Dutch entrepreneurs avoiding negative interest by opening multiple bank accounts(nltimes.nl)
nltimes.nl
Dutch entrepreneurs avoiding negative interest by opening multiple bank accounts
https://nltimes.nl/2021/09/01/entrepreneurs-avoiding-negative-interest-opening-multiple-bank-accounts
517 comments
Think about how ridiculous this is for a moment. It's an easy loophole, and just more red tape and a bother. That's also not really the issue though. The problem is rates in general. Trying to spur growth into a system where there is none. Forcing speculative investing because of poor central banking policies and tough economic conditions. Ultimately the backlash from this will be worse than if central banks had avoided interfering in the first place. However, the interference has allowed a free-for-all in inflation and asset repricing to attempt to shift the debt they created away from themselves and increase wealth for those with assets. So in a sense, it's working. Robbing Peter to pay Paul. No one should be under the assumption anything else is happening here with these policies.
How can the central bank _not_ interfere?
For a central bank there's no such thing as no policy. Even inaction is a policy.
(Of course, there are systems that work without a central bank. And can work very well in fact. But that's not what the Dutch as part of the Euro zone have.)
For a central bank there's no such thing as no policy. Even inaction is a policy.
(Of course, there are systems that work without a central bank. And can work very well in fact. But that's not what the Dutch as part of the Euro zone have.)
Yes, they ultimately act at some point and not at others, and that is their policy or stance (action or inaction). The problem is the actions they've been taking that are leading to the results I'm referencing.
> Even inaction is a policy
Inaction is the only policy. All the other actions are stuff that these people do to justify their existence .
With all due respect for Jerome Powell, Bernanke etc. these people are kind of frauds.
They are the only academic which are globally known and get all the respect and bows as well as recognition.
But their craft is a pseudoscience. The Nobel committee knows this, in fact the Nobel Prize for Economics is commonly referred as such but in reality it's:
"The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel"
Worlds apart.
If they were real men they'd pick a real science and face real irrelevance like real men if they are wrong or fail to make important contributions. Only in economics people are still around after getting it wrong so many times.
It seems like the more wrong you are , the more recognition you get, as people anticipate that economists who shoot frequently will get it right more than those who shoot infrequently given the randomness of their predictions
Inaction is the only policy. All the other actions are stuff that these people do to justify their existence .
With all due respect for Jerome Powell, Bernanke etc. these people are kind of frauds.
They are the only academic which are globally known and get all the respect and bows as well as recognition.
But their craft is a pseudoscience. The Nobel committee knows this, in fact the Nobel Prize for Economics is commonly referred as such but in reality it's:
"The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel"
Worlds apart.
If they were real men they'd pick a real science and face real irrelevance like real men if they are wrong or fail to make important contributions. Only in economics people are still around after getting it wrong so many times.
It seems like the more wrong you are , the more recognition you get, as people anticipate that economists who shoot frequently will get it right more than those who shoot infrequently given the randomness of their predictions
There's no Nobel at all in mathematics. Does that make it pseudoscientific?
Math is the foundation of sciences which gets the real Nobel, it would be redundant to have it in there.
Math isn't a science at all, nor does it pretend to be.
I don't think mathematics is a science at all, nor has it been claimed to be one?
I don't know, I'm just an idiot on the internet, but it seems like a better solution to monetary stimulus would have been fiscal stimulus. The government could have passed an infrastructure bill 18 months ago and the fed could have backed off.
I'll admit I'm pretty furious at the fed right now though. As someone with a lot of assets in cash who was hoping to buy a house last year, I have been double penetrated by inflation and spiraling home prices. The housing market accelerated just out of my reach before I could make a move and my cash pile is on fire. I'd have moved back into the stock market to protect it, but it seemed risky given historical valuations and such. Now I'm poorer and I can't help but think Powell effectively just stole from me and I've been punished for being defensive and not participating in the fueling of an asset bubble.
I'll admit I'm pretty furious at the fed right now though. As someone with a lot of assets in cash who was hoping to buy a house last year, I have been double penetrated by inflation and spiraling home prices. The housing market accelerated just out of my reach before I could make a move and my cash pile is on fire. I'd have moved back into the stock market to protect it, but it seemed risky given historical valuations and such. Now I'm poorer and I can't help but think Powell effectively just stole from me and I've been punished for being defensive and not participating in the fueling of an asset bubble.
> I'll admit I'm pretty furious at the fed right now though.
I suspect you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral triggered by the lockdowns. Can't get a mortgage if you're out of work, ya know?
> As someone with a lot of assets in cash who was hoping to buy a house last year...
Let me stop you right there. Generally speaking, you shouldn't hold cash. Nobody should hold cash. Nobody should have ever held cash because even at the baseline expectation 2% inflation that's still a loss.
> I have been double penetrated by inflation...
Inflation is somewhere between 2 and 5%. That's not what I would call "penetration." Mild discomfort maybe.
> ...and spiraling home prices.
Housing affordability hasn't really changed on a monthly basis, because on a 30-year fixed rate mortgage the drop in interest rates from 4.xx% to 2.xx% means that a monthly payment two years ago on a $1M property is the same as it would be today on a $1.2M property. That's napkin math, I believe the spread is even larger IRL.
In fact, if you can lock in a 2.xx% mortgage in a 2-5% inflationary environment then it is in real dollar terms a zero-interest loan. Before factoring in tax deductions.
What's become more painful is making the down-payment.
> Now I'm poorer and I can't help but think Powell effectively just stole from me and I've been punished for being defensive and not participating in the fueling of an asset bubble.
You're not poorer, you're not as rich as you thought you'd be.
I suspect you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral triggered by the lockdowns. Can't get a mortgage if you're out of work, ya know?
> As someone with a lot of assets in cash who was hoping to buy a house last year...
Let me stop you right there. Generally speaking, you shouldn't hold cash. Nobody should hold cash. Nobody should have ever held cash because even at the baseline expectation 2% inflation that's still a loss.
> I have been double penetrated by inflation...
Inflation is somewhere between 2 and 5%. That's not what I would call "penetration." Mild discomfort maybe.
> ...and spiraling home prices.
Housing affordability hasn't really changed on a monthly basis, because on a 30-year fixed rate mortgage the drop in interest rates from 4.xx% to 2.xx% means that a monthly payment two years ago on a $1M property is the same as it would be today on a $1.2M property. That's napkin math, I believe the spread is even larger IRL.
In fact, if you can lock in a 2.xx% mortgage in a 2-5% inflationary environment then it is in real dollar terms a zero-interest loan. Before factoring in tax deductions.
What's become more painful is making the down-payment.
> Now I'm poorer and I can't help but think Powell effectively just stole from me and I've been punished for being defensive and not participating in the fueling of an asset bubble.
You're not poorer, you're not as rich as you thought you'd be.
> I suspect you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral triggered by the lockdowns.
No, what I'm saying is the government failed to act sufficiently and forced the fed to act when they shouldn't have(or at least to the level they have).
> Generally speaking, you shouldn't hold cash.
Now come on that's not really true in the short term. Generally speaking, you shouldn't put your money in the market if you need it in the next 5 years. Sure I could have bought CDs but have you looked at rates lately? That wouldn't have helped. My only option would have been to pile into an asset, and by the time I needed to park my money assets had already appreciated above historical norms. I'd be gambling against a reversion to the mean.
> Housing affordability hasn't really changed on a monthly basis
The market I am familiar with and was planning on going back into is up about 35% from late 2019. You're also then gambling that these historically high valuations will hold going forward. Homebuyer sentiment has plummeted because folks like me no longer think paying these high prices(https://fred.stlouisfed.org/series/CSUSHPINSA) makes sense.
No, what I'm saying is the government failed to act sufficiently and forced the fed to act when they shouldn't have(or at least to the level they have).
> Generally speaking, you shouldn't hold cash.
Now come on that's not really true in the short term. Generally speaking, you shouldn't put your money in the market if you need it in the next 5 years. Sure I could have bought CDs but have you looked at rates lately? That wouldn't have helped. My only option would have been to pile into an asset, and by the time I needed to park my money assets had already appreciated above historical norms. I'd be gambling against a reversion to the mean.
> Housing affordability hasn't really changed on a monthly basis
The market I am familiar with and was planning on going back into is up about 35% from late 2019. You're also then gambling that these historically high valuations will hold going forward. Homebuyer sentiment has plummeted because folks like me no longer think paying these high prices(https://fred.stlouisfed.org/series/CSUSHPINSA) makes sense.
> Generally speaking, you shouldn't put your money in the market if you need it in the next 5 years.
Did you really mean 5 years, or 5 months, or something else? I'm not sure if I can take this statement seriously, or if it's meant to be a joke. 5 years is a long time.
Did you really mean 5 years, or 5 months, or something else? I'm not sure if I can take this statement seriously, or if it's meant to be a joke. 5 years is a long time.
Asset prices don't always go up. The downturns have lasted much longer than 5 years. So if you want relative certainty you'll have $X at a certain date then you need to be in cash years beforehand. Otherwise you're gambling or have a backup source of cash.
Yes, 5 years. http://nerdwallet.com/article/investing/where-to-put-short-t...
If you're young and you've only seen the market go up you need to familiarize yourself with normal volatility patterns. The market can easily take a dump at any time and fail to provide a positive return for years.
If you're young and you've only seen the market go up you need to familiarize yourself with normal volatility patterns. The market can easily take a dump at any time and fail to provide a positive return for years.
> The market can easily take a dump at any time and fail to provide a positive return for years.
...or decades: "Nikkei index hits 30,000 for first time in three decades"
https://asia.nikkei.com/Business/Markets/Nikkei-index-hits-3...
...or decades: "Nikkei index hits 30,000 for first time in three decades"
https://asia.nikkei.com/Business/Markets/Nikkei-index-hits-3...
Do you remember the lost decade? 2000-2009-ish... the markets went no where for almost 10 years.
> No, what I'm saying is the government failed to act sufficiently and forced the fed to act when they shouldn't have(or at least to the level they have).
What should the government have done?
What should the government have done?
Fiscal stimulus. More jobs programs. More infrastructure. Put people in affected industries to work doing something productive.
> Generally speaking, you shouldn't put your money in the market if you need it in the next 5 years.
According to whom? Right now, nothing pays out any yield, it’s stocks or lose to inflation.
According to whom? Right now, nothing pays out any yield, it’s stocks or lose to inflation.
BDCs are paying ~10%. It’s not without risk, of course, they saw large drawdowns in 2020 but have recovered alongside the rest of the economy. I personally generate income borrowing on margin to purchase the Goldman Sachs BDC (GSBD) and using a risk reversal (selling a call, using the premium to buy a put) to hedge against a large draw down. NFA.
I’ve followed ARCC, MAIN and GSBD for years, and there’s the more diversified Van Eck Vectors BDC ETF (BIZD), with an 8.5% yield. But I digress.
I’ve followed ARCC, MAIN and GSBD for years, and there’s the more diversified Van Eck Vectors BDC ETF (BIZD), with an 8.5% yield. But I digress.
You can try real estate as well. Or junk bonds.
> Let me stop you right there. Generally speaking, you shouldn't hold cash. Nobody should hold cash. Nobody should have ever held cash because even at the baseline expectation 2% inflation that's still a loss.
Nah, holding cash is fine under some circumstances.
Yes, the 2% inflation that the Fed chose to aim for makes holding cash costly.
But everybody holds cash. It's just that higher inflation expectations makes people hold less cash in real terms.
But then, you can be angry at the Fed for choosing that particular inflation target. The Fed could just as well go for 0% inflation. Or even go for a stable nominal GDP 65,000 USD per year per capita in perpetuity. (The latter would basically automatically ensure its dual mandate. Though most of the proponents of nominal GDP level targeting suggest to target a slight increase over time.)
In such a stable nominal-GDP system, holding cash would be rational in many more circumstances than today, because in general cash would slowly increase in real value as productivity and thus real GDP improved.
Nah, holding cash is fine under some circumstances.
Yes, the 2% inflation that the Fed chose to aim for makes holding cash costly.
But everybody holds cash. It's just that higher inflation expectations makes people hold less cash in real terms.
But then, you can be angry at the Fed for choosing that particular inflation target. The Fed could just as well go for 0% inflation. Or even go for a stable nominal GDP 65,000 USD per year per capita in perpetuity. (The latter would basically automatically ensure its dual mandate. Though most of the proponents of nominal GDP level targeting suggest to target a slight increase over time.)
In such a stable nominal-GDP system, holding cash would be rational in many more circumstances than today, because in general cash would slowly increase in real value as productivity and thus real GDP improved.
> In fact, if you can lock in a 2.xx% mortgage in a 2-5% inflationary environment then it is in real dollar terms a zero-interest loan. Before factoring in tax deductions.
This is a factor worth considering for anyone who is currently looking to buy a home. As long as you can afford the downpayment, you could lock in a fixed-rate mortgage while your earnings or other savings could grow at a higher rate. This is analogous to what some companies have done in recent years, loading up on low interest debt.
This is a factor worth considering for anyone who is currently looking to buy a home. As long as you can afford the downpayment, you could lock in a fixed-rate mortgage while your earnings or other savings could grow at a higher rate. This is analogous to what some companies have done in recent years, loading up on low interest debt.
When interest rates on mortgages are lower, doesn't the prices of homes increase to compensate (like what's happening right now)?
If interest rates decrease and home prices increase vs. interest rates increase but home prices decrease, then there is a point where the two will intersect, and there are many points around the intersection where the difference between the two is fairly insignificant.
How does the common expression go -- "The house always wins?"
If interest rates decrease and home prices increase vs. interest rates increase but home prices decrease, then there is a point where the two will intersect, and there are many points around the intersection where the difference between the two is fairly insignificant.
How does the common expression go -- "The house always wins?"
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I did this a month ago. 2.3% interest on a second home, refinanced the other for close to that. Assuming (big assumption) this transitory inflation doesn't go away it's stupid not to load up on debt.
If the Fed and the government are going to reward those who leverage up on risk, might as well. As '08 shows you'll even be rewarded when the crash happens
If the Fed and the government are going to reward those who leverage up on risk, might as well. As '08 shows you'll even be rewarded when the crash happens
A $2000 mortgage payment at 4% interest is not equivalent to a $2000 payment at 2%.
That money that would have gone towards your equity, is being spent in interest. This is why people making 60k/yr. buy $65,000 trucks. Interest rates drop and they only look at the monthly payment amount.
You don’t always get the full tax deduction on a first home either. In high tax states the 10k deduction limit kicks in when your paying high state taxes + mortgage interest.
That money that would have gone towards your equity, is being spent in interest. This is why people making 60k/yr. buy $65,000 trucks. Interest rates drop and they only look at the monthly payment amount.
You don’t always get the full tax deduction on a first home either. In high tax states the 10k deduction limit kicks in when your paying high state taxes + mortgage interest.
OP said he or she is upset with price inflation and now has a pile of cash losing purchasing power.
arcticbull said '... you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral ...'
Deflation makes cash have more purchasing power, so arcticbull your speculation is wrong. Completely backwards.
arcticbull said '... you would have been a lot more furious at the Fed in the event they had sat back during COVID and presided over a deflationary spiral ...'
Deflation makes cash have more purchasing power, so arcticbull your speculation is wrong. Completely backwards.
The economic consequences of deflation are very destruction. Cash may become more valuable, but a prolonged economic contract will leave you with less to buy with that cash.
I'm aware, however a mortgage also requires a job to obtain, which was what I was pointing to in the statement. Unless we saw truly spectacular deflation, I'm talking 500% year over year, it wouldn't have mattered. I suspect OP would have lost their job well before their admittedly less than 20% down-payment amount deflated enough to buy a house outright.
I suspect anything in between would have led to a huge spike in interest rates making borrowing yet less affordable no?
> Deflation makes cash have more purchasing power, so arcticbull your speculation is wrong. Completely backwards.
>> Can't get a mortgage if you're out of work, ya know?
So no, not really... unless you stopped reading before you got to that sentence ;)
I suspect anything in between would have led to a huge spike in interest rates making borrowing yet less affordable no?
> Deflation makes cash have more purchasing power, so arcticbull your speculation is wrong. Completely backwards.
>> Can't get a mortgage if you're out of work, ya know?
So no, not really... unless you stopped reading before you got to that sentence ;)
why do you assume a deflation will cause job loss, in particular for the poster? Maybe they have a deflation-proof job (most jobs that aren't a result of malivestment). Deflation is not a magic wand where "boom, it happens, and people lose their job". Just as, much as the central bank might wish it to be, inflation is not a magic wand where "boom it happens, and jobs are created" (hence the word "stagflation").
There is a gigantic difference between inflation and deflation from a policy perspective. Deflection has a positive feedback loop which does tend to cause situations where liquidity dries up literally overnight and then "boom, it happens, and people lose their jobs." Inflation tends to happen more gradually. It's manageable as long as people don't lose confidence in the currency. The fed generally wants to avoid deflation if at all possible. As people leave the job market due to automation and median age trends higher, this because more and more difficult. Japan has had serious struggles fighting off deflation for decades now.
"stagflation" is simply what happens when inflation keeps up with deflationary trends. It doesn't mean monetary policy is doing nothing. It likely means it's working as intended.
"stagflation" is simply what happens when inflation keeps up with deflationary trends. It doesn't mean monetary policy is doing nothing. It likely means it's working as intended.
Surely you're kidding, right? If inflation didn't have a positive feedback loop we wouldn't have the hockey stick exponential devaluation as seen in: Venezuela, Yugoslavia, Zimbabwe, Brazil, etc...
> Japan has had serious struggles fighting off deflation
But the CPI in Japan hasn't gone down, if anything it's gone up more years than it's gone down. Moreover, in what way is Japan terrible? Due to less inflation, there's less income inequality. Maybe deflation isn't bad.
> Japan has had serious struggles fighting off deflation
But the CPI in Japan hasn't gone down, if anything it's gone up more years than it's gone down. Moreover, in what way is Japan terrible? Due to less inflation, there's less income inequality. Maybe deflation isn't bad.
Gentle inflation is what the fed targets. Out of control inflation is what you're talking about.
In an inflationary economy, people spend their money quickly, since it's worth less sitting around. In a deflationary economy people hoard cash because the value of cash just increases in the bank. Why invest in anything (companies, labor, capital investment) if your money just earns 10% in the bank?
If enough people do that jobs disappear, as they realize they don't need to market any new product or service to make their money.
FWIW, they call that period in Japan "The Lost Decade(s)" https://en.m.wikipedia.org/wiki/Lost_Decades_(Japan)
In an inflationary economy, people spend their money quickly, since it's worth less sitting around. In a deflationary economy people hoard cash because the value of cash just increases in the bank. Why invest in anything (companies, labor, capital investment) if your money just earns 10% in the bank?
If enough people do that jobs disappear, as they realize they don't need to market any new product or service to make their money.
FWIW, they call that period in Japan "The Lost Decade(s)" https://en.m.wikipedia.org/wiki/Lost_Decades_(Japan)
The wage-price increase cycle is the kind of inflation the Fed attempts to control. Runaway inflation/hyperinflation is much more associated with a loss of faith in the government and a total systemic collapse.
Yeah I'm very familiar with it not the least because I'm of japanese extraction and have relatives my age living the lost generation: it's a lost generation because instead of letting crap companies/crap bosses die, due to fear of deflation, they bailed them out with monetary and fiscal stimuli, making working salaryman jobs meaningless for an entire generation of young Japanese people. What the fuck is the point of trying hard when your connected, incompetent competitor or your incompetent boss is going to get bailed out anyways?
I covered the examples you cited already. Rampant inflation happens when people lose faith in the currency. That isn’t what’s happening here.
How do people lose faith in currencies? You start by devaluing them. What are some symptoms of people losing faith in them? They start flocking to currency alternatives. Widespread grassroots popularity in cryptos should probably be some sort of warning sign: The people know that they can't get rich using dollars, the investment game is rigged, so it's worth it to try and 'stack' strange assets, even if they're constantly being warned that those assets are peri-legal by the authorities...
You are on the wrong forum my friend.
Austrians and the HN community talk past each other because it's not easy to get the latter (which I am a part of) to see that their large salaries in FAANG companies are partly due to the Fed largesse.
Austrians and the HN community talk past each other because it's not easy to get the latter (which I am a part of) to see that their large salaries in FAANG companies are partly due to the Fed largesse.
'spectacular deflation, I'm talking 500% year over year ...'
If currency loses 100% of value, it will be worth zero. A complete, 100%, total loss.
A 500% loss would be spectacular! And not possible using commonly accepted laws of the universe such as math.
If currency loses 100% of value, it will be worth zero. A complete, 100%, total loss.
A 500% loss would be spectacular! And not possible using commonly accepted laws of the universe such as math.
You are confusing deflation with inflation.
A dozen yummy donuts experience 100% increase. A double so you now have two dozen yummy donuts. Inflation.
A dozen peaches experience 100% deflation. They completely 100% go to zero. There are zero peaches. They are gone.
What would 500% deflation do? Using regular math and experiences with donuts and peaches, what happens at theoretical 101% deflation? And 500% deflation? How can something be reduced more than 100%, the point at which it already disappeared?
A dozen peaches experience 100% deflation. They completely 100% go to zero. There are zero peaches. They are gone.
What would 500% deflation do? Using regular math and experiences with donuts and peaches, what happens at theoretical 101% deflation? And 500% deflation? How can something be reduced more than 100%, the point at which it already disappeared?
I am not talking about the rate, but rather about your sentence:
> If currency loses 100% of value, it will be worth zero. A complete, 100%, total loss.
Inflation is about the loss of value, not deflation. 1£ today will be worth x£ tomorrow, where x < 1.
Inflation is about the loss of value, not deflation. 1£ today will be worth x£ tomorrow, where x < 1.
Just confirming I’m on the right page here, what about supply and demand? Doesn’t inflation increase the quantity of cash in existence, reducing its value relative to other units of exchange, and vice versa for deflation?
So for example, a 500% deflation just means that one dollar today buys $6 worth of whatever it could have bought in the past (my math might be off)?
So for example, a 500% deflation just means that one dollar today buys $6 worth of whatever it could have bought in the past (my math might be off)?
People absolutely should be holding cash if, as in the parent’s case, they’re looking for a home to buy :-p
Also, “don’t worry, just look at the monthly payment” is something that should only ever be said by a car salesman.
Also, “don’t worry, just look at the monthly payment” is something that should only ever be said by a car salesman.
On a 30 year fixed mortgage what else matters? That’s your monthly payment. Taxes I guess?
Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!
Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!
As above, the same reasons why it’s bad to think of a car purchase purely in terms of the monthly payment.
> Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!
You don’t know how long the search for a home will take. That’s the point.
> Depends how long you’re planning to save. You can hold treasuries or risk parity adjusted pairings. Or CDs ladders. Lots of stuff!
You don’t know how long the search for a home will take. That’s the point.
>> Also, “don’t worry, just look at the monthly payment” is something that should only ever be said by a car salesman.
> On a 30 year fixed mortgage what else matters?
I think the general criticism regarding monthly payments is more targeted at products like interest-only mortgages, which were hot in the early oughts. Those aren't as common these days. Maybe some people have 10/1 ARMs and similar in mind, but that's a stretch. (Anyhow, today the spreads between ARMs and 30-year are ridiculously small.)
> On a 30 year fixed mortgage what else matters?
I think the general criticism regarding monthly payments is more targeted at products like interest-only mortgages, which were hot in the early oughts. Those aren't as common these days. Maybe some people have 10/1 ARMs and similar in mind, but that's a stretch. (Anyhow, today the spreads between ARMs and 30-year are ridiculously small.)
> you shouldn’t hold cash
I don’t think they intended to be holding cash, they were setting up for a large purchase and the timing was bad. But yeah, arguably when there’s no immediate prospect of the opportunity resurfacing, probably reinvesting that paper would be more congruent with the system we have before us.
I don’t think they intended to be holding cash, they were setting up for a large purchase and the timing was bad. But yeah, arguably when there’s no immediate prospect of the opportunity resurfacing, probably reinvesting that paper would be more congruent with the system we have before us.
Not only has the Fed’s endless easing been unfair to many, I fear what will happen next. We will suffer when the bubble pops or inflation worsens or both.
Do you want to bet on the 'bubble popping' or 'inflation worsening'?
Financial markets don't seem to expect either. Inflation expectations (via TIPS spreads) are where the Fed wants them.
Financial markets don't seem to expect either. Inflation expectations (via TIPS spreads) are where the Fed wants them.
We'll see about that. I was predicting deflation months ago. Now that the government is cutting back on stimulus the labor market will have to support itself.
I can understand your frustration, but you seem to have contradictory feelings. You didn't want to fuel an asset bubble and are unhappy that you didn't?
Are you fueling an asset bubble every time you make a purchase?
But this article is clearly about the Netherlands, not the USA ...
