Inflation as unemployment has been soaring these several years of Bernanke---the raising of US FED interest rates is due to expand that rising inflation the US FED is FORCED to do this because of past policies---it is not a choice. So, what global banking is doing next is PRETENDING TO BRING DOWN INFLATION as they pretended inflation was zero these several years. NEGATIVE INTEREST RATES is a complex financial instrument with a goal of bilking MORE money from 99% of WE THE PEOPLE now that they have exhausted all known means as these articles state. Again, the policies of tiering and tranches are already in place protecting the rich from any of these coming policies. When articles say citizens will be charged interest to keep money in the bank---they don't mean the global 1% and their 2% ---they mean any wealth coming to 99% of citizens black, white, and brown citizens. With DIRECT DEPOSIT of wages coming soon as a requirement---each time wages hit the bank those sums are HIT WITH INTEREST---it is yet another TAX.
The other effect of negative interest is keeping citizens from wanting to place money in bank----who is forced to spend that money global banking has targeted? The 99% not wanting to lose more and more money with interests and taxes.
Take pensions, Social Security, 401K, life insurance and annuities of all kinds -----all subject to being charged interest rates ---taxed------just for sitting in that long-term account. It's like sending in a hunting dog to get a rise of ducks to be shot when they fly. The penalties for cashing out these savings investments are growing making that painful. Are people going to cash in these financial instruments and spend them ------spurring consumption? No doubt for only this coming decade because remember, more and more and more US citizens will lose their jobs. In two decades the plan is to install BASIC INCOME and eliminate all hard currency going digital money only.
If Bernanke had come to the US FED holding Wall Street accountable the US economy would be well on its way to recovery and 99% of WE THE PEOPLE would have house, wealth, and assets safe and growing.
This article from the global 1% neo-liberal think tank Brookings Institution offers two ways out of current economic crises-----they would not suggest the most EASY PEASY way------claw back fraud from Wall Street banks.
Modifying the Fed’s policy framework: Does a higher inflation target beat negative interest rates? Ben S. Bernanke Tuesday, September 13, 2016
Nominal interest rates are very low, and in a world of excess global saving, low inflation, and high demand for safe assets like government debt, there’s a good chance that they will be low for a long time. That fact poses a potential problem for the Federal Reserve and other central banks: When the next recession arrives, there may be limited room for the interest-rate cuts that have traditionally been central banks’ primary tool for sustaining employment and keeping inflation near target.
That concerning possibility has led to calls for a new monetary policy framework, including by Fed insiders like John Williams, president of the San Francisco Fed. In particular, Williams has joined Olivier Blanchard and other prominent economists in proposing that the Fed consider raising its target for inflation, currently 2 percent. If the Fed targeted a higher average level of inflation, the reasoning goes, nominal interest rates would also tend to be higher, leaving more room for rate cuts when needed.
Interestingly, some advocates of a higher inflation target have been dismissive of the use of negative short-term interest rates, an alternative means of increasing “space” for monetary easing. For example, in a recent interview in which he advocated reconsideration of the Fed’s inflation target, Williams said: “Negative rates are still at the bottom of the stack in terms of net effectiveness.” Williams’s colleague on the Federal Open Market Committee, Eric Rosengren, also has suggested that the Fed may need to set higher inflation targets in the future while asserting that negative rates should be viewed as a last resort. My sense is that Williams’s and Rosengren’s negative view of negative rates is broadly shared on the FOMC. Outside the United States, Mark Carney, governor of the Bank of England, has expressed openness to targeting nominal GDP (which essentially involves targeting a higher inflation rate when GDP growth is low), but has also made clear that he is “not a fan” of negative interest rates.
As I explain below, negative rates and higher inflation targets can be viewed as alternative methods for pushing the real interest rate further below zero. In that context, I am puzzled by the apparently strong preference for a higher inflation target over negative rates, at least based on what we know now. Yes, negative interest rates raise a variety of practical problems, as well as political and communications issues, but so does a higher inflation target. In this post, I argue that it’s premature for policymakers to emphasize the option of raising the inflation target over the use of negative rates. Pending further study about the costs and benefits of both approaches, we should remain agnostic about whether either or both should be part of the Fed’s policy framework.
