rates decreases further it's soon going to be cheaper to store cash, which is going to create a lower bound for the interest rate (assuming the government doesn't prohibit storing large amounts of cash).

eigenvalue said 5 months ago:

My guess is that these analyses by insurance companies don't properly take into account the risk of theft. All that cash in a bunker makes a very appealing target for thieves, both insiders and outsiders. Also, if it starts happening with any frequency, the central banks will just forbid hording of cash (e.g., by refusing to allow member banks to provide the cash if it exceeds a certain amount).

outworlder said 5 months ago:

> My guess is that these analyses by insurance companies don't properly take into account the risk of theft.

So your guess is that insurance companies, companies for which their entire business model revolves around risk management, are not taking into account something as mundane as risk of theft?

That's a... curious line of reasoning.

tim58 said 5 months ago:

I bet they even have theft insurance.

quantguy11959 said 5 months ago:

It’s positive for now, in Europe the deposit accounts are negative as well for the most part.

nawitus said 5 months ago:

They're positive for regular customers, but negative for large organizations.

rocqua said 5 months ago:

I still get 0,05٪ interest! That is technically positive!

quantguy11959 said 5 months ago:

What’s 0.05% minus 1.5% inflation ? Negative

refurb said 5 months ago:

If you’re an individual with a lot of cash that would be a pain to split up into accounts with less than the FDIC insured limit, then a negative interest rate might be attractive.

toomuchtodo said 5 months ago:

While true, cash management accounts that'll insure up to $1.5 million in cash across many underlying banks is now a commodity offering (Fidelity, SoFI, Personal Capital, to name a few). As an individual, it's rare you're keeping more than that liquid.

basementcat said 5 months ago:

There’s no requirement that FDIC accounts must pay an interest rate above 0%. It is perfectly legal to charge fees to fund the continued operation of the bank.

simplecomplex said 5 months ago:

There’s a market because a -1% rate is a better return on capital than -2%. You’re assuming people are choosing negative rates over positive. Even if bonds are negative investors may have no choice, it’s a better rate than letting the cash sit there.

internet_user said 5 months ago:

currency would be on deposit at some bank, so it would essentially be a claim on that bank's balance sheet.

Bonds are claims on sovereigns with a printing press.

What has a lower chance of default?

fitech said 5 months ago:

I love the discussion on this topic. Classic HN. A bunch of pretty smart people throwing out claims and arguing assertions with no evidence or even an inkling of how they could justify their claims.

Perhaps this topic is especially suited to these types of arguments as economics and financial instruments _seem_ to follow some sort of intuition. The problem is that you can have lots of ideas about what causes something but unless you can build a model that seems to reflect the world properly and then introduce your change and see if it results in the outcome you expected, you have no idea if it is even close to possibly true.

Arguing off intuition is fun and could even give you some ideas but it is ultimately pointless if you don’t test your intuition and correct it if you are off.

bubble_talk said 5 months ago:

Unlike, say, the design of an actual rocket ship (where it is perfectly OK to leave everything to the experts), the economy is the truest form of democracy - of the people, for the people, by the people and all that. You cannot really opt out of it. And ignoring it is generally a bad idea. And to make it worse, someone you don't know and cannot influence (and is generally unaccountable to the elected political class also) controls policies which directly affect your livelihood.

We probably need more discussions, not less. But I agree with you that folks should also spend more time learning about economics. If you think there are good sources for learning the subject, please let us know.

xchaotic said 5 months ago:

Obviously this article shows up when the negative rates are already here, with the benefit of hindsight. What I am more interested in at this point is what is a good, safe alternative for a small time investor who’s already overweight on equities and housing. Bonds used to be the sensible pillar that worked at times when stock market crashed and now it doesn’t really make sense to use them for a small guy.

opportune said 5 months ago:

Not sure what your criteria for "good, safe" is but if you're interested in similar asset classes:

Government bonds in foreign currencies. Of course this exposes you to whatever that country does with their central bank and to foreign exchange rates.