Indeed the Dutch economy is fine. Everyone expected COVID to be some kind of economic disaster but despite heroic efforts by the finance minister to spend money like water the Netherlands still only has a 70% GDP debt ratio and unemployment is at 4%.
There's a lot wrong with the Netherlands and Dutch people but economically everything is still chugging along nicely. Our sole saving grace.
There's a lot wrong with the Netherlands and Dutch people but economically everything is still chugging along nicely. Our sole saving grace.
The people who outbid you for those houses could have outbid you without any monetary stimulus too, yes?
Not necessarily. If the monetary stimulus was like $10,000 per person, it would be totally different than lowering interest rates that mainly benefit the rich that can get even more cheap money now to buy properties off the market.
A lot of those people bid because interest rates are so low or even negative
So?
If they could afford an X/month mortgage, so bidded a higher total cash price because X/month suddenly was a higher total purchase price due to lower interest rates, and the original poster could only afford a X-$300/month mortage, the original poster isn't beating them anyway.
There has been an extreme shortage of supply due to some combination of people not wanting to move due to Covid because of exposure to lots of people being required, people valuing homes with more space over apartments more than they did in the past, and people not wanting to try to "trade up" because the houses they'd upgrade to were also being hit by the price increase. That shortage is what fucked the original poster here, not stimulus checks.
If they could afford an X/month mortgage, so bidded a higher total cash price because X/month suddenly was a higher total purchase price due to lower interest rates, and the original poster could only afford a X-$300/month mortage, the original poster isn't beating them anyway.
There has been an extreme shortage of supply due to some combination of people not wanting to move due to Covid because of exposure to lots of people being required, people valuing homes with more space over apartments more than they did in the past, and people not wanting to try to "trade up" because the houses they'd upgrade to were also being hit by the price increase. That shortage is what fucked the original poster here, not stimulus checks.
I think one important point is that said people need to invest into properties instead of say government bonds because interest rates are so low or even negative.
Sure, some of them. But others (institutional investors) are basically able to make outrageous bids due to access to easy money.
Not if he has a large pile of cash, which the OP said it did.
Say that he's got $500K in cash but can put only $3.8K/month toward the mortgage, while the average person around him has $250K but can put $5K/month toward a mortgage. Average housing prices are $1.25M, so at 4.5% interest rates he's competitive. He puts down $500K and borrows $750K @ $3.8K/month for a $1.25M house, while the average borrower puts down 20% ($250K) and borrows $1M @ $5K/month.
If interest rates go down to 2.5% like they did now, the average borrower can now borrow $1.25M, so home prices go up to $1.5M. His cash stash still would require a $1M loan, which would cost around $4K/month, so he has been priced out.
If interest rates go up to 20% like in 1980, then the average borrower can only borrow $300K to maintain $5K/month, so home prices drop to around $550K and he can purchase with cash, or a tiny mortgage. All of the homes between $550K-730K (previously, roughly $1.25M-$1.7M) are now unaffordable to the average mortgage buyer, but are well within OP's range.
Inflation acts as a tax on savers and a subsidy for debtors.
Say that he's got $500K in cash but can put only $3.8K/month toward the mortgage, while the average person around him has $250K but can put $5K/month toward a mortgage. Average housing prices are $1.25M, so at 4.5% interest rates he's competitive. He puts down $500K and borrows $750K @ $3.8K/month for a $1.25M house, while the average borrower puts down 20% ($250K) and borrows $1M @ $5K/month.
If interest rates go down to 2.5% like they did now, the average borrower can now borrow $1.25M, so home prices go up to $1.5M. His cash stash still would require a $1M loan, which would cost around $4K/month, so he has been priced out.
If interest rates go up to 20% like in 1980, then the average borrower can only borrow $300K to maintain $5K/month, so home prices drop to around $550K and he can purchase with cash, or a tiny mortgage. All of the homes between $550K-730K (previously, roughly $1.25M-$1.7M) are now unaffordable to the average mortgage buyer, but are well within OP's range.
Inflation acts as a tax on savers and a subsidy for debtors.
> Inflation acts as a tax on savers and a subsidy for debtors.
Slightly tangental, but you piqued my interest. If it's clear the Fed can print more money, which causes inflation, which is a tax on savers. Then why do savers or anyone need to pay taxes? Could the Fed just not use inflation as a form of taxes in general? Instead of taking x% of people's income, the dollar could just print the money they need, and inflate the dollar's value to recoup their costs.
I'm not saying this is a good idea or anything. I am not knowledgable enough in economics to argue for/against this. It's just a food for thought kind of thing.
Slightly tangental, but you piqued my interest. If it's clear the Fed can print more money, which causes inflation, which is a tax on savers. Then why do savers or anyone need to pay taxes? Could the Fed just not use inflation as a form of taxes in general? Instead of taking x% of people's income, the dollar could just print the money they need, and inflate the dollar's value to recoup their costs.
I'm not saying this is a good idea or anything. I am not knowledgable enough in economics to argue for/against this. It's just a food for thought kind of thing.
> Could the Fed just not use inflation as a form of taxes in general?
In some sense, they already do that.
But it's more complicated than it first appears.
First, most of the money the Fed+government makes from issuing money comes from seigniorage, not from inflation.
Simplified a bit, seigniorage just means that the cash people hold in their wallets (and bank accounts) took the government pennies to print, but the people offered real goods and services in exchange to acquire it.
Second, higher inflation makes people hold less cash in real terms. A simple illustration: when Germany had hyperinflation in the early 1920s, some people might have carried cash by the wheelbarrow, but even a whole wheelbarrow would only be worth eg a few apples and potatoes.
In contemporary Germany with a stable currency, it's not too unusual to carry enough cash in a slim wallet to be able to afford wheelbarrows full of apples and potatoes.
So if the government+central bank want to maximize how much real benefit they get from printing money, they can't just crank up inflation. In fact, lower inflation is probably better, if you want to maximize this.
In some sense, they already do that.
But it's more complicated than it first appears.
First, most of the money the Fed+government makes from issuing money comes from seigniorage, not from inflation.
Simplified a bit, seigniorage just means that the cash people hold in their wallets (and bank accounts) took the government pennies to print, but the people offered real goods and services in exchange to acquire it.
Second, higher inflation makes people hold less cash in real terms. A simple illustration: when Germany had hyperinflation in the early 1920s, some people might have carried cash by the wheelbarrow, but even a whole wheelbarrow would only be worth eg a few apples and potatoes.
In contemporary Germany with a stable currency, it's not too unusual to carry enough cash in a slim wallet to be able to afford wheelbarrows full of apples and potatoes.
So if the government+central bank want to maximize how much real benefit they get from printing money, they can't just crank up inflation. In fact, lower inflation is probably better, if you want to maximize this.
I'm not even close to an expert on economics, either... but I think what you're describing sounds similar to what's called "Modern Monetary Theory" or MMT.
If I understand the very basic gist of MMT correctly, it's basically that the government "invents" currency simply by spending. If the government wants to finance, e.g., an enormous infrastructure project, all it has to do is will it into existence and the money will get printed - mostly because the full faith in credit of the United States Treasury will make sure the right people are paid.
If this is true, what then is the point of taxes? Taxes are a buffer to "sop up" excess cash in the economy to keep inflation under control.
Another central tenet of MMT is that the end goal of tuning these knobs should be 0% unemployment, because that's when your economy is producing maximally.
I'm sure I got a lot of that wrong, because (like I said) I'm not an expert, but what you described reminded me of the MMT Wikipedia rabbithole I ended up in a few years back.
If I understand the very basic gist of MMT correctly, it's basically that the government "invents" currency simply by spending. If the government wants to finance, e.g., an enormous infrastructure project, all it has to do is will it into existence and the money will get printed - mostly because the full faith in credit of the United States Treasury will make sure the right people are paid.
If this is true, what then is the point of taxes? Taxes are a buffer to "sop up" excess cash in the economy to keep inflation under control.
Another central tenet of MMT is that the end goal of tuning these knobs should be 0% unemployment, because that's when your economy is producing maximally.
I'm sure I got a lot of that wrong, because (like I said) I'm not an expert, but what you described reminded me of the MMT Wikipedia rabbithole I ended up in a few years back.
Yes, you described MMT about right.
Unfortunately, MMT is either a meaningless tautology that doesn't change anything about our understanding of the world. Or, it's wrong. Depending on what definition the MMT people use at any one point in time during a discussion.
Unfortunately, MMT is either a meaningless tautology that doesn't change anything about our understanding of the world. Or, it's wrong. Depending on what definition the MMT people use at any one point in time during a discussion.
Heh, you've asked an eternal question which I asked in my intro macroeconomics class, and which I suspect is being asked at the Presidential/Prime Minister and Central Bank levels in many developed countries now. I'll give you both the macroeconomic answer and the historical answer.
The macroeconomic answer is yes, assuming that you can control inflation and spend your money in a wise disciplined manner, you can do this. An inflation rate of 10% is basically a wealth tax on currency-denominated assets of 1/1.1 ~= 9%, collected implicitly. And it has many benefits. Administration cost is near-zero, the government just needs to print money and let price levels do the rest. As a wealth tax, it's progressive. It encourages consumer spending, and encourages people to hold productive assets rather than currency-denominated financial instruments. Aside from land & externality taxes, it's one of the best types of tax.
The historical reality is much nuanced, and negative. In reality, you never get uniform inflation across all prices; instead you get something called Cantillon Effects [1], where money pools at the places it's injected within the economy and at monopolies, and never makes it to ordinary consumers. This ruins a lot of the progressiveness of inflation: Google and Facebook shareholders will enjoy higher ad prices (which is happening now), but the ordinary service worker on the street still lacks the bargaining power to get a raise. And it's also easier to dodge than governments believe: instead of holding wealth in cash, wealthy individuals will simply hold stocks, cryptocurrency, art, NFTs, and other "floating" assets whose value rises along inflation (this is also happening now). Inflation also acts on a tax on the economic efficiency of businesses and consumers - instead of the government collecting the tax, businesses simply have to re-price all of their items, and consumers may need to find alternate sources if relative prices change.
The worst case, though, is that it's unclear whether it's possible to maintain steady, government-controlled inflation at appropriate tax levels (which would have to be about 50% to maintain government spending levels of about 35% of the economy). Looking at incidents of high & hyperinflation [2], it's very difficult to find time periods where inflation exceeded 20% but then did not go on to exceed hundreds of percent. Businessmen seem to have a binary approach to inflation - either they can think of a world of stable prices (where maybe they give 2-3% CoL increases each year), or they must grab all the money they can right now because all their costs are going up too and if they don't they'll go out of business. There are many historical examples where governments thought "Okay, we can tolerate just a few percent higher inflation to fund this one war, and the spoils will pay it back later" and instead they found themselves tipped into hyperinflation and unable to rein the economy back in.
[1] https://mattstoller.substack.com/p/the-cantillon-effect-why-...
[2] https://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hig...
The macroeconomic answer is yes, assuming that you can control inflation and spend your money in a wise disciplined manner, you can do this. An inflation rate of 10% is basically a wealth tax on currency-denominated assets of 1/1.1 ~= 9%, collected implicitly. And it has many benefits. Administration cost is near-zero, the government just needs to print money and let price levels do the rest. As a wealth tax, it's progressive. It encourages consumer spending, and encourages people to hold productive assets rather than currency-denominated financial instruments. Aside from land & externality taxes, it's one of the best types of tax.
The historical reality is much nuanced, and negative. In reality, you never get uniform inflation across all prices; instead you get something called Cantillon Effects [1], where money pools at the places it's injected within the economy and at monopolies, and never makes it to ordinary consumers. This ruins a lot of the progressiveness of inflation: Google and Facebook shareholders will enjoy higher ad prices (which is happening now), but the ordinary service worker on the street still lacks the bargaining power to get a raise. And it's also easier to dodge than governments believe: instead of holding wealth in cash, wealthy individuals will simply hold stocks, cryptocurrency, art, NFTs, and other "floating" assets whose value rises along inflation (this is also happening now). Inflation also acts on a tax on the economic efficiency of businesses and consumers - instead of the government collecting the tax, businesses simply have to re-price all of their items, and consumers may need to find alternate sources if relative prices change.
The worst case, though, is that it's unclear whether it's possible to maintain steady, government-controlled inflation at appropriate tax levels (which would have to be about 50% to maintain government spending levels of about 35% of the economy). Looking at incidents of high & hyperinflation [2], it's very difficult to find time periods where inflation exceeded 20% but then did not go on to exceed hundreds of percent. Businessmen seem to have a binary approach to inflation - either they can think of a world of stable prices (where maybe they give 2-3% CoL increases each year), or they must grab all the money they can right now because all their costs are going up too and if they don't they'll go out of business. There are many historical examples where governments thought "Okay, we can tolerate just a few percent higher inflation to fund this one war, and the spoils will pay it back later" and instead they found themselves tipped into hyperinflation and unable to rein the economy back in.
[1] https://mattstoller.substack.com/p/the-cantillon-effect-why-...
[2] https://en.wikipedia.org/wiki/Hyperinflation#Examples_of_hig...
The problem with inflation as a tax is not so much that you can't target 10% exactly. We could probably do that these days with level targeting.
No, the real problem is the deadweight cost:
The higher your inflation, the less cash people want to hold in real terms. But that amount of cash is what you collect your inflation tax on.
> An inflation rate of 10% is basically a wealth tax on currency-denominated assets of 1/1.1 ~= 9%, collected implicitly.
What makes you say so? Expected inflation would purely be a tax on cash. Currency-denominated assets like loans and bonds would just get a higher interest rate up front.
Your next paragraph describes exactly that 'dodging' of the inflation tax.
Btw, you can also simply dodge eg a USD inflation tax by holding Swiss Franks. No need for NFTs.
(Of course, if you have a capital gains tax levied on nominal gains, then inflation effectively increases the capital gains tax. The solution here is to charge capital gains taxes only on real gains. That's a real problem in the real world.)
> In reality, you never get uniform inflation across all prices; instead you get something called Cantillon Effects [1], where money pools at the places it's injected within the economy and at monopolies, and never makes it to ordinary consumers.
The Cantillon effect is controversial to say the least.
In order to work like Internet Austrians commonly describe the effect, people have to be idiots who act purely on historical data and do not form any expectations.
In the real world, when the Fed announces some future policy in advance (like a taper or a new round of QE), that announcement has effects on eg the stock market right away, even when the Fed hasn't added or removed any money yet.
In contrast, for the Cantillon effect to work as described, money would need to act sort-of like a liquid or gas and 'slosh around the economy' and get stuck in nooks and crannies.
No, the real problem is the deadweight cost:
The higher your inflation, the less cash people want to hold in real terms. But that amount of cash is what you collect your inflation tax on.
> An inflation rate of 10% is basically a wealth tax on currency-denominated assets of 1/1.1 ~= 9%, collected implicitly.
What makes you say so? Expected inflation would purely be a tax on cash. Currency-denominated assets like loans and bonds would just get a higher interest rate up front.
Your next paragraph describes exactly that 'dodging' of the inflation tax.
Btw, you can also simply dodge eg a USD inflation tax by holding Swiss Franks. No need for NFTs.
(Of course, if you have a capital gains tax levied on nominal gains, then inflation effectively increases the capital gains tax. The solution here is to charge capital gains taxes only on real gains. That's a real problem in the real world.)
> In reality, you never get uniform inflation across all prices; instead you get something called Cantillon Effects [1], where money pools at the places it's injected within the economy and at monopolies, and never makes it to ordinary consumers.
The Cantillon effect is controversial to say the least.
In order to work like Internet Austrians commonly describe the effect, people have to be idiots who act purely on historical data and do not form any expectations.
In the real world, when the Fed announces some future policy in advance (like a taper or a new round of QE), that announcement has effects on eg the stock market right away, even when the Fed hasn't added or removed any money yet.
In contrast, for the Cantillon effect to work as described, money would need to act sort-of like a liquid or gas and 'slosh around the economy' and get stuck in nooks and crannies.
Don't forget, our salaries are largely unchanged although the market is finding it out the hard way (employee shortage).
So honest hardworking people got triple-fucked.
I can't imagine how well UBI would ever go. This should be the nail in the coffin for UBI for me, I will never vote for it.
So honest hardworking people got triple-fucked.
I can't imagine how well UBI would ever go. This should be the nail in the coffin for UBI for me, I will never vote for it.
I think you're getting downvoted for your UBI comment.
> So honest hardworking people got triple-fucked.
You're absolutely right. Real wages are actually down. If I wasn't a relatively rich SW guy and was a laborer I might be out in the streets lighting shit on fire right about now. I feel frustrated because I might not be able to buy a home again for a year or two, but there are people who are seeing their dreams disappear forever in front of their eyes. Imagine being a low-skilled person who was aiming to buy a house in a lower-tier market until outside speculators and investors move in, searching for anywhere they can park their leveraged cash piles before inflation sets them aflame. I can only hope that these piles of capital go up in smoke as the malinvestments driven by fanatical fed policy prove unwise.
> So honest hardworking people got triple-fucked.
You're absolutely right. Real wages are actually down. If I wasn't a relatively rich SW guy and was a laborer I might be out in the streets lighting shit on fire right about now. I feel frustrated because I might not be able to buy a home again for a year or two, but there are people who are seeing their dreams disappear forever in front of their eyes. Imagine being a low-skilled person who was aiming to buy a house in a lower-tier market until outside speculators and investors move in, searching for anywhere they can park their leveraged cash piles before inflation sets them aflame. I can only hope that these piles of capital go up in smoke as the malinvestments driven by fanatical fed policy prove unwise.
You wouldn't vote for the party that promised to implement it you mean. I would love it if more democracies would enable citizens to vote on important issues like this, similarly to what Switzerland does.
This sounds noble in theory, but in practice people make awful choices.
I've always been a Democrat but lately, I am reconsidering my position. I am not a single issue voter but UBI might be the reason to not support the Democratic party for me (if it ever gets on the ballot). Thankfully, most Democrats I know oppose UBI. The reason I am reconsidering is to do with how the entire west-coast is run - living in Seattle, Bay Area, LA and Portland feels like a third world nation. I'll probably continue to vote for Democrats in the presidential election, but local and county elections it will be the Republicans or Libertarians.
You've very clearly never been to an actual third world country.
Having homeless people and a high crime rate does not == 3rd world. In fact, it only means many, many people want to live there due to the overwhelming economic prosperity that is clearly not equitably split.
Also fun fact: the three "third world" states you mention have a combined GDP higher than EVERY OTHER COUNTRY IN THE WORLD after the US, China and Japan.
Having homeless people and a high crime rate does not == 3rd world. In fact, it only means many, many people want to live there due to the overwhelming economic prosperity that is clearly not equitably split.
Also fun fact: the three "third world" states you mention have a combined GDP higher than EVERY OTHER COUNTRY IN THE WORLD after the US, China and Japan.
Hold on a sec, cut down the all caps. No need to shout. I grew up in a third-world nation and it's far better than the feces ridden shithole that is SF and Oakland, largely the bay area. Needles on walkways, crime through the roof, plastic trash on the road sides, feeling terrified of walking on the street at night, car thefts, the whole 9 yards. It is indistinguishable from a third-world country, I'd argue it is worse.
Sure, GDP is higher, thanks to big corporations and wealthy NIMBYs camping out in their caves, voting for their own demise.
> many people want to live there due to the overwhelming economic prosperity
No one wants to live in Bay Area. In fact, most engineers I've talked to want to leave and they have been leaving in droves.
Sure, GDP is higher, thanks to big corporations and wealthy NIMBYs camping out in their caves, voting for their own demise.
> many people want to live there due to the overwhelming economic prosperity
No one wants to live in Bay Area. In fact, most engineers I've talked to want to leave and they have been leaving in droves.
The Bay Area is much larger than SF and Oakland. The Peninsula is lovely, no needles, no shit, good schools, beautiful homes in the hills, we actually support our police departments who generally come when you call them, etc. Even South Bay is great, modulo housing expenses. I never felt unsafe in Sunnyvale, and it and Fremont have some of the lowest crime rates of cities > 150K pop in the U.S.
> living in Seattle, Bay Area, LA and Portland feels like a third world nation
UBI would help a lot with homelessness and blight. Also seattle is not nearly as bad as the rest of those places in 90+% of the area.
UBI would help a lot with homelessness and blight. Also seattle is not nearly as bad as the rest of those places in 90+% of the area.
If it's coupled with actually building houses. Add UBI to existing zoning & construction regulations and you'll just see rent increase.
That's not fair to UBI.
Not everyone got it, so it wasn't universal.
They shut down most small businesses, so the benefits of the extra income were consolidated in a few major companies.
The housing market went up because people who were previously happy to live in an expensive small apartment in a busy city were suddenly forced to stay inside most of the time, and realized they would rather have a bigger place.
Not everyone got it, so it wasn't universal.
They shut down most small businesses, so the benefits of the extra income were consolidated in a few major companies.
The housing market went up because people who were previously happy to live in an expensive small apartment in a busy city were suddenly forced to stay inside most of the time, and realized they would rather have a bigger place.
Not convinced. Inflation would skyrocket, asset-holders will get richer and inequality would get worse if it already isn't. The fella working at McDonalds would get shortchanged for not playing the asset-bubble stock-bubble game as he/she is serving $20 burgers to customers.
That may be true, but my point was that this is not a good example of UBI. This is a global pandemic, and a bunch of actions around it.
Though since we're talking about it, I think UBI might work if we also outlawed fractional reserve banking.
Currently, new money is created when banks lend out more than they have, I think they like to call it "leverage." This creates a type of inflation, but the only ones benefiting are the banks and the people/businesses they choose to loan money to.
Instead of allowing leveraged bank loans, we could create the same inflation by blatantly printing new money every year and distributing it equally. This would give the benefits of inflation to everyone. If you wanted to start a business, instead of getting a cheap loan you would have to crowd fund it, because all the money(power) that was in the hands of banks is now everywhere. If we needed to control inflation, we could have taxes and remove the money collected from the pool instead of using it.
It would be a bit of a balancing act to make sure enough people keep working, and that prices don't get too high, but I think it's doable.
Though since we're talking about it, I think UBI might work if we also outlawed fractional reserve banking.
Currently, new money is created when banks lend out more than they have, I think they like to call it "leverage." This creates a type of inflation, but the only ones benefiting are the banks and the people/businesses they choose to loan money to.
Instead of allowing leveraged bank loans, we could create the same inflation by blatantly printing new money every year and distributing it equally. This would give the benefits of inflation to everyone. If you wanted to start a business, instead of getting a cheap loan you would have to crowd fund it, because all the money(power) that was in the hands of banks is now everywhere. If we needed to control inflation, we could have taxes and remove the money collected from the pool instead of using it.
It would be a bit of a balancing act to make sure enough people keep working, and that prices don't get too high, but I think it's doable.
I think systemsvoltages' point is that if it's "not a good example of UBI" because not everyone got stimulus, an actual, scotsman UBI would be even worse, precisely because everyone would get stimulated.
> Inflation would skyrocket, asset-holders will get richer and inequality would get worse if it already isn't.
1) I don't think UBI would be that much money per person. The UBI proposals are alternatives to food stamps, not jobs.
2) The people with money to burn and buy assets and $20 burgers would lost more than their UBI due to taxes.
Aside, in expensive west coast cities we already have $20 burgers
1) I don't think UBI would be that much money per person. The UBI proposals are alternatives to food stamps, not jobs.
2) The people with money to burn and buy assets and $20 burgers would lost more than their UBI due to taxes.
Aside, in expensive west coast cities we already have $20 burgers
$20 McDonalds burgers (the point was not about burgers at all but about inflation).
I am fine with providing social services to alleviate homelessness needs. Getting these people jobs would be the way to go. For those that cannot find jobs or are mentally unstable - they can continue to live off welfare.
UBI would go to 99.9% of the polulation that is not homeless.
I am fine with providing social services to alleviate homelessness needs. Getting these people jobs would be the way to go. For those that cannot find jobs or are mentally unstable - they can continue to live off welfare.
UBI would go to 99.9% of the polulation that is not homeless.
Was this actually the last nail in the coffin for you? Or had the coffin already been buried?
I've been punished for being defensive and not participating in the fueling of an asset bubble.
Yes, that is exactly it. The economy falls apart if everyone saves too much. Money is an imaginary number designed to facilitate separation of labor, if too many people save and retire early then there won't be enough people working.
FWIW I am the same way, and used to be angry about it, but I have accepted it for what it is. I bought my house 15 years ago at the height of the last housing bubble. I was under water for a while, but I didn't qualify for any of the assistance because I bought a house I could afford. If I had bought a more expensive house, or if I made slightly less money I would have been able to get some money from the government. It was all based on the ratio of income to mortgage payment, which is still kind of annoying.
Only way I could cut my losses in my mind was to pay off the house as quickly as possible, to save money on interest. So now it's paid off, and for the first time since a year after I moved in Zillow has it at a higher price than I paid for it, though just barely.