Comparing a strategy based on a higher inflation target with the use of negative rates is natural because, as just mentioned, they work through the same channel. Economic theory suggests that aggregate demand (consumption and investment) responds to the real rate of interest, which is the nominal (market) interest rate minus the public’s expected rate of inflation. As I noted in my earlier post on negative rates, the Fed has routinely set the real federal funds rate at negative levels (i.e., with the nominal funds rate below inflation) to fight recessions. However, with the inflation target at its current level of 2 percent, and assuming that the Fed does not set its policy rate lower than zero, the Fed cannot reduce the real policy rate below -2 percent, i.e. a zero nominal rate less 2 percent expected inflation. History, including the experience of the past few years, suggests that—in the absence of a robust fiscal response—that may not be enough to deal with a bad recession. To reduce the real policy rate further, the Fed would either have to lower the nominal interest rate into negative territory, raise expected inflation (by raising the inflation target), or both. Since negative nominal rates and a higher inflation target both serve to reduce the lower (negative) bound on the real interest rate achievable by monetary policy, they are to some extent substitutes.
Which approach is preferable?
Without trying to be exhaustive, I’ll briefly compare them on four counts: ease of implementation, costs and side effects, distributional effects, and political risks. I find that negative rates are not clearly inferior to a higher inflation target and may even be preferable on some dimensions.
Ease of implementation.
Negative interest rates are easy to implement. In practice, central banks in Europe and Japan have imposed negative short-term rates by deciding to charge (rather than pay) interest on bank reserves, an action that is clear, concrete, and essentially instantaneous. Experience suggests that the effects of imposing negative rates on reserves also spread fairly quickly to other interest rates and asset prices. Like other central banks, the Fed pays interest on bank reserves and presumably could use a similar approach—essentially charging banks to keep reserves at the Fed—to enforce a negative policy rate.
In contrast, while the Fed could announce at any time that it is raising its inflation target, the announcement would not increase the Fed’s ability to lower the real interest rate unless the public’s inflation expectations changed accordingly. But, as the Japanese experience has shown, inflation expectations may adjust slowly or incompletely to announced changes in target, especially if actual inflation has been very low for some time. The public might also have reasonable doubts about the Fed’s ability to reach the higher target or about the willingness of the Congress or future Fed policymakers to support a higher inflation goal, both of which would reduce the credibility of the new target and thus its ability to influence expectations.
Which approach provides, potentially, more policy “space” for the Fed?
Some advocates of a higher inflation target, such as Blanchard, have proposed increasing the target to as much as 4 percent, which would allow a real policy rate as low as -4 percent, if the nominal rate is zero. The extent to which rates can be pushed negative, in contrast, is constrained by the fact that households and businesses can always choose to hold cash, which pays a zero nominal interest rate, rather than securities. To date we have not seen policy rates below -0.75 percent (Switzerland), equivalent to a -2.75 percent real policy rate if expected inflation is 2 percent. That comparison favors a higher inflation target, obviously. On the other hand, it is not clear that an inflation target as high as 4 percent would be politically tenable and hence credible in the U.S. or other advanced economies, whereas arguably feasible institutional changes, some as simple as eliminating or restricting the issuance of large-denomination currency, could expand the scope for negative rates. The question of which approach creates more policy “space” is thus still somewhat open. Of course, nothing rules out using some combination of the two strategies.
Costs and side effects.
Negative rates and a higher inflation target both have costs and side effects. As I discussed in my earlier post, negative rates can create problems for money market funds, banks, and other financial institutions, costs that would have to be managed if rates remained negative for very long. These concerns are legitimate, since effective transmission of monetary policy requires a properly functioning banking and financial system. For what it’s worth, the effects of negative rates on banks’ net interest margins in Europe appears to have been moderate thus far. There are also means by which central banks can limit the effects of negative rates on bank profits—by charging a negative rate only on a portion of bank reserves, for example, as the Bank of Japan has done.