Corporate bonds, obviously riskier than government bonds but at least you can get positive interest rates in your preferred currency

Preferred stock, which are similar to bonds. Before you invest in these, make sure you know how they work. They can be called back by the issuer

Other asset classes which are less safe but could help you diversify: crypto, commodities and precious metals, collector's items and art, foreign currencies. Wouldn't really recommend putting too much money in this

perfunctory said 5 months ago:

Invest in reducing your energy bill if you haven't done so yet. solar plus storage plus house isolation. Should also raise the value of the house. In theory.

seiferteric said 5 months ago:

Can you or anyone recommend a unbiased solar ROI calculator? I have been looking for something, bu every site that I find is trying to sell me solar, so it's not too unbiased. I already have a couple quotes, and I know roughly what my rates will be, so I should be able to plug all the numbers into something to find out what % ROI I will get.

aoeusnth1 said 5 months ago:

Make a spreadsheet with one row per year. You can assume your system will last 25 years, depending on the panels and type of inverters you get.

Put your upfront costs at the first year's row (you're buying the system).

Calculate how much the system will save you in the current year (365 days), and put that in another column ("energy income") on the first row.

Each future energy income row gets discounted by ~7% multiplicatively: (1/1.07) * prev_row. This is to account for your ability to earn money from other investments, and to discount the future energy flows because of uncertainty. You can tweak this number up or down if you think the regulatory or technical value of solar energy is riskier than I do, or have different opinions about the stock market.

If the sum of the energy income column is bigger than the sum of the expense column, it's a good idea to buy solar. Shop around for the best deal you can get.

toomuchtodo said 5 months ago:

Rough numbers: https://www.solarpowerrocks.com/wp-content/uploads/2016/12/s...

Google Sunroof: https://www.google.com/get/sunroof

Always buy the panels (no PPA), don't buy storage unless your net metering agreement with the utility is terrible (likely kills the ROI, storage isn't cheap enough yet). Ensure your tax liability is enough to capture the full 30% federal tax credit. Check for state, utility, and SREC benefits in your area. Panels are 25 year warranty, stay away from SolarEdge inverters; their mortality rate has skyrocketed over the last 12-18 months. Paying cash is best, otherwise find the cheapest debt you can find to finance whatever remains after incentives.

shados said 5 months ago:

I don't have a good calculator, but step 1 is to make sure you BUY the panels, and not rent them or fall into any kind of weird plans where you resell some energy for free panels or whatever.

So your ROI is pretty much calculated with: How much do the panels cost (installed) How long do they last, whats expected maintenance, etc How much energy are they expected to produce Whats your electricity bill.

From there its pretty simple math. The hardest part is how much energy they are expected to produce, and no online calculator will help figuring out how much sun hits your roof.

kbenne said 5 months ago:

For the production side of the calculation, take a look at the National Renewable Energy Laboratory's PVWatts tool. Most of the installers build their ROI tools on top of this. https://pvwatts.nrel.gov

koverda said 5 months ago:

Just make one? Calculate how much the install costs per kw, and how much your electric costs...

1e-9 said 5 months ago:

Take the portion you want to protect with least risk, divide it into $250K chunks (the FDIC limit) and put each in a savings account with a different bank. You'll make a small interest rate and you'll have FDIC insurance covering the entire amount. That's safer than any of the Treasury securities since you will still have the backing of the US government, you can use it to rebalance your portfolio at any time, and you don't have interest rate risk. This is one area where you have an advantage over the big players like Pimco, who can't protect themselves with FDIC insurance.

everybodyknows said 5 months ago:

If in the U.S., buy your $10k quota of Savings Bond, Series I: Pays at least the CPI-U inflation rate, liquid after one year, favorable tax treatment, highly convenient.


ac29 said 5 months ago:

At least at the moment, it would seemingly make more sense to invest in 1-year treasury bonds. The interest rate is higher, they are more liquid, they are more convenient to buy and sell, and they are taxed the same as I-bonds.