But back to the point, don't keep your assets in cash, or any one thing for that matter. Index funds, mutual funds, commodities, collectables, anything that is easy to sell and will generally go up in price with inflation. These policies are meant to encourage people with cash to do things with that cash, instead of hoarding it.
Yes, that is exactly it. The economy falls apart if everyone saves too much. Money is an imaginary number designed to facilitate separation of labor, if too many people save and retire early then there won't be enough people working.
FWIW I am the same way, and used to be angry about it, but I have accepted it for what it is. I bought my house 15 years ago at the height of the last housing bubble. I was under water for a while, but I didn't qualify for any of the assistance because I bought a house I could afford. If I had bought a more expensive house, or if I made slightly less money I would have been able to get some money from the government. It was all based on the ratio of income to mortgage payment, which is still kind of annoying.
Only way I could cut my losses in my mind was to pay off the house as quickly as possible, to save money on interest. So now it's paid off, and for the first time since a year after I moved in Zillow has it at a higher price than I paid for it, though just barely.
But back to the point, don't keep your assets in cash, or any one thing for that matter. Index funds, mutual funds, commodities, collectables, anything that is easy to sell and will generally go up in price with inflation. These policies are meant to encourage people with cash to do things with that cash, instead of hoarding it.
> Yes, that is exactly it. The economy falls apart if everyone saves too much. Money is an imaginary number designed to facilitate separation of labor, if too many people save and retire early then there won't be enough people working.
Yes, this I recently learned is called the paradox of thrift. [1]
[1] https://www.investopedia.com/terms/p/paradox-of-thrift.asp
Yes, this I recently learned is called the paradox of thrift. [1]
[1] https://www.investopedia.com/terms/p/paradox-of-thrift.asp
Yeah, it's not actually real.
The central bank can always just keep printing enough money to keep nominal GDP stable, if they want. No matter how much people want to save.
The central bank can always just keep printing enough money to keep nominal GDP stable, if they want. No matter how much people want to save.
They can’t actually, GDP is a function of supply and velocity. If you increase supply and it’s saved, velocity drops commensurately. This yields no change in nominal GDP.
In that case, just keep printing money and buy up all assets in the world.
You clearly misunderstand. That's not what you proposed initially. Doing so would also not have an impact on GDP. Everything in moderation, as they say.
I said originally that they can print money.
Sorry, that was a bit sloppy. When we say that eg the Fed prints money, we mean that they buy assets with newly created money.
Typically that asset is government debt. But they have been known to buy other stuff as well. And if they run out of government debt to buy, and nominal GDP still hasn't picked up, they can keep buying up the rest of the world.
Just to keep in mind: real GDP = nominal GDP - inflation.
Printing money like isn't expected to do much for real GDP.
Sorry, that was a bit sloppy. When we say that eg the Fed prints money, we mean that they buy assets with newly created money.
Typically that asset is government debt. But they have been known to buy other stuff as well. And if they run out of government debt to buy, and nominal GDP still hasn't picked up, they can keep buying up the rest of the world.
Just to keep in mind: real GDP = nominal GDP - inflation.
Printing money like isn't expected to do much for real GDP.
It's not just the paradox of thrift. The general concept is the paradox of competition. There are macroeconomic statements that always apply but as individuals optimize their local statements they actually end up "deoptimizing" the global statement. Basically a race to the bottom or a continuous form of the prisoners dilemma. In other words, the idea that local decision making will always reach a global optimum, the very foundation of free market economics, isn't even true in theory given our current money system.
See this in the case of Greece vs Germany. Germany is trying to boost exports by cutting back on imports. If Greece would retaliate by following the exact strategy there would be less trade between them overall. Meanwhile if both countries tried to boost imports, then both of them would be better off.
How exactly does Germany do it? The government is simply enacting policies to destroy the bargaining power of labor. Yes, Germany is trying to compete with Greece based on labor costs. It's trying to pass off a questionable economic policy that destabilizes the eurozone as strength because of moral attachments to export industries and saving money while blaming the other side for importing its products and borrowing to pay for them. This is why the eurozone is a failure and every country should have its own currency.
https://en.wikipedia.org/wiki/Paradox_of_competition
See this in the case of Greece vs Germany. Germany is trying to boost exports by cutting back on imports. If Greece would retaliate by following the exact strategy there would be less trade between them overall. Meanwhile if both countries tried to boost imports, then both of them would be better off.
How exactly does Germany do it? The government is simply enacting policies to destroy the bargaining power of labor. Yes, Germany is trying to compete with Greece based on labor costs. It's trying to pass off a questionable economic policy that destabilizes the eurozone as strength because of moral attachments to export industries and saving money while blaming the other side for importing its products and borrowing to pay for them. This is why the eurozone is a failure and every country should have its own currency.
https://en.wikipedia.org/wiki/Paradox_of_competition
> The economy falls apart if everyone saves too much.
I have no problem with policies meant to encourage people to do things with their cash, but only if proper social measures are taken to provide safety and well-being for those people if and when unfortunate events strike e.g. encouraging people to not save their money is a little bit more palatable in a country where socialized health care, public transportation, free public education, etc..
In other words, perhaps people wouldn't need to save so much money if more of their basic needs were covered. In my country (USA), not having savings is like playing a game of Russian roulette with one's financial well-being, assuming one is fortunate enough to have enough income to even have savings.
> These policies are meant to encourage people with cash to do things with that cash, instead of hoarding it.
Which cause the rich to get richer, and the poor get poorer.
I have no problem with policies meant to encourage people to do things with their cash, but only if proper social measures are taken to provide safety and well-being for those people if and when unfortunate events strike e.g. encouraging people to not save their money is a little bit more palatable in a country where socialized health care, public transportation, free public education, etc..
In other words, perhaps people wouldn't need to save so much money if more of their basic needs were covered. In my country (USA), not having savings is like playing a game of Russian roulette with one's financial well-being, assuming one is fortunate enough to have enough income to even have savings.
> These policies are meant to encourage people with cash to do things with that cash, instead of hoarding it.
Which cause the rich to get richer, and the poor get poorer.
"assuming one is fortunate enough to have enough income to even have savings"
This cannot be overstated enough. In the USA a myth has developed about "personal responsibility" in which people have a choice, they can save for retirement or they can spend their money on other things; we tend to forget that for roughly half the country there is no such choice because just paying for basic living expenses (food, shelter, clothing, and transportation to a job) will leave nothing to save. People bought the myth and allowed defined-benefit pension plans to be replaced by IRAs and 401k plans.
"Which cause the rich to get richer, and the poor get poorer."
The rich should get richer if they are compounding their investment returns over time. The problem is that for more than 40 years America has been in the grip of politicians who have attacked government programs of all kinds, insisting that we cannot afford to pay for anything that benefits the poor while also insisting that we have to cut taxes on the rich (naturally, the tax cuts also benefit those very politicians). The fact that the poor cannot invest (for lack of capital) is not the reason they are getting poorer; they are getting poorer because for decades we have reduced the scale and scope of government programs that benefit the poor (or that benefit everyone equally).
This cannot be overstated enough. In the USA a myth has developed about "personal responsibility" in which people have a choice, they can save for retirement or they can spend their money on other things; we tend to forget that for roughly half the country there is no such choice because just paying for basic living expenses (food, shelter, clothing, and transportation to a job) will leave nothing to save. People bought the myth and allowed defined-benefit pension plans to be replaced by IRAs and 401k plans.
"Which cause the rich to get richer, and the poor get poorer."
The rich should get richer if they are compounding their investment returns over time. The problem is that for more than 40 years America has been in the grip of politicians who have attacked government programs of all kinds, insisting that we cannot afford to pay for anything that benefits the poor while also insisting that we have to cut taxes on the rich (naturally, the tax cuts also benefit those very politicians). The fact that the poor cannot invest (for lack of capital) is not the reason they are getting poorer; they are getting poorer because for decades we have reduced the scale and scope of government programs that benefit the poor (or that benefit everyone equally).
Inflation is a tax on cash. It's how the government can spend money without increasing explicit taxes. I don't hold any cash because of this.
However, asset inflation is not quite the solution it seems, as the government taxes the illusory capital "gains" due to inflation. I suspect the stock market surge over the last year is mostly fake inflation gains.
However, asset inflation is not quite the solution it seems, as the government taxes the illusory capital "gains" due to inflation. I suspect the stock market surge over the last year is mostly fake inflation gains.
> I suspect the stock market surge over the last year is mostly fake inflation gains.
It's not really possible to make 100% gains out of 5% inflation. Not every price increase is inflation!
The increase in the price of stocks isn't really inflation (except with respect to CPI) because 1 share of AAPL buys you far more CPI goods than 1 share of AAPL bought you 2 years ago. For it to be "inflation" and "entirely illusory" 1 AAPL share, while priced at $150 would have to only buy you as much a 1 AAPL share 2 years ago at $50.
That makes the increase in asset prices "ROI" not inflation.
What you're seeing is a massive increase in personal savings among Americans, recently at near all-time highs. [1] Combined with FINRA margin debt at near all-time highs due to the low-cost and broader availability of loans. [2] That's my theory anyways.
[1] https://fred.stlouisfed.org/series/PSAVERT
[2] https://www.advisorperspectives.com/dshort/updates/2021/08/1...
It's not really possible to make 100% gains out of 5% inflation. Not every price increase is inflation!
The increase in the price of stocks isn't really inflation (except with respect to CPI) because 1 share of AAPL buys you far more CPI goods than 1 share of AAPL bought you 2 years ago. For it to be "inflation" and "entirely illusory" 1 AAPL share, while priced at $150 would have to only buy you as much a 1 AAPL share 2 years ago at $50.
That makes the increase in asset prices "ROI" not inflation.
What you're seeing is a massive increase in personal savings among Americans, recently at near all-time highs. [1] Combined with FINRA margin debt at near all-time highs due to the low-cost and broader availability of loans. [2] That's my theory anyways.
[1] https://fred.stlouisfed.org/series/PSAVERT
[2] https://www.advisorperspectives.com/dshort/updates/2021/08/1...
Do you really believe that inflation is only 5%? I don't. I see big price increases across the board.
BTW, what the shares of one company does means nothing in this discussion. What the S&P 500 does means something.
BTW, what the shares of one company does means nothing in this discussion. What the S&P 500 does means something.
(1) well I don’t know what to tell you haha, inflation calculations are public. You can’t just say without citation that ehhh I feel like it’s not though shrug - this is actually something you can calculate! Please, do it, or cite some sources - ideally credible ones! You can’t just make giant claims like that without evidence. Of course certain contributors will be higher than the average weighting - like housing - but that’s how averages work.
(2) ok the same exact thing applies to SPY shares and doubly so when you include dividends. I mean AAPL is 7% of the S&P500 and 12% of the NASDAQ and so is fairly representative but your point is well taken.
(2) ok the same exact thing applies to SPY shares and doubly so when you include dividends. I mean AAPL is 7% of the S&P500 and 12% of the NASDAQ and so is fairly representative but your point is well taken.
Inflation is a tax on money earned in the past. Money earned in 2011 isn't as good 2021. You can't sit on it. If you actually spend it within a year the impact is barely noticeable.
There are two reasons why stock prices go up. Inflation raises revenue expectations. Lower interest rates raise the value of future cash flows. This is especially bad with land because it can absorb any additional money you get from lower interest rates. Low interest rates make your car cheap but not your house... It's a big problem.
There are two reasons why stock prices go up. Inflation raises revenue expectations. Lower interest rates raise the value of future cash flows. This is especially bad with land because it can absorb any additional money you get from lower interest rates. Low interest rates make your car cheap but not your house... It's a big problem.
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This is being practiced successfully throughout the world since the Great Depression times. Would love to hear when do you expect this system to collapse?
Maybe around the time all restraint has been abandoned - assets held by the Fed have expanded by 8x in the last 10 years (the story is the same for most large central banks).
https://fred.stlouisfed.org/series/WALCL
We already see the impact in massive asset price inflation over the last decade, a distorted bond market, growing inequality, an inefficient stock market, and a proliferation of scams and fraud. This is not going to end well and MMT is not a panacea.
How do we now leave ZIRP and QE without crashing markets and entering another depression? They have already tried several times to exit and had to abandon it.
https://fred.stlouisfed.org/series/WALCL
We already see the impact in massive asset price inflation over the last decade, a distorted bond market, growing inequality, an inefficient stock market, and a proliferation of scams and fraud. This is not going to end well and MMT is not a panacea.
How do we now leave ZIRP and QE without crashing markets and entering another depression? They have already tried several times to exit and had to abandon it.
Why doesn't the US/EU/UK/Japan all have run away inflation?
And, what is your alternative plan to quantitative easing (QE)?
And, what is your alternative plan to quantitative easing (QE)?
We could return to the times when governments didn’t buy their own debt using an intentionally convoluted and obscure process involving third parties in order to prop up asset values and suppress risk free yields.
See the linked graph above for evidence of just how abnormal the last decade has been.
QE is a failure on its own terms. It was to be targeted and of short duration and to promote growth and suppress inflation. None of those objectives were achieved and we’re now addicted to it in ever increasing amounts, along with zirp. What do we do when the next crisis hits if we don’t normalise rates and bond buying again? How will the bond market function when the gov owns more than half its own debt? How will stock markets function when governments step in to buy even corporate bonds indiscriminately with new money?
See the linked graph above for evidence of just how abnormal the last decade has been.
QE is a failure on its own terms. It was to be targeted and of short duration and to promote growth and suppress inflation. None of those objectives were achieved and we’re now addicted to it in ever increasing amounts, along with zirp. What do we do when the next crisis hits if we don’t normalise rates and bond buying again? How will the bond market function when the gov owns more than half its own debt? How will stock markets function when governments step in to buy even corporate bonds indiscriminately with new money?
The US does have runaway inflation of financial assets, due to the policies of the Fed. Housing and stock prices have been growing at a ridiculous rate for years. The country hasn't tripled its entire productivity in the past decade, but the stock market has been acting like it.
You raise an interesting point about Fed policies (QE) and housing prices. The UK/EU/Japan all use extensive QE. The wealthiest (per capita) economies of EU (France, Germany, Italy, Belgium, Netherlands, Nordics) are not experiencing huge increases in housing prices. Actually, France, Germany and Italy are not very good places to buy houses from an investment viewpoint. Except for center of most economically important cities, most housing in those countries grows at inflation or less. And Japan certainly does not have run away housing prices. Again, they increase only slightly more than inflation.
My point: I think housing prices in Australia, New Zealand, Canada, US, and UK are "out of control" because we read a lot of English-language media about the richest places in those countries where housing supply is highly constrained. As a result, it seems like housing prices are run-away. But no one is saying that about Perth, Australia, or Leeds, UK, or Minneapolis, Minnesota, US, or Ontario, Canada. Do you see my point?
Another thing to consider, most regions of France and Germany carefully plan how much housing supply is needed, then build it -- public or private. This seems to work very well to keep housing prices very stable and affordable for middle class and below.
And Japan has national and universally applied land usage and building codes. It is almost impossible to practice "NIMBY-ism" in Japan. So plenty of houses get built, even in very crowded places like Tokyo, Nagoya, and Osaka.
My point: I think housing prices in Australia, New Zealand, Canada, US, and UK are "out of control" because we read a lot of English-language media about the richest places in those countries where housing supply is highly constrained. As a result, it seems like housing prices are run-away. But no one is saying that about Perth, Australia, or Leeds, UK, or Minneapolis, Minnesota, US, or Ontario, Canada. Do you see my point?
Another thing to consider, most regions of France and Germany carefully plan how much housing supply is needed, then build it -- public or private. This seems to work very well to keep housing prices very stable and affordable for middle class and below.
And Japan has national and universally applied land usage and building codes. It is almost impossible to practice "NIMBY-ism" in Japan. So plenty of houses get built, even in very crowded places like Tokyo, Nagoya, and Osaka.
That's an interesting perspective with some ideas I wasn't aware of. Thanks for the thoughtful response.
default on the currency and never borrow again. Start following a policy of: Pay for everything this year using last year's tax receipts.
That would neither be necessary nor particularly helpful.
I think you're really talking about a soft default here with 'default on the currency' (normally you default on debts, not currency), which is in fact the current policy of risking inflation to get rid of debts, but then you're following that up by suggesting austerity, which was also tried as a response to 2008 (the UK is a prominent example), and failed miserably as well.
There's nothing wrong with borrowing for counter-cyclical spending, or with borrowing in general IMO. There are other answers than borrowing to pay for everything or never borrowing and during a recession a little government support (monetary and fiscal stimulus) can go a long way.
What is wrong and dangerous IMO is to pretend that we don't need taxes any more and that countries can simply print their way out of any problem (as has become orthodoxy with MMT). This used to be called debt monetisation, and was frown upon as debasing the currency in this way usually eventually ends in financial crisis and/or hyperinflation. We'll see where it leads as this is the policy we've been pursuing since 2008 and supercharged in 2020 as you can see in the graph above.
https://en.wikipedia.org/wiki/Debt_monetization
I think you're really talking about a soft default here with 'default on the currency' (normally you default on debts, not currency), which is in fact the current policy of risking inflation to get rid of debts, but then you're following that up by suggesting austerity, which was also tried as a response to 2008 (the UK is a prominent example), and failed miserably as well.
There's nothing wrong with borrowing for counter-cyclical spending, or with borrowing in general IMO. There are other answers than borrowing to pay for everything or never borrowing and during a recession a little government support (monetary and fiscal stimulus) can go a long way.
What is wrong and dangerous IMO is to pretend that we don't need taxes any more and that countries can simply print their way out of any problem (as has become orthodoxy with MMT). This used to be called debt monetisation, and was frown upon as debasing the currency in this way usually eventually ends in financial crisis and/or hyperinflation. We'll see where it leads as this is the policy we've been pursuing since 2008 and supercharged in 2020 as you can see in the graph above.
https://en.wikipedia.org/wiki/Debt_monetization
> There's nothing wrong with borrowing for counter-cyclical spending, or with borrowing in general IMO
1. You're stealing from the poor (via currency devaluation) to give to the rich (via government grants, if you are struggling in the tenderloin you are not getting a SBA)
2. Contemporary ethical government is predicated on the principle that the actions of the government have the consent of the governed. Sure, you can't always have that, but you want to try not minimize not getting the consent of the governed. If government borrows money, then people who could not have voted against the borrowing of that money are enjoined to pay it back (for example, people who became of the voting age after the act of borrowing). If you go to a pay-go system, the voters have approved of the taxation and the voters have approved of the use, and the chain of consent is not broken.
1. You're stealing from the poor (via currency devaluation) to give to the rich (via government grants, if you are struggling in the tenderloin you are not getting a SBA)
2. Contemporary ethical government is predicated on the principle that the actions of the government have the consent of the governed. Sure, you can't always have that, but you want to try not minimize not getting the consent of the governed. If government borrows money, then people who could not have voted against the borrowing of that money are enjoined to pay it back (for example, people who became of the voting age after the act of borrowing). If you go to a pay-go system, the voters have approved of the taxation and the voters have approved of the use, and the chain of consent is not broken.
"default on the currency and never borrow again"
I am struggling to believe this is a serious suggestion.
Can you please (oh please HN don't down vote me!) provide more details?
Almost all highly industrialised, wealthy nations are heavily dependent upon trade. If you default on your national debts to foreigners, they are very unlikely to want to trade with you in the (near) future. How to do you propose to overcome this issue? See Argentina!
I am struggling to believe this is a serious suggestion.
Can you please (oh please HN don't down vote me!) provide more details?
Almost all highly industrialised, wealthy nations are heavily dependent upon trade. If you default on your national debts to foreigners, they are very unlikely to want to trade with you in the (near) future. How to do you propose to overcome this issue? See Argentina!
oh there is no doubt that everyone will be pissed off at the US for defaulting on the dollar since debts are denominated in it. But honestly, TINA. Due to demographics (we had milennials) the US is one of a few robust, rich, markets where you can sell your sh*t, so people will still want to trade with americans, regardless of what the government does. Finally, the US is not as dependent on foreign trade as you think. It has the lowest GDP:trade ratio of any country in G20 (worldwide it is in the very bottom: less than cuba and more than pakistan, and only above nigeria, afghanistan, ethiopia, and sudan). The US is even a net food and energy exporter, so it could probably survive a lowered trade volume. Everyone else would "be rekt", though. It would really suck for ecuador.
> See Argentina!
Perfect example. The country defaulted and it's honestly not a terrible place to be, considering what it's been through. Not everything is an exact parallel, but compare it to Brazil, where the country inflated instead of defaulted.
> See Argentina!
Perfect example. The country defaulted and it's honestly not a terrible place to be, considering what it's been through. Not everything is an exact parallel, but compare it to Brazil, where the country inflated instead of defaulted.
The problem with austerity is that it is incompatible with everything else. You have to sacrifice something to obtain it. Either reducing global trade or increasing regulation (primarily more taxes on bad behavior) to keep companies in check.
Usually austerity is coupled with drastic reductions in expenditures, both for infrastructure and things like social welfare. This kind of stuff regularly drives ruling parties out of power and leads to protest and revolt.
Not a good choice if you can avoid it!
Not a good choice if you can avoid it!
The problem with austerity is that most countries implemented it were forced into doing it and, due to the particulars of that political relationship, chosen to cut social services instead of cutting cronyism, which is also politically calculated to cause as much pain as possible for the poor and create an unpopular sentiment against austerity and coerce the entity imposing the austerity into ending it.
This is the equivalent of saying: This is being practiced successfully throughout the world for the last 80 years
Does that give you confidence? 80 years doesn't seem long to me.
Does that give you confidence? 80 years doesn't seem long to me.
80 years is longer than the average life span of most highly developed economies. In short: It is a lifetime. It seems long to me.
And 80 years is roughly 50% of all years of industrialised economies that started around 1850. Recall that the world economy had zero growth per capita until the industrial revolution started around 1850.
And 80 years is roughly 50% of all years of industrialised economies that started around 1850. Recall that the world economy had zero growth per capita until the industrial revolution started around 1850.
80 years is longer than most constitutions. The current French Republic was created in 1958, 63 years ago. In fact 80 years covers three French constitutions. China’s constitution is from 1982, and Finland redid theirs in 2000.
Of the countries part of the UN, only 14 countries have a constitutions older than 80 years. The oldest is the US in 1788, and the youngest is Ireland in 1937.
Of the countries part of the UN, only 14 countries have a constitutions older than 80 years. The oldest is the US in 1788, and the youngest is Ireland in 1937.
80 years is short enough that we can’t be confident that it’s some rule of human societies, but it’s also much longer than any other recorded bubble has ever lasted. At 80 years the burden of proof is beginning to shift from those who think the system will work tomorrow the same as it worked today, and onto those that are predicting doom and sudden change.
I’d also like to point out that prior to the current system, market panics occurred significantly more often than once in 80 years. So if we’re comparing the system we have today and the system that existed 80 years before it, the current system seems measurably more stable.
I’d also like to point out that prior to the current system, market panics occurred significantly more often than once in 80 years. So if we’re comparing the system we have today and the system that existed 80 years before it, the current system seems measurably more stable.
what is your definition of "success"? Is the divergence between productivity and wage growth success? Also, over and over countries have tried to stimulate their economy with the printing press and had some rather... unsucessful experiences, with extreme examples being yugoslavia, zimbabwe, venezuela. And some more mild but still painful experiences including brazil and argentina.
Predicting timeframes is tricky. An inflationary spiral by its very nature is an exponential process, so you can seem fine for a while and then all of a sudden there's no way out except through a singular process and things are really bad.
Predicting timeframes is tricky. An inflationary spiral by its very nature is an exponential process, so you can seem fine for a while and then all of a sudden there's no way out except through a singular process and things are really bad.
Just because you can't be sure when a ponzi scheme will collapse doesn't mean its not a ponzi scheme.
How far negative can you go before it becomes ridiculous? If your bank has -50% interest, is that not effectively the same as hyperinflation?
But we don't need money, the government can tell us exactly what to do and where to go work, so that way we can run the economy at 100% efficiency. /s
Considering that central banks for highly industrialised, wealthy nations normally move in 25bp increments, moving from -50bp to -50,000bp seems... well, a lot of central bank meetings. Are you proposing run away deflation? We have never seen it since the industrial revoluation stated. If the risk is real, why aren't we seeing more academic papers about this subject?
It can continue until people start withdrawing physical cash in large amounts, which will happen when the negative rate starts outweighing the cost and risk of storing cash.
After that, further decreases of the interest rate can only work if cash withdrawals are restricted to prevent bank runs, or alternatively if the value of physical cash and digital deposits are decoupled. The IMF has posted something about the latter option[1].
[1] https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-nega...
After that, further decreases of the interest rate can only work if cash withdrawals are restricted to prevent bank runs, or alternatively if the value of physical cash and digital deposits are decoupled. The IMF has posted something about the latter option[1].
[1] https://blogs.imf.org/2019/02/05/cashing-in-how-to-make-nega...