Higher inflation has costs of its own, of course, including making economic planning more difficult and impeding the functioning of markets. Some recent research suggests that these costs are smaller than we thought, particularly at comparatively modest inflation rates. More work is needed on this issue. Higher inflation may also bring with it financial stability risks, including distortions it creates in tax and accounting systems and the fact that an unexpected increase in inflation would impose capital losses on holders of long-term bonds, including banks, insurance companies, and pension funds.
In comparing the costs and side effects of the two tools, a difference worth keeping in mind is that negative rates would be in place only in periods when they were needed (i.e., when the zero lower bound on interest rates would otherwise be binding), while higher inflation (assuming it could be achieved) would be a permanent condition, affecting the economy in good times as well as bad. Changing the inflation target also carries the risk of being perceived as opportunistic, which could result in inflation expectations becoming unstable. Less-anchored inflation expectations would make inflation harder to control and give the Fed less scope to use monetary policy to offset fluctuations in employment.
Either policy would give the Fed more scope to fight recessions and keep inflation near target, potentially providing broad benefit. On the margin, though, the two approaches would differ in their distributional implications, with the net effects difficult to assess.
The most direct costs of higher inflation are borne by holders of cash, and, again, with a higher inflation target those costs would be experienced at all times, not just during recessions. More generally, less wealthy people may find it more difficult to protect themselves from inflation. In contrast, negative rates would probably most affect more financially sophisticated and market-sensitive firms and households. In particular, banks would probably not pass on negative rates to small depositors, with whom they want to maintain profitable long-run relationships, but instead would more likely impose negative rates on “hot money” investors who place less value on longer-term relationships.
The transition to a higher level of inflation would hurt holders of bonds and other non-indexed assets while providing a windfall for debtors, including mortgage borrowers. In the medium term, nominal returns to saving (including the investments of pension funds, life insurance companies, etc.) would be higher with a higher inflation target, but the real (net of inflation) returns received by savers would be similar under either regime.
Both negative rates and a higher inflation target would be politically unpopular, possibly leading to reduced support for the policies of the central bank and for its independence. In particular, as already noted, the credibility of a higher inflation target could be reduced if political support for it were seen to be tenuous. Political viability is thus an important concern in judging these policy options.
In the political sphere, the fact that negative rates would be temporary and deployed only during severely adverse economic conditions would be an advantage. Like quantitative easing, which was also unpopular in many quarters, a period of negative rates would probably be tolerated by politicians if properly motivated and explained. We have some evidence on this point: Negative rates are disliked by many in Europe and Japan but central banks have been willing and able to use them without facing high political costs, at least so far.
In contrast, a higher inflation target would be a permanent, or at least very long-lasting change, not restricted to an emergency; and it would raise questions about the flexibility of the Fed’s legal mandate to achieve price stability. It thus might need explicit approval or at least some sort of review from Congress. A possibility, recently proposed by a comprehensive study on monetary policy options, would be to set up a commission to assess potential changes in the Fed’s policy regime and to report to Congress and the public.
Although commissions can serve important public purposes, proponents of a higher inflation target should be careful what they ask for. In the United States, as in Europe, there is a substantial element of public opinion (well represented in legislatures and even in the central banks themselves) that holds that central banks should concern themselves only with inflation, and that efforts to use monetary policy to stabilize employment are illegitimate or impractical. These views have manifested as opposition to the Fed’s accommodative policies in recent years, and even in legislative efforts to eliminate the employment part of the Fed’s dual mandate. Holders of this perspective would be unimpressed by the cost-benefit analyses of the Keynesian proponents of a higher inflation target. To the contrary, they would strongly oppose choosing higher inflation in order to give the Fed more room to respond to employment fluctuations, and indeed might seek a lower target. In their efforts they would be aided by the public’s money illusion (the tendency to confuse general inflation in both wages and prices with changes in real wages). Whatever the abstract merits of a higher inflation target, if it is not politically achievable then it is of no benefit.
It would be extremely helpful if central banks could count on other policymakers, particularly fiscal policymakers, to take on some of the burden of stabilizing the economy during the next recession. Since that can’t be assured, and since the current low-interest-rate environment may persist, there are good reasons for the Fed and other central bankers to consider changes in their policy frameworks. The option of raising the inflation target should be part of that discussion. But, as I have argued in this post, it is premature to rule out alternative or potentially complementary approaches, including the possibility of using negative interest rates.