There's also no limit to the amount you can buy.

kgwgk said 5 months ago:

And what are you going to do with that money in one year. If you’ll need to invest it again the answer is not so obvious.

gnopgnip said 5 months ago:

If you expect interest rates to go down in the future, the 10 year bonds would be a better investment

gnopgnip said 5 months ago:

If you expect interest rates to decline, bonds still make sense as their value increases. US fiscal policy is unlikely to have negative rates in the foreseeable future.

all_blue_chucks said 5 months ago:

It's only government bonds that go negative. Corporate bonds will always provide a positive yield.

christophilus said 5 months ago:

Apple issued negative bonds in some European country recently, if I understand this[0] correctly. Anyway, I don't think there's anything preventing a company from issuing negative bonds. Whether or not anyone would buy them is another question.

[0] https://markets.businessinsider.com/bonds/apple_incsf-notes_...

kgwgk said 5 months ago:

Except they don’t already in many cases.


samsonradu said 5 months ago:

Well one has to consider that it's pretty much the same big pool of money chasing both. This money pool thinks that German 10Y yield should be around -0.60%, while the Italian 10Y yields a juicy 1.62%. That says quite a bit about the future solvency issues around Italy.

Bottom line is that if there are still positive yielding bonds in a market dominated by negatives (we're not yet there) the risk of default is priced in.

said 5 months ago:
shshehe said 5 months ago:

If you can look into the future w that certainty you should trade stuff.

kitten_smuggler said 5 months ago:

Bitcoin and gold imo, in addition to a balanced portfolio of stocks, bonds and real estate.

outworlder said 5 months ago:

> Bitcoin and gold imo

Bitcoin makes zero sense as an investment. Doubly so during a recession.

Izkata said 5 months ago:

On that second point, we don't know that yet. It didn't exist during the last recession, so it's still a guess as to what'll happen.

programmertote said 5 months ago:

Aside from buying physical gold at a refinery, is there a place to buy gold from the equities market? Sorry if this question sounds naive/ridiculous. If it's in my country, people would go to gold/jewelry shops and buy gold. In the US, I'm not sure if it's the case. Thank you.

SmooL said 5 months ago:

Check out gold ETF's. They hold the physical gold so you don't have to, you just buy a stake in the physical assets. The ETF prices will vary depending on the specific ETF, but you can find ones that track very closely.

umeshunni said 5 months ago:

You can buy a Gold ETF such as GLD: https://www.spdrgoldshares.com/

hndamien said 5 months ago:


ZainRiz said 5 months ago:

The article presented and dismissed a valid alternative in the same breath:

"average net monthly payroll gains have now slowed [and] aggregate hours worked for production and non-supervisory workers are now contracting..., something that usually doesn’t happen outside of a recession."

We could instead be entering a recession. They tend to happen about every 10 years, and we're a tad overdue for one now.

freddie_mercury said 5 months ago:

> They tend to happen about every 10 years, and we're a tad overdue for one now.

Though it is oft-repeated, it is not just wrong but meaningless to claim that recessions "tend to happen about every 10 years".

If we look about the NBER data on recessions[1] there is not a single way of measuring that has a 120 month cycle. Not if you measure trough to peak. Not if you measure trough to trough. Not if you measure all recessions, 1854-present. Not if you just limit yourself to post-World War 2, 1945-present.

The average length of a post-WW2 expansion is 58.4 months, or under 5 years.

But, as should be clear from the data in the link, averages are pretty meaningless. Even if we pretend recessions are normally distributed (and there's no reason to believe that), the standard deviation is 33 months, nearly 3 years. Meaning there is a tremendous amount of variance, such that we can't say things like "we're a tad overdue".

But, especially on HN where any scientific study has immediate replies about small sample size, we should all know that something that only has 11 observations (post-WW2) or 33 observations (1854-present) is far too few to draw any actual conclusions from.

What's more, any claims about "the average time between recessions" can't just look at the US, unless we are claiming there is something so unique about US economic activity that we don't need to account for out-of-sample data around the world.

Australia, famously, has gone 27 years without a recession. So much for "they happen every 10 years". Japan had no recession from 1961-1993 (32 years). The Netherlands had no recession from 1981-2008 (27 years).

And on the other side, there's Greece, which has had 3 recessions just since 2010. Or Argentina which has had 5 or 6 recessions in the past 20 years.

If you look at this chart of economies around the world and their incidence of recessions[2], it should be pretty clear there is no such thing as a 10-year cycle.