If interest is -50% those bonds must truly be worthless. Seriously, if you can't find solvent borrowers at -49% something is really wrong with your economy.
With interest rates trending ever lower since then. The only reason to hold government debt right now is to park large amounts of cash that can't otherwise be parked. Bonds are a terrible investment now.
What happens when the only way the state can sell debt is to print the money and buy it itself? What happens in the next crises when we need to stimulate the economy and rates are still negative?
At some point you can't keep kicking the can down the road. When do we reach that point? Are we there now?
I'm not a doom and gloom kind of fellow, but this does not appear to be sustainable to me. As with climate change, destruction of ecosystems, and draining groundwater reserves, all unsustainable practices come to an end. Abruptly if not planned for. It looks like we're nearing that point with monetary policy.
What happens when the only way the state can sell debt is to print the money and buy it itself? What happens in the next crises when we need to stimulate the economy and rates are still negative?
At some point you can't keep kicking the can down the road. When do we reach that point? Are we there now?
I'm not a doom and gloom kind of fellow, but this does not appear to be sustainable to me. As with climate change, destruction of ecosystems, and draining groundwater reserves, all unsustainable practices come to an end. Abruptly if not planned for. It looks like we're nearing that point with monetary policy.
>With interest rates trending ever lower since then.
Clearly not, the peak was in 1981 which is more than 50 years after the Great Depression: https://advisor.visualcapitalist.com/us-interest-rates/
Clearly not, the peak was in 1981 which is more than 50 years after the Great Depression: https://advisor.visualcapitalist.com/us-interest-rates/
That's missing the forest for the trees. No, it's not a continuous straight line down. But the trendline is, which is what I talked about.
>>>With interest rates trending ever lower since then.
We are at crazy lows compared to most of this time frame.
We are at crazy lows compared to most of this time frame.
I don't know about other countries, but this country is absolutely full of such loopholes and my parent is a master at exploiting them.
My entire family s moving assets around in creative ways as to save money. In anticipation of my the death of my grandparent, he is now loaning money to his children in the legal sense to avoid inheritance tax so that when he dies they don't have to pay it. — All of this is legal, and it is silly.
My entire family s moving assets around in creative ways as to save money. In anticipation of my the death of my grandparent, he is now loaning money to his children in the legal sense to avoid inheritance tax so that when he dies they don't have to pay it. — All of this is legal, and it is silly.
My father always said that taxes are a problem of the rich. Middle class and below rarely complain about them. If your family is moving around money like that to avoid taxes, then you are a lucky and/or wealthy person!
Silly? Yes, I agree. I favour about 50% inheritance tax with almost zero minimum. Inheritance is fuel for the fire of income inequality. Families create dynasties by avoiding inheritance tax. Most highly industrialised, wealthy countries would have much less income inequality with vastly higher inheritance taxes.
Silly? Yes, I agree. I favour about 50% inheritance tax with almost zero minimum. Inheritance is fuel for the fire of income inequality. Families create dynasties by avoiding inheritance tax. Most highly industrialised, wealthy countries would have much less income inequality with vastly higher inheritance taxes.
> Most highly industrialised, wealthy countries would have much less income inequality with vastly higher inheritance taxes.
It's true that extremely tax-heavy countries generally have poorer populations with a more even wealth distribution, but that's more or less the result of "nobody will get rich if you take everyone's money".
The vast majority of millionaires in the US are self made, so inheritance taxes couldn't possibly change that?
It's true that extremely tax-heavy countries generally have poorer populations with a more even wealth distribution, but that's more or less the result of "nobody will get rich if you take everyone's money".
The vast majority of millionaires in the US are self made, so inheritance taxes couldn't possibly change that?
> Most highly industrialised, wealthy countries would have much less income inequality with vastly higher inheritance taxes.
Its trivial for someone with lots of money to find ways to avoid dying with money but still ensure the next generation has a good life. As grandparent comment suggests. I don't think any tax or any plan that is not destructively over-burdensome can avoid people ensuring their next of kin have a good life.
Its trivial for someone with lots of money to find ways to avoid dying with money but still ensure the next generation has a good life. As grandparent comment suggests. I don't think any tax or any plan that is not destructively over-burdensome can avoid people ensuring their next of kin have a good life.
> My father always said that taxes are a problem of the rich. Middle class and below rarely complain about them. If your family is moving around money like that to avoid taxes, then you are a lucky and/or wealthy person!
Your father is simply wrong. It can, and is done in my family to avoid losing out on university, rent, and health insurance subsidies that only apply to the poorest segment of society.
By moving our assets around, the poorest members of the family can continue to receive them all the while effectively being slightly over this treshold.
There is much to gain from creative accounting for the poor in countries that provide assistance to the poor by making one appear poorer than one is.
> Silly? Yes, I agree. I favour about 50% inheritance tax with almost zero minimum. Inheritance is fuel for the fire of income inequality. Families create dynasties by avoiding inheritance tax. Most highly industrialised, wealthy countries would have much less income inequality with vastly higher inheritance taxes.
The problem is that it is very easy to avoid it in a number of ways such as simply creating a shell company jointly with one's heirs and then donating the assets to the company; the heir then becomes the sole owner of the company after death, as if such taxes were to apply to stakes in a company, then companies would go defunct upon the deaths of some of their owners.
Tax laws in many ways rely on citizens not being clever enough to exploit the numerous loopholes, — but then again “idiot tax” is not something I'm entirely opposed to.
Your father is simply wrong. It can, and is done in my family to avoid losing out on university, rent, and health insurance subsidies that only apply to the poorest segment of society.
By moving our assets around, the poorest members of the family can continue to receive them all the while effectively being slightly over this treshold.
There is much to gain from creative accounting for the poor in countries that provide assistance to the poor by making one appear poorer than one is.
> Silly? Yes, I agree. I favour about 50% inheritance tax with almost zero minimum. Inheritance is fuel for the fire of income inequality. Families create dynasties by avoiding inheritance tax. Most highly industrialised, wealthy countries would have much less income inequality with vastly higher inheritance taxes.
The problem is that it is very easy to avoid it in a number of ways such as simply creating a shell company jointly with one's heirs and then donating the assets to the company; the heir then becomes the sole owner of the company after death, as if such taxes were to apply to stakes in a company, then companies would go defunct upon the deaths of some of their owners.
Tax laws in many ways rely on citizens not being clever enough to exploit the numerous loopholes, — but then again “idiot tax” is not something I'm entirely opposed to.
I think "taxes are a problem of the rich" is a thing that rich people say. I've been poor, and taxes really fucking suck when you're poor. It's even worse when you're poor and in a service industry where taxes are really stacked against you (taxes on tips). Finally, since this is, after all a thread about inflation: Bracket creep is a thing.
I'm surprised that forgiven debt isn't considered income. It would be in the US, but then in the US the debt would still be owned by the estate and is still collectable.
Ever wondered why government debts are a problem to begin with? Lots of people with money aren't paying taxes. There is always enough money in an economy to repay all debts, the problem is getting that money to move back to the government. If interest is positive it must loop around multiple times.
When 99% of people realise that they've essentially been scammed by the reserve banks, the backlash is going to be massive. There will be discussions about asset seizures and wealth redistribution. That's just a matter of time now. The cryptocurrency crowd knows this and wants this. They're helping to accelerate this. Guess what asset is hard to seize?
The masterplan is this: Let the banks mess things up, ruin people's trust in their governments and in capitalism, you move to a country that's unlikely to fall to communism, HODL your crypto, then wait it out then watch your crypto price moon as capitalists desperately try to flee into crypto to protect their wealth while their home countries fall to communism.
The masterplan is this: Let the banks mess things up, ruin people's trust in their governments and in capitalism, you move to a country that's unlikely to fall to communism, HODL your crypto, then wait it out then watch your crypto price moon as capitalists desperately try to flee into crypto to protect their wealth while their home countries fall to communism.
> There will be discussions about asset seizures and wealth redistribution.
There already is. Asset seizures and wealth redistribution are central planks for Sanders & Warren.
There already is. Asset seizures and wealth redistribution are central planks for Sanders & Warren.
This question never goes well but I'll try it again. How would asset seizure happen? If the government says this is now mine, wouldn't most people say no? Maybe in a disarmed population this could happen but I don't think its feasible in America where citizens are heavily armed and raised in a culture that glorifies rebellion
The government could easily seize all company stocks without any force. For private property, they could make people forfeit their assets - Create a situation such that if you don't forfeit your assets to the state then you will be a social pariah and won't be allowed to participate in the economy. You won't be able to buy food even.
But the thing is that if the monetary system continues down the current path, eventually, the most ardent capitalists will grow to resent capitalism and might turn to communism. Already a lot of young people want communism even those who believe that it's not going to work out; they like the reset aspect of it.
Same reason why people turn to dictators. When the situation gets desperate enough, people will willingly accept an obviously terrible option; just to reset the board. There is a point when people just want to see heads on spikes and are willing to do it at a cost to themselves.
But the thing is that if the monetary system continues down the current path, eventually, the most ardent capitalists will grow to resent capitalism and might turn to communism. Already a lot of young people want communism even those who believe that it's not going to work out; they like the reset aspect of it.
Same reason why people turn to dictators. When the situation gets desperate enough, people will willingly accept an obviously terrible option; just to reset the board. There is a point when people just want to see heads on spikes and are willing to do it at a cost to themselves.
I don't understand what you are trying to say. Negative interest rates combined with low inflation are literally the holy grail of capitalism. All investments that can be done at 0% interest have been done.
Honestly, I'm tired of "boomer capitalism" i.e. capitalism that thinks exponential growth that followed a devastating war should be permanent for all eternity. Essentially demanding that we have periodic wars according to the broken window fallacy.
Where is the "maximalist" capitalism that lets humanity reach its full potential instead of insisting on profit expectations that are divorced from reality?
I don't know what you mean by protecting "their wealth" because money is a promise to work. You cannot protect such a thing by using it to purchase a commodity because there is no promise that the commodity will be worth anything. Sure, the speculation is sort of reliable but it is still speculation.
Honestly, I'm tired of "boomer capitalism" i.e. capitalism that thinks exponential growth that followed a devastating war should be permanent for all eternity. Essentially demanding that we have periodic wars according to the broken window fallacy.
Where is the "maximalist" capitalism that lets humanity reach its full potential instead of insisting on profit expectations that are divorced from reality?
I don't know what you mean by protecting "their wealth" because money is a promise to work. You cannot protect such a thing by using it to purchase a commodity because there is no promise that the commodity will be worth anything. Sure, the speculation is sort of reliable but it is still speculation.
An article from 2014:
http://rootbug.com/interstellar-oikeassa-aikaan-liittyvat-ol...
>That people’s “time preference”, impatience, cannot be negative in the long run — and hence the possibility of negative real interest rates is not needed.
How does time preference become negative? Aging populations consist of people who need to work now, because they cannot work later. Alternatively, rich people at the top consider money a measure of wealth and optimize it like a high score. Third cause. Banks have written an excessive amount of money losing bonds and the money they have issued does not actually reflect the losses in the bond market (2008). In other words, people use money to isolate themselves from losses in the real economy because it is insured by the government.
I will say this: Over the long term interest rates are not set by banks, not even the central bank. It is primarily the availability of solvent borrowers. Companies essentially offer an investment opportunity to the bank and promise a fixed rate of return. The banks purpose is to price risk, effectively it is determining whether that promise is the real deal. The fact that low interest rates have not lead to inflation simply means that there are no solvent borrowers at that level of interest.
Here is a perverse fact about deflation: Once you have deflation, money itself provides a risk free rate of return that competes with labor (the thing that backs debt based money) for capital. When there is deflation there is no market mechanism that can determine an interest rate that balances credit (savings) and debt (borrowing). According to the Friedman Rule [0] the best interest rate is 0% and it is assuming no inflation or deflation. When you have deflation interest rates must become negative.
[0] https://en.wikipedia.org/wiki/Friedman_rule
http://rootbug.com/interstellar-oikeassa-aikaan-liittyvat-ol...
>That people’s “time preference”, impatience, cannot be negative in the long run — and hence the possibility of negative real interest rates is not needed.
How does time preference become negative? Aging populations consist of people who need to work now, because they cannot work later. Alternatively, rich people at the top consider money a measure of wealth and optimize it like a high score. Third cause. Banks have written an excessive amount of money losing bonds and the money they have issued does not actually reflect the losses in the bond market (2008). In other words, people use money to isolate themselves from losses in the real economy because it is insured by the government.
I will say this: Over the long term interest rates are not set by banks, not even the central bank. It is primarily the availability of solvent borrowers. Companies essentially offer an investment opportunity to the bank and promise a fixed rate of return. The banks purpose is to price risk, effectively it is determining whether that promise is the real deal. The fact that low interest rates have not lead to inflation simply means that there are no solvent borrowers at that level of interest.
Here is a perverse fact about deflation: Once you have deflation, money itself provides a risk free rate of return that competes with labor (the thing that backs debt based money) for capital. When there is deflation there is no market mechanism that can determine an interest rate that balances credit (savings) and debt (borrowing). According to the Friedman Rule [0] the best interest rate is 0% and it is assuming no inflation or deflation. When you have deflation interest rates must become negative.
[0] https://en.wikipedia.org/wiki/Friedman_rule
> The fact that low interest rates have not lead to inflation simply means that there are no solvent borrowers at that level of interest.
That's where you lose me. Prices are going up for many things all over the world (including in the Tech world which used to be highly deflationary). Let's not forget that we are in a pandemic (loss of demand) and that oil prices are relatively low. Prices should have gone down. The only thing going down right now is the government CPI.
That's where you lose me. Prices are going up for many things all over the world (including in the Tech world which used to be highly deflationary). Let's not forget that we are in a pandemic (loss of demand) and that oil prices are relatively low. Prices should have gone down. The only thing going down right now is the government CPI.
When you have deflation, capital in general, not just money, competes with labor.
Buffet became very rich because of this fact. In the current environment, revenue, profit, growth are what drives valuations. Cigarette butt value investing? Not so much.
But what if you have deflation and/or high taxes? A building, land, machinery, yourself, etc are what you should invest in because they can be used to make money. Those who get rich in these environments are the ones that are making a bet on depreciation of capital (property, goods, etc) being less because of an increase in value or their useful life in an environment that rewards those who put their money to work.
Buffet became very rich because of this fact. In the current environment, revenue, profit, growth are what drives valuations. Cigarette butt value investing? Not so much.
But what if you have deflation and/or high taxes? A building, land, machinery, yourself, etc are what you should invest in because they can be used to make money. Those who get rich in these environments are the ones that are making a bet on depreciation of capital (property, goods, etc) being less because of an increase in value or their useful life in an environment that rewards those who put their money to work.
And this is news why exactly ?
Negative rates have been around since 2014. And this "trick" of opening multiple bank accounts has been exploited across the EU for pretty much the same period of time.
For example, I've frequently done business with German companies. They don't even hide it. It is not in the slightest bit uncommon to receive an invoice with four or five EUR bank accounts printed on it. You can randomly pick your "preferred" account to pay to and the company's accountant will rebalance the accounts at the end of the quarter (or wahtever).
Negative rates have been around since 2014. And this "trick" of opening multiple bank accounts has been exploited across the EU for pretty much the same period of time.
For example, I've frequently done business with German companies. They don't even hide it. It is not in the slightest bit uncommon to receive an invoice with four or five EUR bank accounts printed on it. You can randomly pick your "preferred" account to pay to and the company's accountant will rebalance the accounts at the end of the quarter (or wahtever).
Multiple accounts on German invoices do not necessarily result from "tricks" to avoid negative interest.
Sometimes they result from a time where it took several bank working days to process a money transfer between different banks. Having bank accounts at banks with large customer bases (e.g. Sparkasse, Postbank, ..) allowed for quicker money transfers from these customer to the company. A customer could choose any of these bank accounts to settle the invoice.
Of course, a company could and can also have bank accounts not disclosed on an invoice.
Edit: Also note, that negative interest especially for major "online" banks just became a thing in Europe recently. Therefore, I think it is not only Entrepreneurs who redistribute their assets to avoid negative interest eating up their savings in addition to inflation, but also normal people.
Sometimes they result from a time where it took several bank working days to process a money transfer between different banks. Having bank accounts at banks with large customer bases (e.g. Sparkasse, Postbank, ..) allowed for quicker money transfers from these customer to the company. A customer could choose any of these bank accounts to settle the invoice.
Of course, a company could and can also have bank accounts not disclosed on an invoice.
Edit: Also note, that negative interest especially for major "online" banks just became a thing in Europe recently. Therefore, I think it is not only Entrepreneurs who redistribute their assets to avoid negative interest eating up their savings in addition to inflation, but also normal people.
Bitcoin.de is not an exchange but it offers a service equivalent to an exchange if you sign up at the fidor bank. Since everyone using that feature of Bitcoin.de has a fidor bank the transfers are instant.
Having multiple bank accounts isn't usually a thing to avoid negative interests in Germany. It's that payments between banks took three days to settle (I think they're down to 1 day now), while payments between accounts at the same bank usually settled immediately.
It's much easier to have multiple accounts with the largest banks so most of your customers can use bank-internal transfers.
Also, it's usually a good idea to have a backup just in case something goes wrong with your primary bank account. Dealing with bureaucracy is bad enough, dealing with it while you're also unable to send or receive payments is way worse.
Also, it's usually a good idea to have a backup just in case something goes wrong with your primary bank account. Dealing with bureaucracy is bad enough, dealing with it while you're also unable to send or receive payments is way worse.
> It's that payments between banks took three days to settle (I think they're down to 1 day now)
Isn't Germany subject to SEPA time constraints like everyone else ?
Isn't Germany subject to SEPA time constraints like everyone else ?
SEPA is more relaxed than you might think. N26 has a nice explanation [1]:
> ...[A]ll standard SEPA transfers should arrive within a maximum of 2 working days. Keep in mind that if a transfer is made just before a weekend or holiday, the time frame will be extended to a maximum of 3 working days.
> You’ve probably heard that all SEPA transfers have to be completed within one “banking day,” so let’s clarify what that means—one banking day is equivalent to two working days due to the opening hours of the banks involved. Any weekday that is not a holiday is considered a working day.
[1] https://support.n26.com/en-eu/payments-transfers-and-withdra...
> ...[A]ll standard SEPA transfers should arrive within a maximum of 2 working days. Keep in mind that if a transfer is made just before a weekend or holiday, the time frame will be extended to a maximum of 3 working days.
> You’ve probably heard that all SEPA transfers have to be completed within one “banking day,” so let’s clarify what that means—one banking day is equivalent to two working days due to the opening hours of the banks involved. Any weekday that is not a holiday is considered a working day.
[1] https://support.n26.com/en-eu/payments-transfers-and-withdra...
If I'm reading this right, this is a theoretical maximum of five calendar days, if you send eg on a late night before a holiday weekend?
[deleted]
Jikes, I am kind of used to swift transfers taking 1 day these days, let alone sepa, that should be max minutes. And I have not seen them take more for quite a while. Did not know it was that different in DE.
AFAIK they have a limit of "at most one working day" since a few years ago. Which, in case of weekends, may still be several days. Because computers dont work on weekends!
It's not great in DE for bank transfers. Either the account does not support sending SEPA instant or it's quite a large charge. Often savings accounts don't seem to be acceptable as destination accounts for SEPA instant.
People do the same thing in the US to take advantage of FDIC insurance, which only goes up to $250,000. Not terribly novel.
I think as far as FDIC and the like go, that's probably the intention of the policy. Less money for them to cover if a bank goes bust and the country has diversified its savings.
I just have to link this video now that you are talking about FDIC... https://youtu.be/mhr4JGbozTA
Maybe at one point 250k was serious money, but now I would imagine the figure would need to be a lot higher.
It was increased from 100k to 250k not that long ago.
ETA: 2011
ETA: 2011
Also, FDIC was designed for everyday folks, not wealthy families or large investors. Exceedingly few people have that much cash on hand.
Wealthy people opening multiple accounts to stay under the FDIC limit is just an example of folks finding a loophole to receive a government benefit that was never really intended for them in the first place.
Wealthy people opening multiple accounts to stay under the FDIC limit is just an example of folks finding a loophole to receive a government benefit that was never really intended for them in the first place.
Most wealthy people don't put all of their wealth in a cash account that earns them no money. Sure, they might have some largish amounts in cash, but the majority of it will be invested making more money.
Even that cash could just be net borrowed cash.
For instance, I keep $XX,000 in my bank account but a negative $XXX,000 balance in my brokerage account.
And I'm not particularly wealthy.
This way I have an isolated cash cushion buffer separate from my investments, and I don't really care what, if anything, that money makes. It's actually invested in my brokerage account, at a [edit](1.25%) margin APR, that's tax deductible - and offsets my capital gains.
[edit] correction: I double-checked, I guess I'm paying closer to 1.25%. Looks like margin rates are both up at IBKR, and my recollection was off. Thanks for the spot-check throwaway2037. It's hard to find the historical rates, too.
For instance, I keep $XX,000 in my bank account but a negative $XXX,000 balance in my brokerage account.
And I'm not particularly wealthy.
This way I have an isolated cash cushion buffer separate from my investments, and I don't really care what, if anything, that money makes. It's actually invested in my brokerage account, at a [edit](1.25%) margin APR, that's tax deductible - and offsets my capital gains.
[edit] correction: I double-checked, I guess I'm paying closer to 1.25%. Looks like margin rates are both up at IBKR, and my recollection was off. Thanks for the spot-check throwaway2037. It's hard to find the historical rates, too.
AB: 75bps for equities lending (I assume). Woah! I assume you are not ultra high net worth (UHNW) @ >100M USD. Where can you borrow so cheap? Interactive Brokers? Please share!
Edited, thanks!
Still, 125bps is an amazingly low rate! Nice find.
Yeah that’s why I use them. A lot of the retail brokerages will offer more competitive rates if you push them on it but it’s really unlikely they’ll do better than IBKR so why bother with the negotiation?
They're also the ones who benefit most from low rates by forcing everyone else to put money into investment vehicles they control and giving themselves cheap loans for financial engineering.
If you are extremely wealthy it wouldn't be a surprise to need more than that limit in your bank accounts just to cover ongoing expenses. A couple large mansions, each with staff to pay... Of course you probably want those in separate accounts anyway just in case some staff defrauds you - they only get the one account.
If you're playing the wealthy game, you don't have anything. Your corporate shells own everything, and each shell would have its own accounting.
Even so, taking the original post in good faith one could assume this also applies to SIPC limits (currently $500k).
I think it's a bit far to say it was never intended for them. Likely the intent was just for people not to have to worry about the money they had in banks disappearing. Even more likely, if enough people had wanted the FDIC limit to be per depositor and not per bank it very easily could have been.
FDIC was a pretty silly idea anyway.
If you want to keep the banking system stable, it's good to keep some skin in the game for depositors.
There's always government bonds (and money market funds that invest in government bonds, and narrow banks that only invest in government bonds etc) for people who want as much of a guarantee as FDIC can give you.
If you want to keep the banking system stable, it's good to keep some skin in the game for depositors.
There's always government bonds (and money market funds that invest in government bonds, and narrow banks that only invest in government bonds etc) for people who want as much of a guarantee as FDIC can give you.
> FDIC was a pretty silly idea anyway.
In 1934 (the year after the FDIC was created) the FSLIC was created[1] (Federal Savings and Loan Insurance Corporation). It served the same purpose as the FDIC, but for financial institutions incorporated as Savings and Loans rather than Banks.
By 1980, the FSLIC insured approximately 4,000 savings and loan institutions with total assets of $604 billion.[2] They failed en-mass. By 1982 the net worth of the entire S&L industry was approximately 0.[2] Yet we did not have a major "run on the banks" like we had seen during the Great Depression.[3] Under federal control, the FSLIC closed or converted essentially all remaining S&Ls and that industry ceased to exist -- but WITHOUT individual citizens losing all their savings.
This was the very reason that the FDIC was created in the first place. A complete collapse has already happened once (albeit with the FSLIC, not the FDIC). FDIC regulation affects the kinds of risks that banks take even today. In fact, most every year, there are a few banks the FDIC is forced to take control of and liquidate (their ultimate power).[4]
The FDIC is VERY much a useful institution. We have chosen to expect major investors and regulators to assess the stability of banks, but to insulate individual consumers from doing so by removing their "skin in the game" and personally I believe that is the right decision as those individual investors don't have and could not obtain the information they would need to make wise choices.
[1] https://www.investopedia.com/terms/f/federal-savings-and-loa...
[2] https://www.fdic.gov/bank/historical/history/167_188.pdf
[3] https://www.history.com/topics/great-depression/bank-run
[4] https://www.fdic.gov/resources/resolutions/bank-failures/fai...
In 1934 (the year after the FDIC was created) the FSLIC was created[1] (Federal Savings and Loan Insurance Corporation). It served the same purpose as the FDIC, but for financial institutions incorporated as Savings and Loans rather than Banks.