Here is why we have shouted that the national and social media surrounding Scandinavia and its LEFT SOCIAL PROGRESSIVISM is FAKE NEWS. Denmark, Sweden, Finland have all been taken global banking neo-liberal these few decades and what WAS LEFT has now gone far-right. These nations have been made FOREIGN ECONOMIC ZONES that has driven the OPEN BORDERS global labor pool flooding Europe. It makes sense these European nations along with Japan would be the first developed nations to install MOVING FORWARD BACK TO DARK AGES dismantling all of 99% of developed nation citizens' wealth. These same nations are the one's leading BASIC INCOME as the next stage to people not having access to any money or employment.
THESE SCANDINAVIAN NATIONS ARE NOT LEFT-----THEY ARE FAR-RIGHT WING EXTREME WEALTH EXTREME POVERTY LIBERTARIAN MARXIST---THIS IS WHY THEY EMBRACED NEGATIVE INTEREST RATES.
American people were told the bank bailout terms were to do just what is being said in Europe ------Europe adopted US FED QE later because 99% of European citizens DID NOT WANT IT. They are doing it now because the EUROPEAN CENTRAL BANK has attained more power these several years. Who has commercial banks lent to these several years in US? The rich and corporations.......who's money is in commercial banks? 99% of WE THE PEOPLE
'Negative rates are an attempt by the ECB to prod commercial banks to lend more money to businesses and consumers rather than maintain large balances with the Central Bank'.
Europe's nations have retained autonomy these few decades because 99% of citizens have fought the power of a central bank-------that dynamic changed in 2008 economic crash now heading to US......DRAGHI is global banking neo-liberal MOVING FORWARD ONE WORLD ONE WORLD CENTRAL BANK.........now European nations are tied to the same systemic global banking frauds as in US
'European Central Bank's powers grow but can it really save the eurozone?
Sweeping new banking supervisory powers, the bond market intervention under Mario Draghi, and the ECB's influence over the fiscal and budgetary policies are raising concerns'
Here's Why Negative Interest Rates Are More Dangerous Than You Think
Even an ultra-cheap currency can't keep the Eurozone's growth rate up.
Photograph by Thomas Lohnes — Getty Images
By Charles Kane
March 14, 2016
Desperate times call for desperate and somewhat speculative measures. The European Central Bank (ECB) cut its deposit rate last Thursday, pushing it deeper into negative territory. The move is not unprecedented. In 2009, Sweden’s Riksbank was the first central bank to utilize negative interest rates to bolster its economy, with the ECB, Danish National Bank, Swiss National Bank and, this past January, the Bank of Japan, all following suit.
The ECB’s latest move, however, was coupled with the announcement that it would also ramp its Quantitative Easing measures by increasing its monthly bond purchases to 80 billion Euros from 60 billion Euros — a highly aggressive policy shift. The fact that the ECB has adopted this approach raises two key questions: What are the risks? And, if the policy fails, what other options are left?
Negative rates are an attempt by the ECB to prod commercial banks to lend more money to businesses and consumers rather than maintain large balances with the Central Bank. In essence, it is forcing the banks to leverage its balance sheet to a higher level or the ECB will penalize the banks by charging interest on their deposits. Historically, such a practice would be highly inflationary, however, with oil prices falling to record lows combined with a slowdown in global growth, inflation is not feared. In fact, inflation is desired at a manageable level, as this would promote near-term growth in the economic markets.
This does not mean, however, that the ECB’s policy does not present risks. First, if the commercial banks decide to pass on the cost of the negative rates to their customers — in other words, they charge customers for keeping their savings in the bank in the same way central banks are now charging the commercial banks for keeping their money – the customers might simply withdraw their savings. In a worst-case scenario, this could create a run on the banks in Europe with customers hoarding their money rather than paying interest on deposits. This would inhibit the free flow of funds through the financial system — ironically, the very reason that negative interest rates were implemented in the first place.