It is just a made up story. The same old made up story of humans seeing patterns in data that aren't actually there.

[1]: https://www.nber.org/cycles.html [2]: https://amp.businessinsider.com/images/59de54466d80ad23008b5...

ZainRiz said 5 months ago:

Are you saying my high school economics professor taught me something without verifying it's authenticity and just relying on social proof?


<seriously>that was a good reminder though to revisit my cached belief, thanks :)</seriously>

scottmsul said 5 months ago:

My understanding is that interest rates were cut originally in order to provide a "safe landing" instead of a "sharp drop" after the last economic crisis (and that they were left low since then). If interest rates are imposed externally by Central Banks instead of by a free market, how do we know what the natural rate would be? Do Central Banks attempt to adjust interest rates towards the natural rate or is it in some sense completely arbitrary/detached?

H8crilA said 5 months ago:

The article is talking mostly about long term interest rates (on 10, 20, 30 yr government bonds). Those are set by the market, by a simple demand/supply mechanism on individual bond issues. Things like QE have some impact, but the impact is hard to gauge. The central banks normally determine only the short term interest rates (up to 3-6 months).

Note that even as QE is being slowly reversed in the United States and the short term interest rates have been raised - the 10yr, 20yr, 30yr treasury yields are still tanking like crazy. So it is not the fault of the central banks, which is the point of the article.

In short - people are buying bonds which eventually drives the yield below zero. There's no rule that says "a bond can only be sold at below the levels that the 0% yield implies", therefore brace yourself for the possibility of breaching this level. For any currency, including USD.

scottmsul said 5 months ago:

> The central banks normally determine only the short term interest rates (up to 3-6 months).

But if the short-term rates are manually set by central banks to be artificially low, wouldn't that be the primary driver behind negative long-term interest rates even if the exact number is determined by supply and demand? The article is talking about natural drivers like "negative time preference" which just sounds wrong.

H8crilA said 5 months ago:

Well 10yr or 20yr should still be above zero even if short term rates are kept around zero for an extended period of time. This is due to the cost of locking money in for a long period of time. What the article is trying to say by "negative time preference" is that this sound logic: "I'm giving you money for 20 years instead of lending money 80 times for 3 months each time; pay me more for that privilege" is disappearing in the market.

gridlockd said 5 months ago:

The natural rate would be fluctuating due to time preference and expected risk, but even if the natural rate was low, it wouldn't be zero. That's absurd.

Central banks attempt to adjust interest rates to keep inflation at a target rate, which is a balancing act between maintaining a stable currency and stimulating (or resuscitating) an economy.

roenxi said 5 months ago:

I don't understand why people are just shrugging off the adjective 'naturally'. Interest rates in the present system aren't natural, they are set by the central banks.

A system where a small number of central bankers choose a number might be a good system, but to call it natural is an abuse of language. If the 'natural' rate for lending money was 10%, we'd never be able to find it because the US, European and whichever other central banks would intervene.

said 5 months ago:
qroshan said 5 months ago:

which part of savings glut do you not understand?

roenxi said 5 months ago:

I understand what a savings glut is.

The point is, we wouldn't know if we had one because that the interest rates are a number being chosen by a small committee. We might not have a savings glut, we might have a natural rate of interest at 10% that is being suppressed by central banks.

There is a minor pension crisis in the United States and their infrastructure is not in great shape. That doesn't make it look like there is a savings glut. There is a lot that needs to be done.

kebman said 5 months ago:

This Danish bank has a -0.5 percent interest rate. Source (in Danish language): https://www.jyskebank.dk/bolig/nyheder/realkredit-med-negati... It still looks like it'll actually be over 0 percent with fees and costs.

gruez said 5 months ago:

Excuse me what? If something is already negative interest rate, how would fees and costs (which are also negative) push that to 0?

refurb said 5 months ago:

Cash you get (loan amount) minus cash you give (payments + fees) will give you a net interest rate.