By 1980, the FSLIC insured approximately 4,000 savings and loan institutions with total assets of $604 billion.[2] They failed en-mass. By 1982 the net worth of the entire S&L industry was approximately 0.[2] Yet we did not have a major "run on the banks" like we had seen during the Great Depression.[3] Under federal control, the FSLIC closed or converted essentially all remaining S&Ls and that industry ceased to exist -- but WITHOUT individual citizens losing all their savings.
This was the very reason that the FDIC was created in the first place. A complete collapse has already happened once (albeit with the FSLIC, not the FDIC). FDIC regulation affects the kinds of risks that banks take even today. In fact, most every year, there are a few banks the FDIC is forced to take control of and liquidate (their ultimate power).[4]
The FDIC is VERY much a useful institution. We have chosen to expect major investors and regulators to assess the stability of banks, but to insulate individual consumers from doing so by removing their "skin in the game" and personally I believe that is the right decision as those individual investors don't have and could not obtain the information they would need to make wise choices.
[1] https://www.investopedia.com/terms/f/federal-savings-and-loa...
[2] https://www.fdic.gov/bank/historical/history/167_188.pdf
[3] https://www.history.com/topics/great-depression/bank-run
[4] https://www.fdic.gov/resources/resolutions/bank-failures/fai...
The counterfactual here is that without the government back-stopped insurance, customers would have had an incentive to push back against the banking behaviours that led to these mass failures.
The Savings and Loan crisis also didn't happen in a vacuum. See https://www.econlib.org/library/Enc/SavingsandLoanCrisis.htm... for some background. A short excerpt from the start:
> Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis. Deposit insurance was actuarially unsound from its inception, primarily because all S&Ls were charged the same Insurance premium rate regardless of how safe or risky they were. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for decades. No sound insurance program would have done that. Congress tried to rectify this problem in 1991 when it directed the FDIC to begin charging risk-sensitive deposit-insurance premiums. However, because those who should pay the most would scream the loudest to Congress, the FDIC’s premium structure still does not charge the riskiest banks and S&Ls enough. Much of the time, the “drunk drivers” of the S&L and banking world pay no more for their deposit insurance than do their sober siblings. Those who do pay more still do not pay enough.
The article goes on to talk about regulation Q and other regulatory choices that contributed to the crises.
The Savings and Loan crisis also didn't happen in a vacuum. See https://www.econlib.org/library/Enc/SavingsandLoanCrisis.htm... for some background. A short excerpt from the start:
> Federal deposit insurance, which was extended to S&Ls in 1934, was the root cause of the S&L crisis. Deposit insurance was actuarially unsound from its inception, primarily because all S&Ls were charged the same Insurance premium rate regardless of how safe or risky they were. That is, deposit insurance provided by the federal government tolerated the unsound financial structure of S&Ls for decades. No sound insurance program would have done that. Congress tried to rectify this problem in 1991 when it directed the FDIC to begin charging risk-sensitive deposit-insurance premiums. However, because those who should pay the most would scream the loudest to Congress, the FDIC’s premium structure still does not charge the riskiest banks and S&Ls enough. Much of the time, the “drunk drivers” of the S&L and banking world pay no more for their deposit insurance than do their sober siblings. Those who do pay more still do not pay enough.
The article goes on to talk about regulation Q and other regulatory choices that contributed to the crises.
The point you raise here about how regulatory choices contributed to the crisis is spot on.
But when you say this:
> customers would have had an incentive to push back against the banking behaviours that led to these mass failures
I'm not persuaded. Do you think that customers would have gotten savings and loan corporate officers to provide them with detailed documentation of the S&L's risk portfolio and then would have analyzed this in detail and chosen where to save their money based on the results? Because I don't believe ANY customers could have done that. As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
But when you say this:
> customers would have had an incentive to push back against the banking behaviours that led to these mass failures
I'm not persuaded. Do you think that customers would have gotten savings and loan corporate officers to provide them with detailed documentation of the S&L's risk portfolio and then would have analyzed this in detail and chosen where to save their money based on the results? Because I don't believe ANY customers could have done that. As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
Customers wouldn't generally do this themselves. They would outsource the job. Ie look for what reviews suggest etc.
I can dig up how that worked in practice in the free banking eras in Scotland and Canada.
> As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
In general the regulatory regime for banking is a bit weird in this respect:
The government tends to give minimum quality standards for the balance sheets of eg banks, and then hands out an implicit (or explicit) guarantee that anything meeting these minimum standards is fine.
In the regime I am suggesting the government would at most force banks to truthfully disclose what's on their balance sheet, but would not put up any minimum requirements.
What happened in practice in Scotland and Canada is that banks would have very low reserves, for every 100 dollars in deposits and notes issued, they would keep around 2 dollars in gold around. (The equivalent today would be central bank reserves.) Basically, just enough to meet redemption demands in the short term.
But to make up for that, they would keep very thick loss-absorbing equity cushions. Typically about one third of their balance sheet were financed by shareholder equity, and the other two thirds with deposits and bonds etc.
Banks also put these equity cushions in their advertisements to prospective customers. So it seems they believed that customers cared about them.
In some instances, shareholders and directors were also personally liable for losses beyond their paid-in capital. (Ie no limited liability shield for them.)
Interesting enough, the latter is also how eg Goldman Sachs used to be run when it was still a partnership and not a public company.
If you want to know more, have a look at eg http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf
(https://www.iea.org.uk/sites/default/files/publications/file... is also quite interesting, but on a slightly different topic.)
I can dig up how that worked in practice in the free banking eras in Scotland and Canada.
> As you point out, regulators didn't even do that, and they are experts whose full-time job is to do this kind of analysis!
In general the regulatory regime for banking is a bit weird in this respect:
The government tends to give minimum quality standards for the balance sheets of eg banks, and then hands out an implicit (or explicit) guarantee that anything meeting these minimum standards is fine.
In the regime I am suggesting the government would at most force banks to truthfully disclose what's on their balance sheet, but would not put up any minimum requirements.
What happened in practice in Scotland and Canada is that banks would have very low reserves, for every 100 dollars in deposits and notes issued, they would keep around 2 dollars in gold around. (The equivalent today would be central bank reserves.) Basically, just enough to meet redemption demands in the short term.
But to make up for that, they would keep very thick loss-absorbing equity cushions. Typically about one third of their balance sheet were financed by shareholder equity, and the other two thirds with deposits and bonds etc.
Banks also put these equity cushions in their advertisements to prospective customers. So it seems they believed that customers cared about them.
In some instances, shareholders and directors were also personally liable for losses beyond their paid-in capital. (Ie no limited liability shield for them.)
Interesting enough, the latter is also how eg Goldman Sachs used to be run when it was still a partnership and not a public company.
If you want to know more, have a look at eg http://files.libertyfund.org/files/2307/Selgin_1544_Bk.pdf
(https://www.iea.org.uk/sites/default/files/publications/file... is also quite interesting, but on a slightly different topic.)
FDIC is to insure people, not the institution. At that point, the institution has failed, so their skin is long gone.
Expectations about what happens in the future drive behaviour in the present.
Or more concrete: without something like FDIC banks have some incentive to arrange they balance sheet in such a way that it's (a) safe, and (b) simple and transparent enough to convince customers that it's safe. Customers have an incentive to look for banks that are simple and safe.
(Customers don't have to do the balance sheet analysis themselves. They can rely on third parties.)
With something like FDIC, customers don't care how risky their bank is. In fact, more risk is better if that ever so slightly raises the returns available.
(FDIC charges insurance premiums, but they are not properly risk adjusted.)
Or more concrete: without something like FDIC banks have some incentive to arrange they balance sheet in such a way that it's (a) safe, and (b) simple and transparent enough to convince customers that it's safe. Customers have an incentive to look for banks that are simple and safe.
(Customers don't have to do the balance sheet analysis themselves. They can rely on third parties.)
With something like FDIC, customers don't care how risky their bank is. In fact, more risk is better if that ever so slightly raises the returns available.
(FDIC charges insurance premiums, but they are not properly risk adjusted.)
If natural incentives obviated the need for the FDIC, we would not have the FDIC, because both banks and incentives pre-date the FDIC by hundreds of years. It was created for a reason.
note that the FDIC was created AFTER the Fed, so you don't know that the reason isn't that "the fed fucked things up and created an economic environment that necessitated the FDIC".
That's a rather rosy view of how laws and regulations in general come about.
First, the stated reasons might not be the real reasons.
Second, the stated reasons might be the reasons as intended, but the people making the laws might still misunderstand what's actually happening.
See eg https://www.alt-m.org/2021/05/20/how-u-s-government-paper-cu... for some wider background.
First, the stated reasons might not be the real reasons.
Second, the stated reasons might be the reasons as intended, but the people making the laws might still misunderstand what's actually happening.
See eg https://www.alt-m.org/2021/05/20/how-u-s-government-paper-cu... for some wider background.
... which is why strict regulations exist to cover what banks can and cannot invest in. Retail banks can't just YOLO reserves into GME lol.
In the regulatory environment of 19th century Canada or 18/19th century Scotland, they could have.
And those places had very stable banking systems during that time. The Canadian experience is especially instructive when compared to its tightly (but fragmentedly) regulated neighbour in the south.
In any case, 'strict' but fixed regulations but shielding customers from consequences just leads to gaming of the regulations.
It's better to give customers (and other stakeholders) skin in the game, and reduce the regulation to perhaps a duty to disclose truthfully. Then customers can police their banks.
And those places had very stable banking systems during that time. The Canadian experience is especially instructive when compared to its tightly (but fragmentedly) regulated neighbour in the south.
In any case, 'strict' but fixed regulations but shielding customers from consequences just leads to gaming of the regulations.
It's better to give customers (and other stakeholders) skin in the game, and reduce the regulation to perhaps a duty to disclose truthfully. Then customers can police their banks.
Your plan literally never works. It simply never works. It’s a lovely theory that in the real world doesn’t yield results.
You get shit like Nikola, like Theranos - all that had sophisticated accredited investors looking at the books, not just randos, and look how that turned out. Ones dead and the other is pushing cars down hills in PR stunts worth billions in market cap.
The directionality around regulation is clear: without it, rivers caught fire. Then we got environmental regulations and lo and behold, no river fire. The idea that customers can just police the environment is equally baseless. Customers aren’t experts in finance or the environment. That’s why we delegate the work to a group of experts who are.
Banks are too important to yolo. Retailers can get their risk on elsewhere.
You get shit like Nikola, like Theranos - all that had sophisticated accredited investors looking at the books, not just randos, and look how that turned out. Ones dead and the other is pushing cars down hills in PR stunts worth billions in market cap.
The directionality around regulation is clear: without it, rivers caught fire. Then we got environmental regulations and lo and behold, no river fire. The idea that customers can just police the environment is equally baseless. Customers aren’t experts in finance or the environment. That’s why we delegate the work to a group of experts who are.
Banks are too important to yolo. Retailers can get their risk on elsewhere.
Huh? What I described worked really well in eg Scotland and Canada.
See https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
See https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
For small accounts, the FDIC premium levied on the institutions is sufficient skin in the game. It goes up during volatile times. I’ve been in meetings worrying about it. The other skin a bank has is making sure its loan and fee business keep up with savings and is sufficiently risk-managed. This pressure regulates the accumulation of large savings accounts.
FDIC doesn't charge enough, and doesn't charge not differentiated enough. (No fixed regulation could charge the right amounts. You'd need competing private insurance companies to get a better approximation for that.)
Of course, even if the FDIC doesn't charge enough, you'd still have meetings about how to game the system so that your bank pays less. It's still a cost to the business.
Of course, even if the FDIC doesn't charge enough, you'd still have meetings about how to game the system so that your bank pays less. It's still a cost to the business.
Good point about the lack of differentiated underwriting. The costs are plenty for small institutions though. Other than perhaps raising money market rates, there aren’t any meaningful gaming levers to pull other than keeping the loan and fee business healthy (right mix of promotions and upsell prompts by tellers.)
Like cameronh90 said, it limits the liability to the government by capping the payout by the number of account holders, which is finite. The assets that could be held there otherwise are theoretically infinite. So, this is smart government policy for institutional protection, not some kind of progressive giveaway.
> Exceedingly few people have that much cash on hand.
Minimal comfortable retirement at 65 requires is what, ~ 1M USD in assets? What the FDIC rule implies, is you can't do this in cash. So obviously, inflation makes it stupid to do that in cash, but even without inflation this FDIC rule basically forces you into playing the wall street game (aka subsidizing rich people) in order to retire comfortably. Think about that!
Of course, in our economy inflation is real, too, so pretty soon they are going to have to increase this to beyond $250k even.
Minimal comfortable retirement at 65 requires is what, ~ 1M USD in assets? What the FDIC rule implies, is you can't do this in cash. So obviously, inflation makes it stupid to do that in cash, but even without inflation this FDIC rule basically forces you into playing the wall street game (aka subsidizing rich people) in order to retire comfortably. Think about that!
Of course, in our economy inflation is real, too, so pretty soon they are going to have to increase this to beyond $250k even.
Someone with a lot of cash can obtain private insurance more cheaply than the cost of managing deposits in dozens of banks. Multiple deposit locations are more of a convenience and a relationship building approach. You do see some people try to “game” FDIC/NCUA with $249k in each bank but they are generally either eccentrics or elderly people who only invest simply and are afraid of disasters. It’s up to the bank to do loan and fee business proportionately to their deposits and these kinds of accounts are factored in. No harm done.
UK business here.. we do the same because the UK equivalent guarantees bank accounts (even for businesses) at £85,000 (~$120,000) each. I have no idea what businesses with huge cash reserves do as you can quickly run out of banks.
They put the money in short term treasuries, I reckon. Money market funds come to mind as well.
> you can quickly run out of banks
Not that individual depositors get a say, but isn't this (the consolidation of banks to relatively few players) the larger source of risk?
In the US, my understanding is that there are a lot of small local banks, but that they are all dependent clients on a much smaller number of larger banks. If I go to my local credit union, I don't think I have a straight-forward way of knowing which mega-bank they depend on, if any. If "per-bank" limits are meant to spread out risk, isn't this undermined by consolidation? Or do I misunderstand the structure of mutual dependence between banks?
Not that individual depositors get a say, but isn't this (the consolidation of banks to relatively few players) the larger source of risk?
In the US, my understanding is that there are a lot of small local banks, but that they are all dependent clients on a much smaller number of larger banks. If I go to my local credit union, I don't think I have a straight-forward way of knowing which mega-bank they depend on, if any. If "per-bank" limits are meant to spread out risk, isn't this undermined by consolidation? Or do I misunderstand the structure of mutual dependence between banks?
The US has a history of unit banking. Ie super small banks that only have one branch in a single city.
That's because branch banking used to be banned.
Predictably, the US also had a history of bank instability.
Canada, by comparison, has enjoyed stable banks with many branches diversified over the whole country for centuries.
That's because branch banking used to be banned.
Predictably, the US also had a history of bank instability.
Canada, by comparison, has enjoyed stable banks with many branches diversified over the whole country for centuries.
I get that this is pedantic, but the first bank in Canada was established in 1817. While that's just over two centuries ago, that wasn't a "branch bank", it was literally the first bank in the country.
I'd ask for sources if you want to make claims that broad.
I'd ask for sources if you want to make claims that broad.
See eg https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
Well, 'centuries' interpreted as an integer multiply of 100s of years was probably overstating things a bit.
Well, 'centuries' interpreted as an integer multiply of 100s of years was probably overstating things a bit.
But so your view is that small banks are prone to instability in virtue of being small. I get that with many banks, the probability that at least one has problems increases to 1. My hypothesis was that large banks are risky in virtue of being concentrated; though in most years they may all be fine, occasionally big bets made by a single institution can impact a large minority of depositors. I suppose in a context where the state is prepared to prop up banks in times of crisis, perhaps propping up a few big ones is less complex than trying to support many small ones?
The Canadian system I talked about had no government propping up of banks.
See also https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
See also https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
> I have no idea what businesses with huge cash reserves do as you can quickly run out of banks.
To take an extreme example, imagine running Apple’s reserves. It’s probably close in scale to the finances of a fairly large country (and considerably more profitable).
To take an extreme example, imagine running Apple’s reserves. It’s probably close in scale to the finances of a fairly large country (and considerably more profitable).
Apple revenue (2020) $274 billion
Czech Republic GDP (2021) $276 billion
Czech Republic GDP (2021) $276 billion
The reserves are another part of this too, though countries would probably be primarily managing debt, while Apple has a lot of savings too.
It's an especially interesting statistic because GDP is calculated as money velocity times supply. Meaning, each time a unit of currency changes hands in any purchase, it counts towards GDP.
That means Apple, one entity, receives (not including spending) as much money as every single transaction that occurred in the entire country of the Czech Republic in a given year. Any people say Apple is overvalued...
That means Apple, one entity, receives (not including spending) as much money as every single transaction that occurred in the entire country of the Czech Republic in a given year. Any people say Apple is overvalued...
Braeburn capital exists for this reason.
Big businesses use current accounts for day-to-day operations. For savings, they have access to a variety of securities which they can liquidate overnight and might pay them some interest.
Of course, this is not limited to big businesses. You can do the same with an IB brokerage account but I guess the added complexity is what puts people off.
Of course, this is not limited to big businesses. You can do the same with an IB brokerage account but I guess the added complexity is what puts people off.
you can have multiple accounts at the same bank. some banks like HSBC will take care of splitting it up for you behind the scenes.
No - your £85k guarantee is across all your accounts with that bank (even across the same group of banks). Straight from the source:
https://www.fscs.org.uk/what-we-cover/banks-building-societi...
_If you have money in multiple accounts with banks that are part of the same banking group (and share a banking licence) we have to treat them as one bank. This means that our compensation limit applies to the total amount you hold across all these accounts, not to each separate account._
https://www.fscs.org.uk/what-we-cover/banks-building-societi...
_If you have money in multiple accounts with banks that are part of the same banking group (and share a banking licence) we have to treat them as one bank. This means that our compensation limit applies to the total amount you hold across all these accounts, not to each separate account._
The UK bank cover is per-bank, not per-account.
Also worth noting that when a bank operates under multiple names, such as First Direct (part of HSBC) or Cahoot (a division of Santander), the cover applies to your total balance across all accounts, regardless of the name.
So it's worth knowing which "banks" are really just different different brands of the same parent institution, if you're trying to diversify because of this limit.
So it's worth knowing which "banks" are really just different different brands of the same parent institution, if you're trying to diversify because of this limit.
Further to what other replies mentioned, when a bank (or in the US a brokerage account) will do is actually sweep your cash balance into different account spread across multiple banks.
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Historically, multiple bank accounts at different banks in Germany were a way to speed up payments, in a time when wire transfers were dependent on local distance and different banking networks which exchanged wire transfer data on magnet tape in central bank parking garages (and thus were called "Garagenverfahren"). Which ended not too long ago, IIRC in 2006... If you wanted the invoice to lead to cashflow quickly, you asked the customer to pay to an account that would speed up payment.
> It is not in the slightest bit uncommon to receive an invoice with four or five EUR bank accounts printed on it. You can randomly pick your "preferred" account to pay to and the company's accountant will rebalance the accounts at the end of the quarter (or wahtever).
Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
If you send a different bank account every month to many companies, it’s going to get flagged by fraud checks in a lot of ERP/AP systems. (We have vendor records, including the payment bank account number. If your invoice matches and passes internal checks [we received the goods, we have money in the cost center, address/account numbers match, etc], it gets smoothly paid as agreed. If you rotate bank account numbers, it’s going to be kicked out to be manually checked and you’re going to get paid late.)
You could load-balance once per-customer and not trip this, but that doesn’t get you fully automatic rebalancing.
You could load-balance once per-customer and not trip this, but that doesn’t get you fully automatic rebalancing.
Also smaller less sophisticated vendors (I include my company in this) simply enter your remittance information once in their banking system on the first invoice. We aren't going to want to update it every time.
They could have it randomize per vendor I suppose but all that is a lot of hassle when you can just put five accounts in the Payment Advice field in your accounting software and let the vendors do with it as they choose.
They could have it randomize per vendor I suppose but all that is a lot of hassle when you can just put five accounts in the Payment Advice field in your accounting software and let the vendors do with it as they choose.
One more reason that comes to mind. Customers probably would choose the account in same bank as they have their account. Thus instant transfers. Which used to mean getting money possibly days earlier.
Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
The simple answer to this is because "Payment Advice" is a big text field in your accounting software and "Randomize per invoice" or "Randomize per vendor" isn't an option it has.
The simple answer to this is because "Payment Advice" is a big text field in your accounting software and "Randomize per invoice" or "Randomize per vendor" isn't an option it has.
One reason is that a money transfer within one bank is usually faster and might be more secure because some banks check the name agains the account number. For this reason customers perfer to use an account with their own bank.
> Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
Would be interesting to learn if they give the list in the same order always or if they randomize the order of the account numbers listed, DNS round robin style :)
Would be interesting to learn if they give the list in the same order always or if they randomize the order of the account numbers listed, DNS round robin style :)
> Why ask the customer to pick? Why not generate invoices with a randomly picked bank account (which can also lend itself to automatic rebalancing)?
Maybe its just my perspective having (mostly) dealt with SME's. I would guess larger companies are more clever about it (e.g. perhaps they have one "receipt" account and then the money gets automatically spread out from there once received).
Maybe its just my perspective having (mostly) dealt with SME's. I would guess larger companies are more clever about it (e.g. perhaps they have one "receipt" account and then the money gets automatically spread out from there once received).
Invoices list multiple bank accounts at different banks because of transfer fees and delays.
Fees are usually lowest and the transfer is fastest if source and destination accounts are at the same bank.
Slovenia has 5 or so popular banks. Thus it’s feasable for a company to cover banks of most payees.
Fees are usually lowest and the transfer is fastest if source and destination accounts are at the same bank.
Slovenia has 5 or so popular banks. Thus it’s feasable for a company to cover banks of most payees.
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Why would they try to hide this? It seems perfectly reasonable to do.
And legal; it's not like they're hiding their assets. It's a workaround from what IMO is a stupid move from the ECB. The low interest rates are another driver behind the housing prices going up and people risking more money in investments like stonks and crypto.
The ECB has an inflation target. If inflation is too low, they have to put more money into the economy.
Having a hard time calling this "exploiting" in a country where having different accounts with different banks is just something you do. Why would you have a single account with a single bank? Unless your account costs you loads of money instead of the banks going "thanks for your money, it's ours to invest how we see fit and profit off of, even if in theory you could withdraw it at any time. Which you won't". The dutch banking system is literally a foreign concept to North America. Imagine free accounts, free transfers to and from other banks, free ATM use, and not needing a credit card because banks actually did all the things that credit card companies put "on top of bank accounts" in the US. It's such a completely different system that analyzing the NL banking model with a pair of US glasses on just makes no sense at all.
No need to hide it because it is perfectly legal.
Business idea: take in cash deposits. Hold the cash as paper currency in a vault. Avoid negative interest rates. After you build up enough deposits, start making loans to make money. Maybe if you make good loans you could even pay some interest to your depositors. I’ll call it “Bank.”
Ok, so how are you making money to sustain your operation? Presumably you are a business, not a charity. Your vault isn't free, neither is the land it sits in, and as you gain more customers your security costs are going to increase. Also your customers are going to want convenient withdrawal and deposit options, so you will need multiple vaults in different locations (plus security measures). Not to mention the overhead you'll need to run this business (accountants, HR, IT, asset managers, etc). Thus there is a degree of scaling to your costs. This is fine though, just subtract these costs from the revenue generated by your investments. Your simplified business model looks something like this:
Profit = Investment Returns - Operational Costs - Interest Paid to customers
Only you have to have sufficiently liquidity such that your customers can get withdrawals whenever they want. This means your investment pool is going to be conservative, thus limiting your returns. Now what happens when your nation's central bank craters interest rates, thus driving your investment returns down? Oh shit, now the revenue source is drying up. What gives? Profit, or your interest rates? Well profits have to be at minimum high enough to justify all this effort, so looks like the interest rates are going to drop and drop and drop as the cost of money goes down....
Congratulations, you are now in the same place as all those other institutions. Who would have guessed that an identical business model subjected to all the same economic push and pulls would end up at the same destination.
Profit = Investment Returns - Operational Costs - Interest Paid to customers
Only you have to have sufficiently liquidity such that your customers can get withdrawals whenever they want. This means your investment pool is going to be conservative, thus limiting your returns. Now what happens when your nation's central bank craters interest rates, thus driving your investment returns down? Oh shit, now the revenue source is drying up. What gives? Profit, or your interest rates? Well profits have to be at minimum high enough to justify all this effort, so looks like the interest rates are going to drop and drop and drop as the cost of money goes down....
Congratulations, you are now in the same place as all those other institutions. Who would have guessed that an identical business model subjected to all the same economic push and pulls would end up at the same destination.