Conversely, if the banks continue to absorb the costs, it could cut deeply into their profits. Even a tenth of a percent on billions of dollars adds up and can mean the difference in profit or loss in a major commercial bank. To date, the effect negative interest rates have had on bank profits have put downward pressure on the majority of bank stocks, which in turn, has depressed the European and global equity markets.
Negative interest rates also have a profound impact on the foreign exchange markets. Interest rate differentials from one currency to another drive the future value of currencies and as the ECB lowers rates into more negative levels, this puts downward pressure on the European Currency Unit (ECU).
This may improve near-term EC trade
exports from the region. However, capital flight from the lower interest rate ECU markets to more favorable returns in positive interest rate currencies is inevitable over time. Additionally, the U.S. Fed has clearly stated its intent to raise rates over the next year to eighteen months, thereby making the interest differential gap even greater and thus downward pressure on the ECU even more pronounced.
Something has to give and the ECB is painting itself into a corner with very few options left.
The European banks (most vocally, the German banks) are already objecting to current negative interest rate levels; the Euro continues to be negatively pressured by lower rates relative to other currencies due to interest rate differentials; and Quantitive Easing measures, a practice that was shunned by the ECB when the U.S. did its first round of Quantitative Easing in the 2007-2008 timeframe, has been ramped up by the ECB with no apparent material impact on economic growth.
All in all, negative interest rates are not spurring economic growth and are likely to damage the banking sector in Europe if deployed for an extended period. Market stability, tantamount to improving long-term growth prospects, cannot be achieved by testing aggressive and relatively unknown monetary practices such as negative interest rates. Rather, further interest rate adjustments downward by the ECB will seriously hurt the European banking industry — in turn, increasing instability in the European markets. In short, pursuing a negative interest rate policy will most likely hurt economic growth in Europe, not help it.
In the face of continually lowering growth estimates, persistently high unemployment, and a possible Brexit, this is the last thing Europe needs.
The goal of negative interest rates as we saw with JAPAN having been the earliest to adopt them is moving all investment and economic activity to GLOBAL MULTI-NATIONAL INVESTMENTS killing the ability of sovereign nations to conduct any financial activity inside those nations. Central banks making it impossible for commercial banks to hold money means all US cities will have no control over revenue -----global Wall Street banks don't care of course---they are now basically global hedge funds as with global IVY LEAGUE hedge fund JOHNS HOPKINS.
We have discussed the goal of killing all community banks---credit unions in this coming economic crash----these negative interest rates will expedite that MOVING FORWARD all US wealth to WORLD BANK TIED TO GLOBAL INVESTMENT/HEDGE FUNDS.
'All in all, negative interest rates are not spurring economic growth and are likely to damage the banking sector in Europe if deployed for an extended period'.
It is KNOWN these financial policies HARM AND KILL wealth assets for US 99% of WE THE PEOPLE---so all pols and players allowing what are illegal and fraudulent banking policies to UNFOLD are breaking US Rule of Law, 300 years of Federal court precedent, and US Constitutional law surrounding EQUAL PROTECTION UNDER LAW FOR 99% OF US CITIZENS.
'But the bank’s efforts are foundering. Its main tool has been an extensive bond-buying program, similar to policies adopted by the Federal Reserve in the United States and the European Central Bank. Bond-buying injects money into a country’s financial system. From there, it is supposed to flow to the rest of the economy'.
We educate broadly looking globally at how these financial policies work to show 5% pols and players KNOW these policies written by global banking are BAD AND FAIL for 99% of sovereign citizens wherever it is installed. There is no value-----its goal is simply to create more ways to move citizens' wealth by taxes, fees, and fines.
We hope global nations' citizens will WAKE UP to the fact the US is temporarily controlled by a SHIP OF FOOLS--SOCIOPATHS with NO TALENT.
Japan’s Negative Interest Rates Explained
By JONATHAN SOBLE SEPT. 20, 2016
TOKYO — Japan’s central bank is reviewing its economic policies, asking why they have failed to kick-start growth, as intended. Its much-anticipated report is due on Wednesday. One target is negative interest rates — an unconventional tactic adopted in Japan and Europe that turns the usual rules of borrowing and lending upside down.
What are negative interest rates?