With negative mortgage interest rates you might borrow $200K and only pay back $190K, but if there are $10K in fees, then you're net interest rate is 0%.

zxcmx said 5 months ago:

Hm. This is going to be a dumb question but why wouldn't you borrow a billion dollars, spend your 5 million immediately, then pay the rest back in instalments?

kebman said 5 months ago:

Because the bank would never let you borrow a billion dollars unless you could prove to them that you also have the income AND the discipline to service such a loan. For that you'll have to show them quite a bit about your personal economy, which may even include showing them your tax bill. They'll also want papers that prove that they have a stake (mortgage) in what you're loaning money for. On the other hand, if you know your way around law and certain organizational structures, then there are more ways than one to get quite exorbitant loans depending how you go about it. ;)

kgwgk said 5 months ago:

If you look at fees and costs as negative then interest rates on mortgages have always been negative? You have to add them to calculate the effective interest rate paid on a loan.

gridlockd said 5 months ago:

The market must simply be anticipating interest rates going even deeper negative, especially in the EU, where there's a huge amount of sovereign debt, collateralized across different countries.

The "natural" demand is there in the form of reserve requirements by European banks. This is limited by the amount of cash that banks can store at cost, but that practice can restricted or eliminated:


bryanlarsen said 5 months ago:

Risk free interest has been called "welfare for rich people", money for nothing. You shouldn't expect a return unless you put your money to work.

pmiller2 said 5 months ago:

That makes no sense. Rich people are precisely those people who are most able to take risks ("put [their] money to work.") Nobody has millions sitting around in bank accounts earning the risk free rate when they can afford to take risk and earn more on average.

pmorici said 5 months ago:

I'd be interested to see what percentage of government bonds are owned by pension funds and other middle class type retirement funds vs how much is held by the wealthy.

worldvoyageur said 5 months ago:

Negative interest on wealth is the historic norm for people who have a lot of it. Think storage costs for gold, guards (and maintenance) for your palace, or your yacht - not to mention the crazy depreciation.

For the ultra rich, 50 basis points of holding costs would arguably be a bargain. Even normally wealthy people don't hesitate to pay 200 basis points for their wealth to be managed in, for instance, mutual funds.


gridlockd said 5 months ago:

Except when you're giving out a loan you're not asking the debtor to "store the wealth", you're asking them to pay you back the principal plus interest when the loan matures.

The debtor is free to do as they wish with your money in the meantime. The debtor is also "free" to default and not give you back anything. The interest rate is supposed to reflect that risk.

In the case of a government bond, you either have the risk of sovereign default, or the risk of currency devaluation to pay back otherwise unservicable debt.

The idea that already heavily indebted governments will be "storing your wealth" is completely naive. They'll be playing this game until suddenly they can't hide the massive inflation anymore, then they'll have to hike interest rates to double digits to get it back under control. This literally just happened in Turkey last year, but it also happened in the US in the seventies.

worldvoyageur said 5 months ago:

I agree. The difference is that at large levels of wealth, levels beyond what most of us can realistically imagine happening, then storage becomes an issue.

No regular person is going to buy a bond with a negative interest rate. Just hold cash. But once you start to have large amounts of cash, different considerations enter the picture. How do you store it? Security guards. Guards to watch the security guards. Too much cash is hard to spend, so you want it in electronic form.

The market is now saying that for certain types of cash in electronic form, the risk adjusted fee for creating the electronic record and holding it for you is greater than the interest they will pay you for the money.

In that way, the net interest rate including all factors such as the risk of default, ends up negative.

beefield said 5 months ago:

> The debtor is also "free" to default and not give you back anything. The interest rate is supposed to reflect that risk.

That is not the only thing interest rate is supposed to reflect. Interest rate is supposed to also reflect the price of transferring your consumption over time (if you borrow , you want to consume earlier, if you lend, you want to consume later). And there is no real [1] reason why this price would have to clear only at positive values. So you have also possibly negative components on affecting the interest rate, thus it is completely feasible that the total interest rate is negative.