Simple... digitize the dollars, e.g. through some crypto token. For every 1x physical dollar on hand, I will create 8x-30x crypto dollars to lend out and earn interest. I shall call this a "fractional reserve" system.
> For every 1x physical dollar on hand, I will create 8x-30x crypto dollars to lend out and earn interest
That's not how fractional reserve works. Banks are money multipliers because loans are deposited again. Eg one person saves $100, someone borrows $95 - then deposits it again, so the bank can make a new loan of $90 etc etc
That's not how fractional reserve works. Banks are money multipliers because loans are deposited again. Eg one person saves $100, someone borrows $95 - then deposits it again, so the bank can make a new loan of $90 etc etc
When a bank loans 10,000 dollars, the amount is credited to a checking account. It does not have to come from somewhere else. What use would a loan be if you kept it in your checking?
Don't take my word for it, take it from the Bank of England's Quarterly Bulletin [0] "Banks create create additional broad money whenever they create a loan... it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have. In fact, Loans create deposits, not the other way around."
[0] https://youtu.be/CvRAqR2pAgw
Don't take my word for it, take it from the Bank of England's Quarterly Bulletin [0] "Banks create create additional broad money whenever they create a loan... it runs contrary to the view sometimes put forward that banks can only lend out deposits that they already have. In fact, Loans create deposits, not the other way around."
[0] https://youtu.be/CvRAqR2pAgw
Money creation happens when the money is deposited and loaned again
me -> deposit $100 in bank a -> bank a loans $95 to business -> business deposits $95 in bank b -> bank b loans $90.25
This loop repeats indefinitely until we're talking about fractions of pennies. The reserve ratio (and bank willingness to loan up to that ratio) determines the money multiplication effect. No bank is loaning more than it's actual deposits, it's just the effect of the same dollar getting deposited and loaned multiple times.
me -> deposit $100 in bank a -> bank a loans $95 to business -> business deposits $95 in bank b -> bank b loans $90.25
This loop repeats indefinitely until we're talking about fractions of pennies. The reserve ratio (and bank willingness to loan up to that ratio) determines the money multiplication effect. No bank is loaning more than it's actual deposits, it's just the effect of the same dollar getting deposited and loaned multiple times.
Except it doesn't have to be more than one bank, just different accounts at the same bank. So if a bank creates a loan, which ends up deposited in another account, their deposits have increased from $100 to $195. So the question becomes, where does the money that has increased the banks' reserves come from? It was created when it was loaned.
Maybe we are saying the same thing, I can't tell.
Maybe we are saying the same thing, I can't tell.
Yes that is what I was saying. I'm trying to dispute the myth that a bank gets a deposit and lends out 10x as much that it magically creates.
Is that what you were saying? Because I'm trying to disagree with you. You seem to say that banks are not magically creating 10x money, that it only lends out money that was previously deposited. This is not the case.
They're lending 95% of their deposits or whatever the reserve requirement is. It's just that every other bank is too, and when they loan money it almost always ends up back in the banking system just in another account. The money creation is an artifact of the same dollar getting deposited and loaned multiple times.
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We agree that the amount of loans roughly matches the amount of deposits. Lots of people (like beambot I believe) think there are 10x more money lent out than deposits.
Nope. GP said that storing money was expensive. I was simply alluding to the fact that (a) supply of physical dollars << assets on the balance sheet - i.e. fractional reserve, and (b) a trusted authority can 'print' money on demand so long as people have faith in its viability - i.e. central banks & federal reserve.
Bank financing is counterintuitive: deposits are actually liabilities, and loans are assets... but banks also routinely borrow money (e.g. from the Fed) well in excess of their book value. For example, JP Morgan's current debt-to-equity ratio is 1.675 [1], meaning that they are also (in a sense) "mortgaged" well beyond their net assets. It's debt all the way down...
[1] https://ycharts.com/companies/JPM
Bank financing is counterintuitive: deposits are actually liabilities, and loans are assets... but banks also routinely borrow money (e.g. from the Fed) well in excess of their book value. For example, JP Morgan's current debt-to-equity ratio is 1.675 [1], meaning that they are also (in a sense) "mortgaged" well beyond their net assets. It's debt all the way down...
[1] https://ycharts.com/companies/JPM
Thanks I've been working in banks for 25 years now and have an accounting degree. JPM debt equity ratio is about 12. They're supposed to be highly leveraged, that is how banking works.
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It's exactly how fractional reserve works. That it can happen more than once due to redepositing (in other banks, and so on...) doesn't help an argument against that reality.
You may have missed the memo that went out in 2008 regarding how banks like to do things in general. A kind of "statement" regarding their ethics and base principles.
The inventor of Bitcoin didn't miss it, and created a slightly better system that was at least based on something: pointlessly throwing energy away.
Did quite well at proving the concept, it's worth trillions at the moment. So it seems to work. In fact, those old banks might want to start up their own. You know, to compete.
Ah, the exciting world of finance.
You may have missed the memo that went out in 2008 regarding how banks like to do things in general. A kind of "statement" regarding their ethics and base principles.
The inventor of Bitcoin didn't miss it, and created a slightly better system that was at least based on something: pointlessly throwing energy away.
Did quite well at proving the concept, it's worth trillions at the moment. So it seems to work. In fact, those old banks might want to start up their own. You know, to compete.
Ah, the exciting world of finance.
As far as I know, that’s not how banks make loans. They don’t lend deposited money, the money they lend is created out of thin air.
No, he's right, that's the theory behind fractional reserve banking.
At a 10% bank reserve rate, 10x the monetary base is created.
At a 10% bank reserve rate, 10x the monetary base is created.
Except fractional reserve banking is an incorrect model of how banks work, the poster you're replying to is correct, banks create money when they make loans. The Bank of England's guide to money creation makes this distinction clear on the first page, it's worth a read,
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
Edit via comment: I was drawing parallels to the system of central banks & Federal Reserve (i.e. those that create monetary supply), not just individual banks. The point was simply that physical dollars on hand << assets on balance sheet.
At least with a crypto system, we would (theoretically) be able to account for all the tokens issued... Case in point: "Holding U.S. Treasurys? Beware: Uncle Sam Can't Account For $21 Trillion"
https://www.forbes.com/sites/kotlikoff/2019/01/09/holding-u-...
It's all immaterial anyway; someone already beat me to the punch: USDT, USDC, etc.
At least with a crypto system, we would (theoretically) be able to account for all the tokens issued... Case in point: "Holding U.S. Treasurys? Beware: Uncle Sam Can't Account For $21 Trillion"
https://www.forbes.com/sites/kotlikoff/2019/01/09/holding-u-...
It's all immaterial anyway; someone already beat me to the punch: USDT, USDC, etc.
All that does is potentially reduce your overhead costs, not eliminate them. You will always have some costs associated with running your operation, and therefore could always be forced to have negative interest rates if stable investment returns plunge lower. And they can always go lower, even negative
> to lend out and earn interest
Who are you lending to? That’s the key - there’s a ton of money looking for returns but not enough people looking to borrow.
Who are you lending to? That’s the key - there’s a ton of money looking for returns but not enough people looking to borrow.
You could charge people money to hold their money. You know, like some banks do.
That's the same thing as negative interest rate, just by a different name. A flat-fee is effectively a negative interest rate that scales lower as balance is higher. Calling it a fee or a negative interest rate; that's all just marketing.
It's not all marketing for the exact reason you state, it doesn't scale with the balance but is fixed. A flat-fee would be interesting for precisely the account holders with a large balance. There would be a bank-run-exodus of large accounts to such an impossible flat-fee bank.
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I know you're being funny, but for most of history real (as opposed to nominal) rates of return on cash have been negative. Sure, you wouldn't be paying the bank interest, but you'd be paying for storage, security if you have enough, losses on rodents eating your cash, etc. Positive rates of return are actually quite a new phenomenon.
Regulations require you to buy government bonds, you can't hold much cash. European safe govt bonds all pay negative rates. Plus Europe is awash with cash so its hard to make loans. Just another reason all Euro banks are struggling.
Small problem with that.
Banks don't loan out deposits. Banks create deposits by issuing loans.
So to start a Bank you don't need any deposits, and in a negative interest rate environment you don't need to chase them. Deposits backed by 'cash' will automatically come to you in the backfill process (which is how the deposits created by loans can be used to pay people at other banks).
That's how negative interest rates stimulate loans.
Banks don't loan out deposits. Banks create deposits by issuing loans.
So to start a Bank you don't need any deposits, and in a negative interest rate environment you don't need to chase them. Deposits backed by 'cash' will automatically come to you in the backfill process (which is how the deposits created by loans can be used to pay people at other banks).
That's how negative interest rates stimulate loans.
Better idea: borrow as much as they'll give you. Get paid for that. Also invest borrowed money in the highest return/largest etf you can find.
Note that most of the companies in said ETF are also doing this.
Note that most of the companies in said ETF are also doing this.
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> After you build up enough deposits, start making loans to make money.
Downturn hits. Depositors want to withdraw more money than you've kept around. You start trying to delay withdrawals long enough to satisfy them with the upcoming loan payments. Some of those payments start to be late. More people start demanding that you give them all their deposits back. Eventually get arrested, tried and jailed for running an unregulated, uninsured wildcat bank.
Downturn hits. Depositors want to withdraw more money than you've kept around. You start trying to delay withdrawals long enough to satisfy them with the upcoming loan payments. Some of those payments start to be late. More people start demanding that you give them all their deposits back. Eventually get arrested, tried and jailed for running an unregulated, uninsured wildcat bank.
That's when you borrow money from all your competing banks that are offering negative interest rates, pay off your depositors, and profit from the interest.
You'll still have to fulfil minimal required deposits with the central bank (but my understanding was that they are free of charge).
After that, what will you do if you can't make enough money from loans for your employees (including yourself) and your other expenses?
After that, what will you do if you can't make enough money from loans for your employees (including yourself) and your other expenses?
Yes, only that doesn't work. You are discounting the influence of regulators and the central bank. What you are proposing would be illegal under the current European financial oversight model.
Banq (Bunq is taken already)
It's worth pointing out that never in all of world history has such a large percentage of sovereign debt yielded a nominally negative rate.
Where this ends is anybody's guess. But when the situation finally does resolve itself, it seems reasonable to expect economic and social dislocation both qualitatively and quantitatively beyond anything ever seen before.
The incremental manner in which the GFC continues to play out has numbed most people to the danger they are in.
Where this ends is anybody's guess. But when the situation finally does resolve itself, it seems reasonable to expect economic and social dislocation both qualitatively and quantitatively beyond anything ever seen before.
The incremental manner in which the GFC continues to play out has numbed most people to the danger they are in.
Nah, the situation isn't that new.
Yes, negative nominal interest rates are fairly new.
But we had negative real interest rates on sovereign debt every now and then. Especially during the Great Inflation.
Yes, negative nominal interest rates are fairly new.
But we had negative real interest rates on sovereign debt every now and then. Especially during the Great Inflation.
If you look at it in terms of purchasing power rather than on a nominal level, we've been there many times.
Honestly some commenters in the Netherlands were surprised over the past six months that people suddenly took action when their savings account went from 0% to -0.1% interest, but were entirely passive when their 0% interest account was exposed to 2% inflation for years, which has a much larger impact on purchasing power and was essentially subjecting people to negative annual returns on their purchasing power (i.e., the metric that matters).
Honestly some commenters in the Netherlands were surprised over the past six months that people suddenly took action when their savings account went from 0% to -0.1% interest, but were entirely passive when their 0% interest account was exposed to 2% inflation for years, which has a much larger impact on purchasing power and was essentially subjecting people to negative annual returns on their purchasing power (i.e., the metric that matters).
I think people are not that smart but also not that stupid. People are used to small amount of inflation (in Western countries) and thus already planned ahead for it. It works differently in countries with high-inflation, people take notice when prices are increasing fast.
My guess is that people expected bank accounts to work as something they have, that is secure and untouchable. It's not that it can't happen (a bank can go bankrupt and the CB refuses to cover the customers) but people who haven't gone through it, believe it can never happen. Their balance being reduced tipped them off that something is not quite alright.
What I'm trying to say is that people are more concerned about the bank dipping into their accounts (regardless of the amount) rather than them losing some Purchasing Power.
My guess is that people expected bank accounts to work as something they have, that is secure and untouchable. It's not that it can't happen (a bank can go bankrupt and the CB refuses to cover the customers) but people who haven't gone through it, believe it can never happen. Their balance being reduced tipped them off that something is not quite alright.
What I'm trying to say is that people are more concerned about the bank dipping into their accounts (regardless of the amount) rather than them losing some Purchasing Power.
[deleted]
Our entire political systems is hyperbolic and actively seeks to undermine trust in institutions that could push back against the political system’s interests. Even if the danger were eminent, the average person on the street 1) probably couldn’t understand the threat and 2) wouldn’t have a single idea about how to mitigate their personal exposure to that threat (if it were even possible for them to do so).
This does not work in Denmark.
Banks know officially whether your bank account is your "living wage" bank account or not.
If you have a bank account that is not the 'wage deposit' account, banks have started charging a premium for HAVING an account with them.
I used to have several accounts, but since they've started with this extra-fee crap, I have closed all except my main account, because the fees would eat the deposited money.
There may be ways around it, but I haven't found it.
Can you have your employer split up your paycheck into multiple accounts? Account fees being waived when you have direct deposit set up is common in the US as well, but I can have my paycheck split into up to five accounts, so they all qualify.
What about N26, Revolut and all these new online banks? They don't charge anything where I live in the EU. I don't have 100k though.
Revolut does work nicely for this - and has the side benefit of allowing SWIFT transfers to DK accounts. This is something bizarrely that some traditional banks (looking at you Danske) don't allow.
Also in DK, the limit for being charged negative interest is generally 100,000 DKK ~ €13,500. With IT salaries it can become a monthly hassle dealing with it.
Also in DK, the limit for being charged negative interest is generally 100,000 DKK ~ €13,500. With IT salaries it can become a monthly hassle dealing with it.
Consider automatically investing a big portion of it.
> This is something bizarrely that some traditional banks (looking at you Danske) don't allow.
Probably why their Estonian branch was used to launder money.
https://en.m.wikipedia.org/wiki/Danske_Bank_money_laundering...
Probably why their Estonian branch was used to launder money.
https://en.m.wikipedia.org/wiki/Danske_Bank_money_laundering...
> What about N26, Revolut and all these new online banks? They don't charge anything where I live in the EU. I don't have 100k though.
Most (all?) online banks I've seen will charge negative rates.
But ultimately the "if, how and when" is a commercial decision for the bank.
Some of them set higher cut-off levels (e.g. 50k vs 100k vs 1m).
Some of them segregate by account type (e.g. higher cut-off for retail clients than for business customers).
It might well be that some of them have a "fair-use policy" where they silently "eat" the negative rates but will quietly invite you to pay or move elsewhere if you have a large balance.
Most (all?) online banks I've seen will charge negative rates.
But ultimately the "if, how and when" is a commercial decision for the bank.
Some of them set higher cut-off levels (e.g. 50k vs 100k vs 1m).
Some of them segregate by account type (e.g. higher cut-off for retail clients than for business customers).
It might well be that some of them have a "fair-use policy" where they silently "eat" the negative rates but will quietly invite you to pay or move elsewhere if you have a large balance.
N26 charges 0.5% on accounts over 50k, curiously Revolut does not appear to do that (yet).
But I was talking about the "premiums" for not being the main account. Not the negative interest for having a large amount. If N26 and all the alternatives allow up to 50k with no negative interest, then the problem from the intial comment can be solved
On new accounts.
[deleted]
"Negative interest rate" is such an Orwellian term. Let's just call it what it is, the government penalizing you for not spending your own money as fast as they think you ought to.
The government isn’t penalizing you for not spending money. The bank is providing services (safeguarding and transferring money, primarily) and that costs money. The difference is that for the first time in a long time they can’t make enough from deposits to cover that cost.
It's not like they have physical cash to guard these days. Most of these accounts and money is "just digits in a mainframe somewhere". Kind of similar to what happened with traditional vs ebook publishing - there are still some costs, but no longer shifting physical things from place too place should save the customer some costs.
That doesn't make maintaining it free, just cheaper. There's a lot of money out there looking for investments, driving up prices and hence driving down returns.
you are saying that like cybercrime was easier to fight than physical heists. That seems like a bad assumption? And I'm in no way a "banks" fan...
> The difference is that for the first time in a long time they can’t make enough from deposits to cover that cost.
Yes, and the reason they can't make enough is because central banks are pushing down interest rates in order to nudge people into spending vs. saving. If central banks were not acting as a lender of last resort (at record low interest rates no less), the cost to borrow would be higher, and savers would likely be seeing higher interest rates.
Yes, and the reason they can't make enough is because central banks are pushing down interest rates in order to nudge people into spending vs. saving. If central banks were not acting as a lender of last resort (at record low interest rates no less), the cost to borrow would be higher, and savers would likely be seeing higher interest rates.
That isn’t penalizing savers; that just isn’t actively subsidizing them (and by extension the rest of the investing world, since that would easily be the most attractive place to have your money in the world).
Also, central banks have a mandate to be the lender of last resort. It’s one of their most fundamental duties and they’ve been doing it for as long as they’ve existed.
Also, central banks have a mandate to be the lender of last resort. It’s one of their most fundamental duties and they’ve been doing it for as long as they’ve existed.
> the cost to borrow would be higher
We don't know that, do we? It depends on the supply and demand for savings.
We don't know that, do we? It depends on the supply and demand for savings.
You pay for that as well, about 100 a year if you do not touch your money.
The government will also penalize you for not using those services however. For instance, in many places it's impossible to purchase real estate with cash.
Orweillian term? Where the hell do all the insane moral attachments come from?
Positive interest is compensation for delaying spending and a fee for staying in debt.
Negative interest is a fee for delaying spending and compensation for keeping others in debt.
It's not about "governments thinking", it's about maintaining the balance of supply and demand between debt and credit.
The fact that you desire to hold onto money at 0% just shows how profitable it is.
https://youtu.be/j5l_Oeg6kMo
Positive interest is compensation for delaying spending and a fee for staying in debt.
Negative interest is a fee for delaying spending and compensation for keeping others in debt.
It's not about "governments thinking", it's about maintaining the balance of supply and demand between debt and credit.
The fact that you desire to hold onto money at 0% just shows how profitable it is.
https://youtu.be/j5l_Oeg6kMo
Right, I have zero shame about doing this to avoid the truly insane limits (it's like $15,000) before negative interest kicks in per account in Denmark.
You can change your money into a currency that's run under a policy more to your liking, if you please.
You can argue that it’s a consequence of the ECB’s policies, but the ECB is not part of any government.
And neither is the federal reserve in the US. The Federal Reserve is allegedly independent from the government. Does the ECB work in a similar manner?
> And neither is the federal reserve in the US. The Federal Reserve is allegedly independent from the government.
No, its not.
The Fed Board of Governors (like other independent federal agencies) is independent within the government; which is a term of art for executive-branch agencies with leadership board/council/commission that have terms (both length and staggering, usually) and partisan composition rules which prevent them from being reshaped over a short term to reflect the partisan interest of the current President and/or Senate majority, even when those are aligned.
Because its powers are assigned by Congress under law and freely changeable by Congress through new law, it is not and cannot be independent of government (even of by “government” you mean only the President and Congress.)
No, its not.
The Fed Board of Governors (like other independent federal agencies) is independent within the government; which is a term of art for executive-branch agencies with leadership board/council/commission that have terms (both length and staggering, usually) and partisan composition rules which prevent them from being reshaped over a short term to reflect the partisan interest of the current President and/or Senate majority, even when those are aligned.
Because its powers are assigned by Congress under law and freely changeable by Congress through new law, it is not and cannot be independent of government (even of by “government” you mean only the President and Congress.)
It is quite independent. They are in a tug of war with the commission and the council of ministers by design, so their autonomy fluctuates with time, but the commissioners (and several member-states) are regularly quite unhappy with the ECB. The ECB typically does not care about politics and looks only after economical indices. They are known to be afraid of the tiniest bit of inflation, which resulted in counter-productive policies at time.
I am not familiar enough with the federal reserve to say how similar they are.
I am not familiar enough with the federal reserve to say how similar they are.
Should your capital increase over time without it being put to productive purpose?
Banks don't just sit on piles of cash, they lend it out. That's literally what banks do with the money people deposit in them, it's the whole point of banks!
I'd argue that the main point of banks is that they protect your money from theft. Given that most people who use banks are poor and don't actually receive any significant interest.
They don't receive significant interest because banks choose not to share any interest with the end customer. Easy access savings rates have been sub-1% for so long in the UK that customers have instead turned to exploiting introductory offers on current accounts.
That’s not at all how banks work. BoE helpfully explain https://www.bankofengland.co.uk/knowledgebank/how-is-money-c...
EDIT: This whole comment is pretty pointless in context. I didn’t read the the thread closely enough. It’s the sort of argument at cross-purposes that makes us all hate internet comments. I’ve left the text in place so readers can see what other people were responding to, but, y’know, I think it’s pretty dumb.
This verges on pedantry in this context. Banks are required to have a certain amount of capital in reserve to make loans (the reserve requirements and capital adequacy ratios set by central banks). Deposits from consumers give the banks the reserve capital they need to make those loans.
Without a way to use the deposits to make money the banks would just as soon not have your money.
This verges on pedantry in this context. Banks are required to have a certain amount of capital in reserve to make loans (the reserve requirements and capital adequacy ratios set by central banks). Deposits from consumers give the banks the reserve capital they need to make those loans.
Without a way to use the deposits to make money the banks would just as soon not have your money.
> Banks are required to have a certain amount of capital in reserve to make loans
Not if these loans are secured then they can make as much money as they want from thin air.
> Deposits from consumers give the banks the reserve capital they need to make those loans.
No. At least in the US, they just need to secure the loan with an asset that can be held from the dealers. Most of the time, if you got your mortgage from a bank, they'll just liquidate for real cash.
> Without a way to use the deposits to make money the banks would just as soon not have your money.
Which is why, in this new system, banks have become hostile to customers. Banks are no longer in the business of helping customers but trading money market funds.
Not if these loans are secured then they can make as much money as they want from thin air.
> Deposits from consumers give the banks the reserve capital they need to make those loans.
No. At least in the US, they just need to secure the loan with an asset that can be held from the dealers. Most of the time, if you got your mortgage from a bank, they'll just liquidate for real cash.
> Without a way to use the deposits to make money the banks would just as soon not have your money.
Which is why, in this new system, banks have become hostile to customers. Banks are no longer in the business of helping customers but trading money market funds.
>(the reserve requirements and capital adequacy ratios set by central banks).
Those are 0% or effectively zero in most developed nations.
Those are 0% or effectively zero in most developed nations.
[deleted]
You got it completely backwards.
Banks grant credit (bank money) when debtors promise to work.
Your money is effectively a share in the bonds that banks hold onto. In other words, the point of banks is not for people to store their money and earn interest, it's to provide liquidity and a trusted intermediary. When the bank pays interest it basically tells you to keep your money to make room for the investment spending. You and a company want to buy a car, you say the company should go first and you wait until the next car is produced.
In theory you could do the same thing without the bank by writing an IOU saying you work x hours and then use that as money. The problem is that people have to trust you and the IOU is not fungible (it may be worth $4k when all you want to buy is $50 worth of groceries).
https://youtu.be/xkQn56Dtslk
Banks grant credit (bank money) when debtors promise to work.
Your money is effectively a share in the bonds that banks hold onto. In other words, the point of banks is not for people to store their money and earn interest, it's to provide liquidity and a trusted intermediary. When the bank pays interest it basically tells you to keep your money to make room for the investment spending. You and a company want to buy a car, you say the company should go first and you wait until the next car is produced.
In theory you could do the same thing without the bank by writing an IOU saying you work x hours and then use that as money. The problem is that people have to trust you and the IOU is not fungible (it may be worth $4k when all you want to buy is $50 worth of groceries).
https://youtu.be/xkQn56Dtslk
Not OP, but I'd say, sure why not. Why does it have to be productive? It's arguably yet another paternalistic government intervention in the form of tweaking and twiddling with economic and regulatory knobs.
This is exactly the opposite of paternalistic government intervention. If the money can’t be put to productive use then the bank can’t profit from holding your money and they’d just as soon not have it. If you insist on giving it to them anyways they charge you for the privilege.
Formally, it’s the central bank penalizing you as it is independent from your federal government. Of course, the federal government (being it the US or a EUR member state) loves low interest rates for deficit spending.
That's also a really weird way to describe it.
It's just a form of wealth tax, nothing related to the government disapproving of your choices.
Seems like a strange way to implement a wealth tax since it only applies to a single type of wealth (cash) and not equity, real estate, commodities, etc.
There are actually a lot of different forms of wealth tax in the Netherlands.