Negative interest rates mean depositors pay money to save their money, a reversal of the normal rules of economics.
In this case, the depositors are banks. Like regular people keeping accounts at a local bank, lenders hold their unused cash at central banks like the United States Federal Reserve, the European Central Bank and the Bank of Japan. Normally, they receive a small amount of interest in return.
But with negative rates, central banks charge a fee instead. The idea is to encourage banks to put their money to more productive use, lending it to households and businesses. Negative rates are supposed to then ripple through economies by lowering the cost of borrowing for everyone — something that should encourage economic growth.
What sort of countries have negative rates?
Those with ultra-low inflation or deflation, meaning falling prices associated with weak economic growth. The European Central Bank, which oversees monetary policy for countries that use the euro, introduced negative rates in 2014. Denmark, Sweden and Switzerland, which are not part of the eurozone, also have negative rates.
Japan’s central bank followed in January, announcing that it would charge commercial banks a fee of 0.1 percent on a portion of their reserves that they keep with it.
Rate Goes Negative
After declining for a decade, 10-year government bonds yields in Japan fell below zero this year.
Yield on Japanese
10-year government bonds
2012: Shinzo Abe is elected prime minister of Japan.
Source: Bank of Japan, via CEIC Data
By The New York Times
What does the Bank of Japan hope to accomplish?
The bank is trying to lift consumer prices, which have been sliding for most of the past 20 years. Falling consumer prices hurt corporate revenues, keeping companies from raising wages or spending on new projects.
But the bank’s efforts are foundering. Its main tool has been an extensive bond-buying program, similar to policies adopted by the Federal Reserve in the United States and the European Central Bank. Bond-buying injects money into a country’s financial system. From there, it is supposed to flow to the rest of the economy.
It worked for a while, but recently the effect has faded. Prices are falling again, and the bank needed to try something new.
Are negative rates working?
Money was already cheap in Japan, and negative rates have succeeded in making it even cheaper. The yield on 10-year government bonds, for instance, fell below zero in February, meaning investors are lending the government money knowing that they will not be repaid in full.
Yet deflation has not vanished: Core consumer prices fell 0.5 percent in July. Nor has there been an explosion of new bank lending, as businesses say they can’t find enough profitable uses for funding, even if the money is cheap.
And deflation itself undermines the effectiveness of negative rates. If corporate revenues are shrinking because of falling prices, companies will find that even the most generous loan becomes harder to repay. Many potential borrowers are still telling bankers, “No thanks. Keep your cash.”
Still, people must be happy that money is cheap, right?Not the bankers. Between the new fees they are paying the central bank and a general decline in lending income, profits at commercial banks are being squeezed by negative rates. Some analysts also think negative rates hurt broader public confidence. Policy makers are trying to show creativity in finding ways to revitalize their economies — but out-there tactics like negative interest rates risk looking more like desperation.
We spoke how these negative interest rates will effect individual citizens' wealth but the gorilla-in-the room will be how THROUGH US AND MUNICIPAL BONDS these policies will SOAK taxpayers who will be told by state treasurers and local US city finance departments that the billions of dollars in bond debt amassed these several years of OBAMA will now incur these interest rate penalties. When government creates bonds global investment firms are lending that money to government to develop----that is what is meant by KNOWING THEY WILL NOT BE REPAID IN FULL. Who is getting all of our US Treasury and state municipal bond debt? GLOBAL CORPORATE CAMPUSES AND GLOBAL FACTORIES IN US CITIES DEEMED FOREIGN ECONOMIC ZONES.
'The yield on 10-year government bonds, for instance, fell below zero in February, meaning investors are lending the government money knowing that they will not be repaid in full'.
The US citizens will have to look at a national media showing a FAKE NEWS KABUKI CONGRESS pretending to fight one another over having to cut more and more and more from budgets killing social programs---raiding public trusts including our US military benefits not only seniors and government employees.
THOSE FAKE GLOBAL 1% POLS COULD SIMPLY STOP MOVING FORWARD THE SUBPRIMED JUNK BOND US TREASURY DEALS IN US CITIES AND OUTSOURCED FEDERAL PROJECTS.