[1] outside the flawed assumptions of economics textbooks, that is.

ptah said 5 months ago:

I wonder if periodic jubilee style debt forgiveness as in ancient societies could help clear the stagnation of money flow implied by this article

Animats said 5 months ago:

Negative interest rates should result in storing giant shrink-wrapped bales of currency in vaults. Is that happening yet?

dpc_pw said 5 months ago:

Just wait when the people accumulating these savings get a bit older, and decide that now it the time to use them.

imtringued said 5 months ago:

What if they give the money to their children?

dpc_pw said 5 months ago:

Their children will start to spend them.

ackbar03 said 5 months ago:

Are stocks still the best asset during negative rates and contracting growth?

acd said 5 months ago:

I argue that centrals banks are a monopoly that artificially manipulate interest rates in the favor of banks.

Low interest rates drive up home prices as people can borrow more with the same monthly payment. High house prices hurts first time home buyers younger generations the most. Older generation do not need to loan to buy a home as much as the have enjoyed price gain on their homes.

This is a form of generation inequality. Parents who have children will have to think how the will afford home purchases with negative interest rates.

imtringued said 5 months ago:

Easy, just reduce the interest rates until even the children can afford their 70 year mortgage.

rolltiide said 5 months ago:

I like what this perspective adds, where Central Banks are only reactionary. Yes, Central Banks want to distort the market so that savers are forced to invest if they want to keep their wealth growing.

But adding another dimension to why savers do what they do is fascinating. Time value and life expectancy. Very fascinating. I don't think it explains the last 10 years as an accelerant to suddenly consider this, but it is interesting how it happens to coincide with other monetary policy adjustments.

Its like people stopped trusting the markets and money supply, so central banks reacted to add liquidity to markets. This coincided with people realizing en masse that they can also delay gratisfaction for a rosier economic reality, and Central Banks react to that further by trying to push saved liquidity in the markets.

So far, private persons have barely budged and will rather pay for the privilege of keeping their money.

djyaz1200 said 5 months ago:

5 months ago on HN...

10 points by djyaz1200 5 months ago | parent [-] | on: U.S. personal income posts first drop in over thre...

"We can't sit there and leave interests rates low forever" ...says who? What force dictates that the equilibrium for rates must be higher? Yes that's historically been the case but that doesn't mean that's the right path for us now and in the future. I would argue that low interest rates will be and need to be the new normal.

Interest is the ultimate rent seeking activity. The fed funds rate is a form of price fixing for banks whereby they collectively decide how much interest they can extract from the economy without killing it. Why must this be the case, the economy should be allowed to run much hotter for much longer.

Inflation is less of a risk now because of technology + globalization, right now we are experiencing significant deflationary pressure as products and labor converge towards global pricing/wages.

Our economy and government will be in very serious trouble if we have to pay higher interest on our significant national debt, so the government has a big interest (pun intended) in keeping rates low to protect its own financial solvency.

Finally, high interest rates imply money is scarce and that's far from the case now. Having large sums of money is not what it used to be, you're competing against a lot of other people and organizations seeking to deploy that money productively for a return. This generates downward pressure on market interest rates as evidenced by European Central banks going below zero to negative rates.

remarkEon said 5 months ago:

>Inflation is less of a risk now because of technology + globalization, right now we are experiencing significant deflationary pressure as products and labor converge towards global pricing/wages.

I've seen this point frequently cited on blogs, but I've yet to see any academic data that supports it. Intuitively it makes sense to me. I just haven't seen any raw data that backs it up yet. Indeed, isn't this what Trump and Brexit are trying to reverse?

djyaz1200 said 5 months ago:

I agree, I have yet to see hard data on this but academic research tends to shed light on things long after the fact... while a big part of making money is about what is happening right now. Anecdotally I've seen (and you probably have too) that I can buy many of the items I need for daily life for dirt cheap online, and when I need labor for my company I can hire nationally/globally on sites like upwork for a fraction of what local talent would cost. Both have low transaction costs and because of ratings I waste much less time and money buying the wrong thing or hiring the wrong person... which is an aspect of inflation.

That final point is probably worth study. My thesis would be that when the economy is hot everyone is in a hurry and more likely to hire people/vendors and buy things that aren't ideal. Online rating systems tend to direct demand to the vendors who can successfully satisfy that demand. The web also makes discovery of new vendors and products very quick lowering the switching costs.