What are you referring to? If anything I know the Netherlands as having a comparatively few forms of wealth tax compared to other countries, the main wealth tax is mostly based on 'one form' that is completely undifferentiated (i.e., any net wealth, as part of box 3)
That's the point though: large amounts of cash should not be sitting there, they should be circulating through investment. It's not a tax as much as an incentive. Inflation functions the same way by making holding on to cash a losing proposition.
There is just SO MUCH cash right now in the hands of the wealthy classes and it's just sitting there in bank accounts not being circulated.
There is just SO MUCH cash right now in the hands of the wealthy classes and it's just sitting there in bank accounts not being circulated.
Low interest rates rather increase wealth than decrease it. Except for cash, almost all other assets increase with low interests such as stocks, real estate etc. So the wealthy generally get more with low interest rates and not the other way around. Probably also one of the reasons why it is so difficult for central banks and politicians to decide to increase the interest rates although it's most likely badly needed.
It’s not a tax (the governments are not getting any money from this). If it were, it would be terrible, because outrageous wealth is not in cash on bank accounts. It’s in things like real estate or stocks, which don’t lose any value because of negative interest rates.
> If it were, it would be terrible, because outrageous wealth is not in cash on bank accounts.
The only outrageous wealth you listed was real estate because of the land component. Nobody gets hurt by stocks. People get hurt if money ceases to circulate because money is needed to pay incomes, taxes and debts. If all the money piles up in one bank account everyone stops working. Meanwhile if one person owns all the stocks people can still work and be happy.
The only outrageous wealth you listed was real estate because of the land component. Nobody gets hurt by stocks. People get hurt if money ceases to circulate because money is needed to pay incomes, taxes and debts. If all the money piles up in one bank account everyone stops working. Meanwhile if one person owns all the stocks people can still work and be happy.
> Meanwhile if one person owns all the stocks people can still work and be happy.
I know you didn't mean it quite so literally, but this paints a rather dystopian picture: a single person holding effectively all the material wealth while everyone else happily shows up every day to work for them
I know you didn't mean it quite so literally, but this paints a rather dystopian picture: a single person holding effectively all the material wealth while everyone else happily shows up every day to work for them
You can have an outrageous amount of something that is not intrinsically bad. Money, or wealth in general, is not a bad thing in itself, but its distribution can be outrageous.
This applies to regular people in Spain. Banks have started to pass these costs to the customer and practically all kinds of accounts that have traditionally been free now cost money to keep, even if you only make minimum wage. Needless to say, I'm not happy with the ways the EU screws over poor people.
We see these low interest rates worldwide, twisting them into somehow the EU having them to screw poor people over is laughable.
Note that low interest rates affect those with money (i.e. not poor) much more than those without much money.
Note that low interest rates affect those with money (i.e. not poor) much more than those without much money.
> Note that low interest rates affect those with money (i.e. not poor) much more than those without much money.
I disagree, wealthy people (even middle class) don't hold cash, they invest it
I disagree, wealthy people (even middle class) don't hold cash, they invest it
I didn't say they don't exist anywhere else, but they didn't exist here until recently.
I also didn't say the purpose is screwing poor people, but like many other things like car emissions caps, they introduce new regulations and laws and bullshit without thinking the poor are often disproportionately affected by them.
I also didn't say the purpose is screwing poor people, but like many other things like car emissions caps, they introduce new regulations and laws and bullshit without thinking the poor are often disproportionately affected by them.
It's not a question of a tax on the rich vs. a tax on the poor, it's a tax on savers to benefit borrowers and spenders. You're forcing the responsible to subsidize the irresponsible. Donald Trump loves low interest rates for example, because he uses debt for everything. My grandmother by contrast, would always be sure to have a rainy day fund with plenty of cash. Having lived through the Great Depression, she knew it was prudent to always keep some cash on hand and not have everything tied up in illiquid assets.
Sadly the world no longer values savings and prudence. Might as well jump out on the risk curve and get rewarded with everyone else. Those with the worst loans in '08 were bailed out so there is little downside. I wish it were not this way but might as well take advantage
Very true - at the same time, when everyone start thinking like this, the bubble may pop
Not only that, but it's also a method of protecting your assets. You're protected for €100k per entity per bank.
Worth pointing out that sometimes multiple banks share a license (usually when new entities want a bank-like product and white-label an existing bank) and then you’re only covered for 100k per license. In extremis, you can have many bank accounts but only be covered up to 100k total, if they all map to the same license.
Many people though like you they are protected in the EU... Until Cyprus declared in 2013 they will confiscate money even from accounts with less than 100.000 EURO due to their financial crisis in 2013. Later, they reverted that decision, because the EU was scarred by the consequences and decided to help Cyprus overcome the crisis.
There is no EU-wide deposit insurance. It was widely called for but blocked. European deposit insurance is nationally administered.
There is a EU directive that require certain guarantees from the member states. Citation from wikipedia:
Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes[11] requires all member states to have a deposit guarantee scheme for at least 90% of the deposited amount, up to at least 20,000 euros per person. On October 7, 2008, the Ecofin meeting of EU's ministers of finance agreed to increase the minimum amount to 50,000. ...
Directive 94/19/EC of the European Parliament and of the Council of 30 May 1994 on deposit-guarantee schemes[11] requires all member states to have a deposit guarantee scheme for at least 90% of the deposited amount, up to at least 20,000 euros per person. On October 7, 2008, the Ecofin meeting of EU's ministers of finance agreed to increase the minimum amount to 50,000. ...
> EU directive that require certain guarantees from the member states
Which is not EU-wide deposit insurance. It is a directive asking EU members to create national deposit insurance schemes.
Which is not EU-wide deposit insurance. It is a directive asking EU members to create national deposit insurance schemes.
This is only for natural persons, not for businesses.
Maybe in theory. In practice everything will be protected, without amount limit, otherwise trust would collapse.
The germans made this official in the 2007 crisis by declaring that all bank accounts are guaranteed by state, with a 1 billion euro limit.
The germans made this official in the 2007 crisis by declaring that all bank accounts are guaranteed by state, with a 1 billion euro limit.
https://bitcointalk.org/index.php?topic=160292
My bank account's got robbed by European Commission. Over 700k is lost.
The most of circulating assets on our business Current Account are blocked. Over 700k of expropriated money will be used to repay country's debt. Probably we will get back about 20% of this amount in 6-7 years.
I'm not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation.
The business is definitely ruined, all Cypriot workers to be fired. We are moving to small Caribbean country where authorities have more respect to people's assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners.
Special thanks to:
- Jeroen Dijsselbloem - Angela Merkel - Manuel Barroso - the rest of officials of "European Comission"
P.S. The worst thing is, that even a month ago I was suspecting that things can go wrong. In February, I several times called my banker and lawyer and asked them if money on the account is safe, mentioning that article in Financial Times. But they convinced me that there is no reason to worry, and even if country goes default, in no way current accounts may be affected. "This is European Union and banks here can't just grab your money and go" I was told. I got a hard lesson and now I know the meaning of phrase "TRUST NO ONE".
(...)
The stealing of my money is now finalized.
Yesterday I looked at my Laiki account and found that frozen amount is not more shown on my balance. 100% of frozen funds is now appears as outgoing transaction to nobody with comment "DECREE".
Also there are some news from lawyers.
Quote The Supreme Court has not announced its decision yet. It examines preliminary objections raised by the Attorney on a basis that the Law and the Order are political acts of the state (like decision to start war) and therefore cannot be examined or controlled by the Supreme Court and that the matter in issue should be considered as a private and not a public law matter.
Also, there is recent translation of the "Capital Controls imposing DECREE"
[ 2013-07-10 10:49:23 PM Update ] "Blocked Funds" amount has finally disappeared from our Laiki account. Bank told me it's "waived" (their interpretation of word "stolen"). We won't receive any bank shares as compensation for confiscated amount since the bank is liquidated. The rest of the money (100k EUR) are still subject to Capital Control and we can only transfer 5K monthly.
Today I had a conversation with a manager from Laiki Bank. He has been honest and confirmed that we may forget about anything over 100K as it's already spent to pay country's debts. Also, I was warned that the financial situation in the country is getting worse and worse and we should be ready to lose even part of insured (under 100K) money during this year (this is why they keep capital control enforced).
By the way, this style of "bank restructuring" is going to be adopted in the whole European Union. Soon, everyone's uninsured money (over 100K EUR) in EU banks will be at risk of seizure.
My bank account's got robbed by European Commission. Over 700k is lost.
The most of circulating assets on our business Current Account are blocked. Over 700k of expropriated money will be used to repay country's debt. Probably we will get back about 20% of this amount in 6-7 years.
I'm not Russian oligarch, but just European medium size IT business. Thousands of other companies around Cyprus have the same situation.
The business is definitely ruined, all Cypriot workers to be fired. We are moving to small Caribbean country where authorities have more respect to people's assets. Also we are thinking about using Bitcoin to pay wages and for payments between our partners.
Special thanks to:
- Jeroen Dijsselbloem - Angela Merkel - Manuel Barroso - the rest of officials of "European Comission"
P.S. The worst thing is, that even a month ago I was suspecting that things can go wrong. In February, I several times called my banker and lawyer and asked them if money on the account is safe, mentioning that article in Financial Times. But they convinced me that there is no reason to worry, and even if country goes default, in no way current accounts may be affected. "This is European Union and banks here can't just grab your money and go" I was told. I got a hard lesson and now I know the meaning of phrase "TRUST NO ONE".
(...)
The stealing of my money is now finalized.
Yesterday I looked at my Laiki account and found that frozen amount is not more shown on my balance. 100% of frozen funds is now appears as outgoing transaction to nobody with comment "DECREE".
Also there are some news from lawyers.
Quote The Supreme Court has not announced its decision yet. It examines preliminary objections raised by the Attorney on a basis that the Law and the Order are political acts of the state (like decision to start war) and therefore cannot be examined or controlled by the Supreme Court and that the matter in issue should be considered as a private and not a public law matter.
Also, there is recent translation of the "Capital Controls imposing DECREE"
[ 2013-07-10 10:49:23 PM Update ] "Blocked Funds" amount has finally disappeared from our Laiki account. Bank told me it's "waived" (their interpretation of word "stolen"). We won't receive any bank shares as compensation for confiscated amount since the bank is liquidated. The rest of the money (100k EUR) are still subject to Capital Control and we can only transfer 5K monthly.
Today I had a conversation with a manager from Laiki Bank. He has been honest and confirmed that we may forget about anything over 100K as it's already spent to pay country's debts. Also, I was warned that the financial situation in the country is getting worse and worse and we should be ready to lose even part of insured (under 100K) money during this year (this is why they keep capital control enforced).
By the way, this style of "bank restructuring" is going to be adopted in the whole European Union. Soon, everyone's uninsured money (over 100K EUR) in EU banks will be at risk of seizure.
[deleted]
Businesses are protected too:
https://www.dnb.nl/betrouwbare-financiele-sector/nederlandse...
https://www.dnb.nl/betrouwbare-financiele-sector/nederlandse...
yeah but realistically will any person ever lose assets in a bank? I know in the 2008 crisis they made (or maybe it was just they said they would make) any personal accounts good; if it was over the limit (I think that's FICA) or not.
Yes, it actually happened in The Netherlands a bit over a decade ago, after the financial crisis. If you had more than 100k in savings in there (and they were known for their attractive savings rate), you would be in trouble.
https://en.m.wikipedia.org/wiki/DSB_Bank
https://en.m.wikipedia.org/wiki/DSB_Bank
https://www.reuters.com/article/us-cyprus-banks-idUSKBN1K324...
https://en.wikipedia.org/wiki/Icesave_dispute
Are the two that come to mind. Cyprus deposits in a couple of banks in 2013 above 100k were lost I believe. Icesave played out badly in the UK in 08, quite a few councils etc took some nasty lossses.
Either way, waiting for multiple years, winding up and down of court cases, bankrupcy proceedings etc to find out if the rest of your money is gone or not is not much fun.
The kind of person parking a couple of 100k in cash accounts is almost by definition risk averse.
Are the two that come to mind. Cyprus deposits in a couple of banks in 2013 above 100k were lost I believe. Icesave played out badly in the UK in 08, quite a few councils etc took some nasty lossses.
Either way, waiting for multiple years, winding up and down of court cases, bankrupcy proceedings etc to find out if the rest of your money is gone or not is not much fun.
The kind of person parking a couple of 100k in cash accounts is almost by definition risk averse.
My friend lost 1M in Cypriot bank. There are many stories about frozen assets.
If you have decent money, using single account/country is not just lazy, but stupid.
If you have decent money, using single account/country is not just lazy, but stupid.
If you have decent money you go with the best, no need to spread:
Below the list of the world's top 50 safest banks
https://d2tyltutevw8th.cloudfront.net/media/document/press-r...
Below the list of the world's top 50 safest banks
https://d2tyltutevw8th.cloudfront.net/media/document/press-r...
I haven't found any of these stories. Care to share a news article?
Search for "Laiki bank account" and that gives plenty of info about Cyprus money re-appropriation, for example.
Iceland bank issues were widely covered too
Iceland bank issues were widely covered too
I couldn't find anything about re-appropriation. Just about the bank having problems, and the accounts being moved to a different bank.
Does (or did) the US have laws that protect a certain amount of savings?
I would assume since the 100k are guaranteed by law that the state does not further step in on losses above that.
When there is no law like that in place the situation is entirely different.
I would assume since the 100k are guaranteed by law that the state does not further step in on losses above that.
When there is no law like that in place the situation is entirely different.
https://www.fdic.gov/deposit/deposits/faq.html
FDIC deposit insurance, 250k per FDIC-insured bank, per ownership category.
FDIC deposit insurance, 250k per FDIC-insured bank, per ownership category.
Also add this is per person including beneficiaries. So a family of four has $1mn in FDIC coverage.
It's not entirely true that this is caused by the ECB. In fact, only 10% of a typical German bank account (Sichteinlagen) are required to be held with the ECB. For other countries it might be even less (minimal reserve is 1%). Out of these 10% the bank gets charged no interests on the first 6% (six times minimal reserve).
So if you have 100k€ in the bank in Germany, that bank has to pay for 4k€ - that's just 20€ per annum and charges you 250€ (assuming a typical 50k€ exemption). At the same time they can lebd out 90k€ at a market rate of 1.5% to finance some housing. That's 1350€ revenue per annum. So in this simplified, idealized case, the bank just asks you to increase their revenue by 17% out of your own pocket.
The only case when the bank has to pay more is when they don't hand out enough credits and whose fault is that, frankly? Who should carry that risk?
So if you have 100k€ in the bank in Germany, that bank has to pay for 4k€ - that's just 20€ per annum and charges you 250€ (assuming a typical 50k€ exemption). At the same time they can lebd out 90k€ at a market rate of 1.5% to finance some housing. That's 1350€ revenue per annum. So in this simplified, idealized case, the bank just asks you to increase their revenue by 17% out of your own pocket.
The only case when the bank has to pay more is when they don't hand out enough credits and whose fault is that, frankly? Who should carry that risk?
Indeed, in addition the central banks don't just charge negative rates, they also allow borrowing at negative rates (-1%) via the TLTRO which means banks are making money borrowing from the ECB, they currently receive more money from TLTRO loans alone than the ECB charges them.
In short, low interest rates are obviously a factor, but banks didn't have to do this. They're charging you because they can and because most banks are following suit.
In short, low interest rates are obviously a factor, but banks didn't have to do this. They're charging you because they can and because most banks are following suit.
You are free to move your money and business to a different bank, if you don't like it.
Yeah right. Because banksters would never all run the same scheme, right? They are so "competitive", you would never find the same conditions on every bank account nation-wide.
How would you figure out whether the conditions are because of 'banksters' colluding or because of something else?
I find this weird. How can you possibly have negative interest on a savings account? That means it’s quite literally better to withdraw all of your excess cash and stuff it in an old sock…
Because if you put it in a sock, you risk it getting stolen or lost in a fire. And it's more of a hassle to pay with it. So the negative interest rate might be worth the safety and convenience of your bank account.
As for the reason: it currently costs the bank money to have your money (ECB interest rate on overnight loans is negative), in addition to the costs of operating the bank itself.
As for the reason: it currently costs the bank money to have your money (ECB interest rate on overnight loans is negative), in addition to the costs of operating the bank itself.
I am in finance and literally struggled to wrap my mind around this last year, until a proper fixed income trader explained this to me and I'll explain it the same way.
Last year, oil futures prices turned negative. Which means "wait, I can take delivery of oil AND get cash for it too." So why didn't people do this? Because there's a cost of cary to oil - I need to pick it up in a train car at a specific place in the US and I need to store it somewhere, which is expensive. So while they were "paying you to take the oil" you couldn't really just jump on it and do it.
This is an analogous situation to what's going on with a negative interest rate. You're right, you're literally better off taking the money out into a pile of cash. And if you only have a few thousand bucks you could just do that (but then you need to drive to the bank, figure out how to store it, drive back when the rate goes back up, etc.) But if you have a few hundred thousand bucks - what are you gonna do? Cash it out in hundreds and keep it in your garage? At some point the logistics and theft risk of that adds up too.
Meaning, similarly to the oil example, while the raw numbers indicate one strategy, the practicality of carrying the asset on your own tends to outweigh the benefit. So yeah, someone may chose to incur negative interest if their only other option is to pile up cash in the house where they have to worry about it being stolen, burning in a fire, etc.
Last year, oil futures prices turned negative. Which means "wait, I can take delivery of oil AND get cash for it too." So why didn't people do this? Because there's a cost of cary to oil - I need to pick it up in a train car at a specific place in the US and I need to store it somewhere, which is expensive. So while they were "paying you to take the oil" you couldn't really just jump on it and do it.
This is an analogous situation to what's going on with a negative interest rate. You're right, you're literally better off taking the money out into a pile of cash. And if you only have a few thousand bucks you could just do that (but then you need to drive to the bank, figure out how to store it, drive back when the rate goes back up, etc.) But if you have a few hundred thousand bucks - what are you gonna do? Cash it out in hundreds and keep it in your garage? At some point the logistics and theft risk of that adds up too.
Meaning, similarly to the oil example, while the raw numbers indicate one strategy, the practicality of carrying the asset on your own tends to outweigh the benefit. So yeah, someone may chose to incur negative interest if their only other option is to pile up cash in the house where they have to worry about it being stolen, burning in a fire, etc.
Note that this is an inverse of Gresham's Law and is behind the large increases in value of alternative stores of value (art, real estate, cryptocurrency, stocks).
Gresham's Law is that "bad money drives out good" - when you have two forms of currency circulating within the economy and one is inflating at a faster rate than the other, people will tend to spend the inflating currency and hoard the appreciating one. The inverse of that is that they will tend to hoard the appreciating currency and spend the inflating one, i.e. as a store of value, nobody with long time preferences is going to hold cash. Instead they pile into any asset with zero cost of carry and a liquid market, which was stocks from about 1980-2010 and now also includes art, cryptocurrency, real estate, NFTs, other securities, etc.
It occurs to me that this could play tricks on how we measure interest rates. Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash. But nobody serious about future returns wants to lend cash! They've exited the cash market entirely, and only touch it when they need to convert long-term holdings to short-term holdings. Instead, they trade amongst themselves in asset markets, which have appreciated far quicker than 3% CPIs and 2% nominal interest rates would suggest. It could be that the divorce between stock market returns (10-15% in recent years) vs. interest rates (2-3% in recent years) might indicate that all of the firms with high time preferences have exited the cash market, leaving behind only those firms who need cash now.
Gresham's Law is that "bad money drives out good" - when you have two forms of currency circulating within the economy and one is inflating at a faster rate than the other, people will tend to spend the inflating currency and hoard the appreciating one. The inverse of that is that they will tend to hoard the appreciating currency and spend the inflating one, i.e. as a store of value, nobody with long time preferences is going to hold cash. Instead they pile into any asset with zero cost of carry and a liquid market, which was stocks from about 1980-2010 and now also includes art, cryptocurrency, real estate, NFTs, other securities, etc.
It occurs to me that this could play tricks on how we measure interest rates. Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash. But nobody serious about future returns wants to lend cash! They've exited the cash market entirely, and only touch it when they need to convert long-term holdings to short-term holdings. Instead, they trade amongst themselves in asset markets, which have appreciated far quicker than 3% CPIs and 2% nominal interest rates would suggest. It could be that the divorce between stock market returns (10-15% in recent years) vs. interest rates (2-3% in recent years) might indicate that all of the firms with high time preferences have exited the cash market, leaving behind only those firms who need cash now.
> Assuming no central bank interference, interest rates are set at the equilibrium between people who want to borrow cash and those who want to lend cash.
Nitpick: It's the equilibrium between people who want to have savings and those who want to have debt. When you have deflation no such mechanism exists which is why the central bank has to set the interest rate manually.
Nitpick: It's the equilibrium between people who want to have savings and those who want to have debt. When you have deflation no such mechanism exists which is why the central bank has to set the interest rate manually.
> How can you possibly have negative interest on a savings account?
If a bank is forbidden from investing your money, and thus putting your savings at risk, then it costs them money to safely manage it.
If a bank is forbidden from investing your money, and thus putting your savings at risk, then it costs them money to safely manage it.
I'm learning today that most people on hn don't know how central banks work and how interest rates are set
I wasn't saying that's what's happening here, the OP just asked how banks "could possibly" charge negative interest on savings. In a world where a bank couldn't use the money you deposited, they would have to charge you in some way. Negative interest rates could be one way to do it. Simple answer to a simple question.
Why should guarding your money be free? The concept of negative interest is very natural.
Banks have found ways to reinvest your deposits. If the earnings there are higher than the storage costs they can share some of the earnings with you. But if they can’t, they have to charge for their service.
Banks have found ways to reinvest your deposits. If the earnings there are higher than the storage costs they can share some of the earnings with you. But if they can’t, they have to charge for their service.
Banks don’t “guard your money” at all. They use it to make loans. Leaving money at a bank exposes you to vastly more systemic risk than just putting bills in a safe or something. If they’re not remunerating you for it, you’re getting screwed.
> Leaving money at a bank exposes you to vastly more systemic risk than just putting bills in a safe or something.
This is very dependent on the country you are in. Some countries have very conservative risk tolerances for their banks which are imposed on them and watched closely.
This is very dependent on the country you are in. Some countries have very conservative risk tolerances for their banks which are imposed on them and watched closely.
Still, there's risk, right? If there were zero risk the bank would be unable to make any loans at all. It would just be like a safe.
Before central banks there were local banks that operated like that, you could pay them to keep your money safe, or you could let them lend it out for a share of the interest, but you also had a share of the loss/risk.
With central banks the risks of loss is low enough that nobody needs the just keep my money safe service anymore - except now they do because rates are so low
With central banks the risks of loss is low enough that nobody needs the just keep my money safe service anymore - except now they do because rates are so low
BoA charges me for savings if keep under a certain amount. In the process of refinancing so I don’t want to hurt my credit and it’s the oldest account. Soon it will be closed. Most of my savings is in a credit union due to favorable interest rates.
If anyone charged me negative interests rates on the whole balance I would cancel my account.
If anyone charged me negative interests rates on the whole balance I would cancel my account.
Banks have given interest rates lower than inflation for as long as I can remember. If negative real interest rates are natural, then it is weird people are so alarmed by nominal interest rates being negative as well
A lot of Banks already charge account fees, service fees, overdraft fees, maintenance fees, transaction fees - I'm sure there is more.
And they are also loaning out your money to others at a non trivial rate of interest.
And they are also loaning out your money to others at a non trivial rate of interest.
Are they loaning it out at non trivial rates? Outside things like credit card debt I have understood that part of the problem is that rates are or are becoming trivial.
The reason is (or so my bank claims) that the ECB charges negative interest, and all banks have large deposits there. They don't store the cash at home in a vault.
Well, aren't you "loaning" the bank your money when you put it in an account? If everyone wanted to withdraw all the money from all their accounts at once the bank would be unable to pay; you get paid interest because you take on slight risk.
Bank notes are a liability of the central bank. When you withdraw your money the central bank can just buy the bonds off that bank. Of course a bank without bonds is basically dead but from the perspective of the person holding onto the bank note nothing changed assuming the zero lower bound is strictly followed by the central bank.
The bank is also providing a service (tracking your money, making it easy to manage and transfer) and that costs. We’ve just ended up in a situation where the cost of the service exceeds the value of the interest paid.
In the UK at least, I'd say we have ended up in a situation where banks found that their approach to 'selling financial services' vastly abused their customers and now they are having to pay massive sums in compensation, they need to fleece account holders in some other way to meet their income and profit targets.
Long-gone are the times when high street banks were based on loaning out the deposits from savings accounts. Building Societies do/did this, but of course the banks bought up most of those too in their spending sprees of M&A to become 'bigger and better'. Well, bigger anyway
Long-gone are the times when high street banks were based on loaning out the deposits from savings accounts. Building Societies do/did this, but of course the banks bought up most of those too in their spending sprees of M&A to become 'bigger and better'. Well, bigger anyway
If you ignore the volatility, crypto makes a lot of sense.