THERE GO THE PENSIONS......RETIREMENTS.....LIFE INSURANCE.....ANNUITIES
'Sweden's experience with negative rates has shown the so-called "zero lower bound" to be a fairytale '
'You buy a bond for, say, $100 today, and the government will give you, say, $99 a year from now, an interest rate of negative 1 percent'.
Who are buying all these negative interest bonds? GLOBAL MUNI-BOND INVESTMENT FUNDS like PIMCO-----so who will be losing that money? Everyone invested in bond market which will be all US pensions, government coffers, life insurance and annuities-----that's right 99% of WE THE PEOPLE.
It is made to sound like the banks or corporations are paying these negative rates when the opposite is happening.
As we said, global investment firms like PIMCO and CARLYLE GROUP want negative interest rates because it is yet another way to extract money from all our US assets HELD CAPTIVE IN ILLEGAL AND CORRUPT INVESTMENTS .
We'll have a few years of hyper-inflation followed by negative interest followed by BASIC INCOME -----VOILA, US 99% AS IMPOVERISHED AS THIRD WORLD 99% OF CITIZENS.
Who Buys Bonds With A Negative Interest Rate?
July 21, 20165:00 AM ET
Heard on Morning EditionJacob Goldstein
Many developed countries are issuing bonds at negative interest rates. That means people are buying them expecting to get paid back less than they invested. Why then are people buying them?
RENEE MONTAGNE, HOST:
A strange thing is happening in the global economy - lots of countries are selling bonds with negative interest rates. In other words, the people buying these bonds are guaranteed to lose money if they hold on to them. Jacob Goldstein from our Planet Money podcast wanted to know why would anyone buy these.
JACOB GOLDSTEIN, BYLINE: Negative interest rates started with central banks in Europe and Japan. Today, they've spread to government bonds in lots of countries - Switzerland, Germany, France, Japan. You buy a bond for, say, $100 today, and the government will give you, say, $99 a year from now, an interest rate of negative 1 percent. Who hears this pitch - you will lose money - and says I'm in? Who buys these? Rick Rieder, head of global fixed income at BlackRock.
Do you own any bonds that are paying negative interest rates?
RICK RIEDER: Yes. Yes is the answer.
GOLDSTEIN: (Laughter) I feel like that was about to be yes but or something.
RIEDER: Yeah. So yes but is exactly right.
GOLDSTEIN: Yes but he doesn't like it.
RIEDER: It just feels surreal, and it feels that it's not natural buying negative-yielding bonds.
GOLDSTEIN: Of course, it's not natural. People with money want to make more money. They want to invest in things that'll grow. But in a lot of the world right now, they're scared to risk their money, to bet on some strong economic recovery. So they're buying bonds with negative interest rates. They're afraid if they invest in something riskier, they'll lose even more.
You could just put your money in the bank. But in a lot of places where rates are negative, people who want to put a lot of money in the bank have to pay a fee. Rates are negative there, too. Guy Miller works at Zurich Insurance, which owns some of these bonds. I asked him if the bank's charging you a fee, why not just put your money in a vault?
GUY MILLER: The issue with that is that that doesn't come cost-free. You have to have some kind of insurance or some kind of guard over that. And given the amount of money you're talking about, you know, volume-wise, it could take up a fair amount of room.
GOLDSTEIN: Big companies like Zurich Insurance have billions of dollars. Miller's saying you're going to need a big vault. You got to pay for the vault. You got to pay for security. So even there, you're paying to hold money.
Still, this is actually something companies might start doing. Earlier this year, a big German insurance company said, as an experiment, it pulled 10 million euros out of the bank and, yes, stuck it in a vault. Rick Rieder of BlackRock told me that it is possible to make money buying bonds with negative interest rates.
RIEDER: Yes, and we actually bought Japanese bonds two to three weeks ago.
GOLDSTEIN: Since then, people have become even more eager to buy bonds with negative rates. Rieder could sell them today for more than he paid.
Are you going to sell them for a profit?
GOLDSTEIN: He didn't want to tell me the details, but you can think of it this way - he bought a bond for $100 with the promise of getting paid back $99. Today, people will buy that same bond for $101. Jacob Goldstein, NPR News.