Yes, if you ignore the possibility of losing access to your funds, the possibility of getting hacked, the massive environmental impact, the inability to use it to pay for most legal things, and a couple of other things - crypto makes a lot of sense!
Chuckle, do you either work in a bank or government? Scared of losing job? Understandable. You have to be computer illiterate to not know how to keep your keys safe. We'll get there. While you are ok with funny money. Just a matter of time.
Other than that, how was the play, Mrs Lincoln?
Not really? I mean, the cost of storing 100M of my cash is exactly the same as 100 of it, but in the former case I’d pay 1,000,000x more
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By storing your money you are missing out on any potential gains from investing it instead. AKA Opportunity costs.
You have to keep cash on hand for emergencies. I can’t wait to cash out a mutual fund or stocks. Not to mention that I don’t want certain savings, such as a new car, to be at the mercy of the market.
A couple years ago I put a lot of my HSA into investments and the market tanked.
A couple years ago I put a lot of my HSA into investments and the market tanked.
> I don’t want certain savings, such as a new car, to be at the mercy of the market.
New and used car prices are like a jump rope this year, regardless...can't hide from the market in cash.
New and used car prices are like a jump rope this year, regardless...can't hide from the market in cash.
Depends on the make and model. BMW and Mercedes didn’t fluctuate in the 6 months we looked at them.
I can’t have a down payment plunge because Yellen made an announcement or (as I saw last year) a roller coaster of an election year.
I can’t have a down payment plunge because Yellen made an announcement or (as I saw last year) a roller coaster of an election year.
There's an important difference between simply storing funds with a bank, and using the convenience services that a bank provides when you are their customer.
I guess it depends on how you value the security of storing your money in socks vs banks.
Also, an interest rate of -0.5% is not that much worse than 0% -- they're both a few percentage points below inflation.
Also, an interest rate of -0.5% is not that much worse than 0% -- they're both a few percentage points below inflation.
Most people don't own a savings account because it is profitable. They do it because it us a valuable service. It provides an easy way to store your money that is secured by 'this collapsing is an exustensial threat to the government'. It also provides access to the financial system.
I would be willing to pay a lot of money for such a service. Of course, given that I already need it, I might as well choose a cheap option. If that cheap option happens to have a negative cost, I'm not going to complain.
I would be willing to pay a lot of money for such a service. Of course, given that I already need it, I might as well choose a cheap option. If that cheap option happens to have a negative cost, I'm not going to complain.
Here is a paper exploring the elasticity of the zero lower bound: http://mattrognlie.com/negative_rates.pdf
Because someone at the European Central Bank decided so.
Lafarge met with other banksters in a castle, and they had a big fight.
Lafarge met with other banksters in a castle, and they had a big fight.
Very common in the EU. Every danish bank has negative interest over a certain amount of money
One day you come home and your sock is gone...
This is going to probably not be received well given HN’s famously visceral hostility to crypto… But you can get 5%+ yields on Euro stablecoins in DeFi. And I’m not talking fly by night ponzi pools. This is like on battle tested bluechip protocols like Curve on Uniswap.
Is the risk zero? No. Should you put all your funds there? No. But parking a small segment to balance out the negative bank yields is pretty attractive from a risk reward standpoint. If you’re getting negative 0.5% at the bank, you can protect your capital from decaying by moving 10% or less of your cash savings into DeFi.
Is the risk zero? No. Should you put all your funds there? No. But parking a small segment to balance out the negative bank yields is pretty attractive from a risk reward standpoint. If you’re getting negative 0.5% at the bank, you can protect your capital from decaying by moving 10% or less of your cash savings into DeFi.
Personally I refused to entertain the idea of a stablecoins and after all the stuff that's happened around stablecoins has only reinforced that decision. It seems like it's not a matter of if, but when it becomes clear that the stablecoin is not really backed by real money.
I'm a big believer in crypto, but I don't think stablecoins are it.
I'm a big believer in crypto, but I don't think stablecoins are it.
I don't think it's fair / accurate to paint all stablecoins with a broad brush like that. Tether? Yes, it's at a bare minimum sketchy. USDC and GUSD are both regularly audited, and backed by cash reserves.
Saying that they’re backed by cash reserves is misleading. Yes, they do hold some cash to back the value of the coin, but that’s less than half of the total backing.
CDs and treasuries and commercial paper are pretty solid stuff - but they definitely aren’t cash.
CDs and treasuries and commercial paper are pretty solid stuff - but they definitely aren’t cash.
USDC will no longer be backed by corporate bonds or commercial paper:
https://www.bloomberg.com/news/articles/2021-08-23/coinbase-...
I don't know how you feel about short term treasury bonds, but I think they are nearly as good as cash. Slightly less liquid but with some return.
https://www.bloomberg.com/news/articles/2021-08-23/coinbase-...
I don't know how you feel about short term treasury bonds, but I think they are nearly as good as cash. Slightly less liquid but with some return.
Get an algorithmically stablecoin, like DAI (but not DAI because a ton of DAI supply is collateralized with USDC and ETH/DAI LPs)
People will do that when there are more normal onramps to crypto.
Currently to get crypto on Coinbase or wherever, one needs to go through a crazy signup process where you deliver photos of documents that enables anyone who gets ahold of these photos to identify as you and use these to sign up as you on other places.
It is a catch 22. There should be a crypto way of doing KYC. Not signing up by delivering a photo of you passport, but by signing a message cryptographically.
Currently to get crypto on Coinbase or wherever, one needs to go through a crazy signup process where you deliver photos of documents that enables anyone who gets ahold of these photos to identify as you and use these to sign up as you on other places.
It is a catch 22. There should be a crypto way of doing KYC. Not signing up by delivering a photo of you passport, but by signing a message cryptographically.
> Currently to get crypto on Coinbase or wherever, one needs to go through a crazy signup process where you deliver photos of documents that enables anyone who gets ahold of these photos to identify as you and use these to sign up as you on other places.
Really? I'd like to see a civil suit where an institution says I owe them money and shows a picture of my ID as proof of contract.
There are ways of signing legally binding things online (DocuSign for example, which AFAIK was actually tested in a trial in EU), but they have more sophistication than that.
Really? I'd like to see a civil suit where an institution says I owe them money and shows a picture of my ID as proof of contract.
There are ways of signing legally binding things online (DocuSign for example, which AFAIK was actually tested in a trial in EU), but they have more sophistication than that.
This is a misunderstanding.
What I mean is this: If online companies require a copy of some document as identification, then this document you just copied and sent out to them can be used to identify as you when signing up with other companies.
The old brick and mortar way was better: When you walk into a bank to sign up for an account, the bank now cannot walk into another bank as you.
A new crypto way would be better as well: Instead of copying data for identification, sign a message cryptographically.
What I mean is this: If online companies require a copy of some document as identification, then this document you just copied and sent out to them can be used to identify as you when signing up with other companies.
The old brick and mortar way was better: When you walk into a bank to sign up for an account, the bank now cannot walk into another bank as you.
A new crypto way would be better as well: Instead of copying data for identification, sign a message cryptographically.
I understand what you mean. I'm talking about liability. Will they be able to make a revolut account? possibly (although if I remember correctly, they also had video identification, which makes it about as secure as a real bank, but let's pretend). But having an account as me and having me on hook for something are different things. Revolut doesn't allow borrowing. Most things that involve liability still have better security.
> they have more sophistication than that
Go on.
Go on.
This is no different than traditional platforms
There are differences.
1: You can walk into a bank and sign up for an account. You cannot walk into Coinbase and sign up for an account.
2: Most people already have a bank account. Most people do not have a Coinbase account.
1: You can walk into a bank and sign up for an account. You cannot walk into Coinbase and sign up for an account.
2: Most people already have a bank account. Most people do not have a Coinbase account.
or use one of the many traditional finance options that offer ~5% yields with less risk than crypto (hard to quantify the risk of "crypto", but there's regulatory, technology and volatility risk even amongst stablecoins and DeFi).
(this isn't an anti-crypto post, just making the point that 5% yields are not unique to crypto and that the choice isn't crypto vs. banks)
(this isn't an anti-crypto post, just making the point that 5% yields are not unique to crypto and that the choice isn't crypto vs. banks)
I'd love to know where you will find 5% yield outside of the stock market. Everywhere I've looked, interest rates are at near rock-bottom prices.
If there is only one investment vehicle (other than the stock market) that offers considerably higher returns than everything else, then that vehicle carries pretty by definition a much higher risk than you seem think it does.
Strictly speaking, the returns only indicate a higher perception of risk, which may not necessarily translate to the same amount of actual risk.
As far as I can tell, the risks of depositing stablecoins in something like Uniswap or Compound are the following:
1) The stablecoin might not be redeemable 1:1 for fiat in the future. Personally, I think this risk is negligible for USDC and minimal with DAI.
2) The smart contract code might have bugs leading to loss or theft of the deposited tokens. I think this is minimal with Uniswap or Compound. It's significantly higher with some other providers (which do seem to offer higher rewards, but not enough for my taste).
3) High Ethereum gas fees could make it very costly to withdraw your funds in the future. So far, I have seen these fees spike as high as US$200-300, but only for a brief period of time. Usually they settle back to $20-50. This might be the highest risk but is still acceptable, to me, anyway.
Taken together, these risks are well worth getting ~5% instead of 0.1%, to me. YMMV, of course.
As far as I can tell, the risks of depositing stablecoins in something like Uniswap or Compound are the following:
1) The stablecoin might not be redeemable 1:1 for fiat in the future. Personally, I think this risk is negligible for USDC and minimal with DAI.
2) The smart contract code might have bugs leading to loss or theft of the deposited tokens. I think this is minimal with Uniswap or Compound. It's significantly higher with some other providers (which do seem to offer higher rewards, but not enough for my taste).
3) High Ethereum gas fees could make it very costly to withdraw your funds in the future. So far, I have seen these fees spike as high as US$200-300, but only for a brief period of time. Usually they settle back to $20-50. This might be the highest risk but is still acceptable, to me, anyway.
Taken together, these risks are well worth getting ~5% instead of 0.1%, to me. YMMV, of course.
Not necessarily. While I agree it is riskier, I think there's an argument to be made that higher returns can also come from an arbitrage on information/regulatory hurdles/slow moving corporations.
Official inflation is 4% (!!!) now in Germany, but the real inflation is usually 2.5 times higher than the official, so it is probably 10%.
Gas prices increased by 4% in just last 3 months:
https://www.mwv.de/statistiken/verbraucherpreise/
The most food prices increased by 5% - 20% in the last year:
https://www.az.com.na/nachrichten/nahrungsmittelpreise-gesti...
Gas prices increased by 4% in just last 3 months:
https://www.mwv.de/statistiken/verbraucherpreise/
The most food prices increased by 5% - 20% in the last year:
https://www.az.com.na/nachrichten/nahrungsmittelpreise-gesti...
Germany reduced its VAT last year in july by 3% and reinstated it this year. This masks inflation quite a bit. Inflation last august was 0% (rest of the year was negative). So inflation compared to 2019 is also 4% for august.
source: https://de.statista.com/statistik/daten/studie/1045/umfrage/...
gas prices in germany are highly volatile in general. It is currently as expensive as it was 2012.
source: https://www.adac.de/verkehr/tanken-kraftstoff-antrieb/deutsc...
source: https://de.statista.com/statistik/daten/studie/1045/umfrage/...
gas prices in germany are highly volatile in general. It is currently as expensive as it was 2012.
source: https://www.adac.de/verkehr/tanken-kraftstoff-antrieb/deutsc...
> but the real inflation is usually 2.5 times higher than the official, so it is probably 10%.
Citation needed.
Citation needed.
He probably meant, for a certain demographics the inflation is higher since they they have a different consumption "basket" than the average citizen.
E.g. young people are more likely to rent than owning an appartement. But the general inflation reflects only the average spending on housing. So if 50% of the population owns a home, rising rents are only reflected half as strong for the general population.
However I could not find any reliable numbers how strong the contrast for each demographic group is...
E.g. young people are more likely to rent than owning an appartement. But the general inflation reflects only the average spending on housing. So if 50% of the population owns a home, rising rents are only reflected half as strong for the general population.
However I could not find any reliable numbers how strong the contrast for each demographic group is...
The food prices link seems to be for Namibia, not Germany.
you shouldn't let facts get in the way of a good story.
How does the housing market work in countries with negative interest rates, I am assuming the home loan rates are very very low so does that lead to a boom in house prices?
The housing market in the Netherlands is a complete train-wreck for almost a decade. The climate crisis pressing down on the ability to build new houses, the negative interests rate and a flailing government makes matter consistently worse. In Q1 2021 the prices rose with almost 12% compared to previous year, and the prices are rising almost quicker and quicker by each month, with no clear end in sight.
Yes, the loan rates are on a historical low, but have been already for a few years now.
Yes, the loan rates are on a historical low, but have been already for a few years now.
Trying to move back to the Netherlands, but I despair of ever trying to buy a house there. Half a million is not uncommon for the area I’m looking :/ and that’s in a tiny suburb half an hour from Amsterdam.
Like, salaries do not seem to have similarly risen, so who the hell is buying these houses?
Like, salaries do not seem to have similarly risen, so who the hell is buying these houses?
Salaries don't need to raise when interest rates drop. For same payment with lower interest rates you can service much higher principal.
For example at 1000€ month 5% rate you could loan 151 525€ but with 1% rate you could loan 217 441€...
True. The problem is that housing prices have risen by several hundred percent.
>Like, salaries do not seem to have similarly risen, so who the hell is buying these houses?
People and institutions looking for a way to 'park' their funds in a safe investment.
People and institutions looking for a way to 'park' their funds in a safe investment.
You can observe this (at least) in Germany right now. (Probably all over Europe, though.)
Interest on saving accounts is < 1%, loans are cheap, so everybody's trying to buy houses right now. House prices are rocketing up.
There will be lots of tears and people will lose their home once this starts to change and the fixed rates run out on some of those very cheap loans.
Interest on saving accounts is < 1%, loans are cheap, so everybody's trying to buy houses right now. House prices are rocketing up.
There will be lots of tears and people will lose their home once this starts to change and the fixed rates run out on some of those very cheap loans.
>and the fixed rates run out
I think I'm confused. I have zero experience with Germany, so please be graceful with what may be a stupid question.
So you're saying the super low rate is only for a set period of time, and will change at some point in the future, correct? If the rate is set to change at some point, you can't really call it a fixed rate, can you? I thought fixed rate meant that it was just that rate for the life of the loan. Hence, fixed versus variable.
What am I missing?
I think I'm confused. I have zero experience with Germany, so please be graceful with what may be a stupid question.
So you're saying the super low rate is only for a set period of time, and will change at some point in the future, correct? If the rate is set to change at some point, you can't really call it a fixed rate, can you? I thought fixed rate meant that it was just that rate for the life of the loan. Hence, fixed versus variable.
What am I missing?
The American system where you have a fixed rate for the entire length of the loan is an oddity worldwide, and largely created by post-WW2 housing policy. In most other countries all mortgages are variations on what we'd call ARMs in the U.S: you get a fixed rate for a certain term and then it resets periodically afterwards.
> If the rate is set to change at some point, you can't really call it a fixed rate, can you? Hence, fixed versus variable.
Fixed rate mortage has fixed percentage for an agreed period of time (fixation duration). Variable rate mortgage is based on current inter-bank market rate (or some other index), e.g. EURIBOR + X %.
Fixed rate mortage has fixed percentage for an agreed period of time (fixation duration). Variable rate mortgage is based on current inter-bank market rate (or some other index), e.g. EURIBOR + X %.
Most banks offer a fixed rate for an x number of years while you pay your mortage in 30 years.
The lower x is, the lower the interest you pay during those years.
For example, banks can offer the following loans: - 20 year fixed rate at 1.30% - 30 year fixed rate at 1.42%
So there is a possibility to gamble with the interest rates while still having a "fixed" rate.
The lower x is, the lower the interest you pay during those years.
For example, banks can offer the following loans: - 20 year fixed rate at 1.30% - 30 year fixed rate at 1.42%
So there is a possibility to gamble with the interest rates while still having a "fixed" rate.
I presume fixed rate on real estate loans. You take 25 year mortgage, while having first 10 years fixed because its so cheap. You as a buyer hope desperately super low interest rates will still remain after those 10 years. If not, many people will be royally screwed since their monthly payments can easily double/triple.
Ie in Switzerland with their specific mortgages, it can easily go from USD 800 to USD 8000 per month if things go south, with drop in prices matching this development.
Ie in Switzerland with their specific mortgages, it can easily go from USD 800 to USD 8000 per month if things go south, with drop in prices matching this development.
The loans have fixed interest rates for 10 or 15 years. You refinance after. So the tears come with a delay.
You generally have the option of setting the fixed rate for a lesser period of time in exchange for a discount. At least that’s how it worked in Japan.
So
Floating rate: 0.7%
1 year fixed rate: 0.9%
5 year fixed rate: 1.2%
10 year fixed rate: 1.4%
35 year fixed rate: 1.6%
So
Floating rate: 0.7%
1 year fixed rate: 0.9%
5 year fixed rate: 1.2%
10 year fixed rate: 1.4%
35 year fixed rate: 1.6%
Here is Australia mortgages are typically for 30 years but it would be unusual to fix your mortgage for more than 5 years. Once you reach the end of your first fixed period you can re-fix at whatever the market rates are at the time.
How common fixed rates are? In Finland they are mostly 12 month Euribor(currently at -0.501%). Ofc you can buy "rate cap" type of service, but even those are limited length...
In Germany, you can get fixed rate mortgages from 10 to 15 years around 1% interest. It's fuelling a housing bubble of course.
This is not unlike the practice in the US of opening accounts at multiple banks to keep the balance below the FDIC insurance limit (currently $250,000).
Is that because banks are allowed to print money as they wish?
I mean, what became of the business where entrepreneurs go to a bank and loan money to finance building new ventures? For that the bank needs money, right?
So I guess that they don't want money from customers anymore means they get it from elsewhere. Probably from the government in the form of permission to print money?
Let me know if I am wrong here.
I mean, what became of the business where entrepreneurs go to a bank and loan money to finance building new ventures? For that the bank needs money, right?
So I guess that they don't want money from customers anymore means they get it from elsewhere. Probably from the government in the form of permission to print money?
Let me know if I am wrong here.
Banks never lend other people's money. They create it. When you give your money to a bank, they add it to their reserves and your bank balance becomes a liability to them. They hold that liability because they need reserves for inter-bank transactions. When a Bank makes a loan to you, they don't take money from reserves. They simply create a balance in your bank account with them marking how much they owe you. They just create the money there. Reserves come into play when you want to transfer those funds to another bank. But if two people have a bank account with the same bank, then the bank doesn't need reserves to do that transfer.
So no, banks don't lend other people's money. Not a single bank in the modern world lends other people's money.
Bank lending in fact CREATES deposits. All the money you have in your bank account came from either A) Government spending B) Someone took out a loan. Either public spending or private debt.
See: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
So no, banks don't lend other people's money. Not a single bank in the modern world lends other people's money.
Bank lending in fact CREATES deposits. All the money you have in your bank account came from either A) Government spending B) Someone took out a loan. Either public spending or private debt.
See: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
> So no, banks don't lend other people's money. Not a single bank in the modern world lends other people's money.
That's easy then. In case of a bank run, just give everyone their money back. They never loaned their customers' money, so they should have 100% of it ready to go.
That's easy then. In case of a bank run, just give everyone their money back. They never loaned their customers' money, so they should have 100% of it ready to go.
They might not have "loaned" their customers money but they don't have it anyhow. Because "their customers money" is just a number in their database.
Imagine a new bank with no money and no customers.
First customer walks in "Can I loan $100?".
Bank: Sure. We make an account for you. Your account number is 1. Your balance is $100.
Next day the customer walks in again. "I'd like to get my $100 in cash to go shopping".
Bank: "Uh oh. Sorry, we have to file for bankruptcy."
Imagine a new bank with no money and no customers.
First customer walks in "Can I loan $100?".
Bank: Sure. We make an account for you. Your account number is 1. Your balance is $100.
Next day the customer walks in again. "I'd like to get my $100 in cash to go shopping".
Bank: "Uh oh. Sorry, we have to file for bankruptcy."
People who took out loans can withdraw money from the bank as well.
Inter-bank transactions need to be done with real money (the "reserves")?
So a bank run could be done online? If enough customers of bank A send money to bank B, then bank A has to file for bancruptcy?
So a bank run could be done online? If enough customers of bank A send money to bank B, then bank A has to file for bancruptcy?
Yes, this is a risk banks need to manage. They typically do this by not having all the reserves tied to instant access accounts. So deposit accounts where the person cannot take everything out at once like savings and CDO.
Darn it, I feel excluded, I am dutch and haven't opened any multiple back accounts yet. I probably should.
Do it! Also, why not program periodic circular transfers across a month, of let's say 100€, just for fun! For extra fun, include words in the description like Iran, Kabul, and North Korea :D
Does anyone _not_ have multiple bank accounts? It makes sense, not just because of negative interest rates, but for when things like a bank's IT systems going down.
At least in the UK, you're typically not charged for having a basic bank account; fancier ones do have monthly charges.
At least in the UK, you're typically not charged for having a basic bank account; fancier ones do have monthly charges.
Clueless here. What’s the point of a negative interest savings account? It seems about as good keeping cash under the mattress and burning some at the end of the year.
Matress is not as safe as a bank.
Under current economic policy, banks basically don’t want your money. They have plenty of money they can’t get return on. Processing your dirty cash, maintainibg secure ATMs and servers is not worth it.
They can borrow money from central banks at 0% or negative (return back less than borrowed) with less trouble.
Under current economic policy, banks basically don’t want your money. They have plenty of money they can’t get return on. Processing your dirty cash, maintainibg secure ATMs and servers is not worth it.
They can borrow money from central banks at 0% or negative (return back less than borrowed) with less trouble.
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> To prevent this, entrepreneurs are now spreading their money over different accounts at different banks.
Did anyone think this wouldn't happen?
Did anyone think this wouldn't happen?
Might as well buy some crypto stable coins and store them on a lending platform and earn 5%+ interest.
Bank fee income will definitely go up as they are typically set at flat level and not linked to the deposit amount. Could it be that increased fee payments effectively undo the strategy of avoiding the negative rate?
Remember, you can beat the system, but you can't beat the house...
Remember, you can beat the system, but you can't beat the house...
Negative interest is an abomination considering how wealth enables further gain of capital. This is why cash should stay, otherwise people would be subjected to a lot of money grabbing. Entrepreneurs are acting correctly here.
Negative interest is a return to the origins of banking. You would pay a bank to hold your assets. What you got in return was the convenience of not worrying of getting robbed, or being able to transfer large sums across large distances with bank notes. imho - that was the proper way to think about savings. If bank patrons want to see interest on their savings, they should convert theirs to capital and actually invest it, with all the responsibilities and risks that entails.
We don't chisel bank balances on stone/clay tablets anymore, or guard it with spears. Securing and transferring money should be much cheaper than it used to be millennia ago.
Today banks don't store anyone's money, they store a virtual database, ideally replicated a few times. For a bank, storing a trillion isn't any different than storing a million. There's a tiny per-account expense because it's a, well, a separate entry in the database.
That isn't applicable since the bank invests my savings already and doesn't just keep it in a safe.
It could also mean that any amount you borrow would result in you paying back less. It would be a negative interest rate...
It could also mean that any amount you borrow would result in you paying back less. It would be a negative interest rate...
It's completely applicable if the returns the bank can make are less than the operational costs associated with storing your money. The offered interest rate is going to be some function of the bank's operational cost subtracted from the bank's investment return.
When interest rates set by fiscal policy are so low that the bank can't make enough through investing deposits to offset the operational costs, negative interest rates must occur.
When interest rates set by fiscal policy are so low that the bank can't make enough through investing deposits to offset the operational costs, negative interest rates must occur.
The interest is already negative because you pay for those accounts.
Isn’t this just brokered deposits - which are nothing new?
I've been doing the same since forever for a different reason:
bank deposits are protected up to 85k£/100k€.
Switch over to private crypto currencies like monero or pirate chain. Many problems instantly solved.
One great way to monitor how currencies are really doing is by comparing them to real estate, there isn't much that you can hide there. In NL houses increased between 10 to 20% in value (depending on where in the country you look) over the last year alone. That's almost the same as saying the Euro has devalued to the same degree, but of course when you track the official inflation numbers they come out all roses and sunshine.
100 thousand euros? The limit in denmark is 13442 euros.....
"What we do is simply share the bill with our customers", but funny how they don't really seem to want to share the surplus...
Why don’t they put these sums into crypto ?
Isn't having a loan better?
Chips totally forgot about this
> For someone with 200 thousand euros in the bank, this could mean paying 500 euros in interest at the end of the year.
If 200k euros of working capital is worth less to you than 500 euros/year then you're really, really bad at capitalism.
If 200k euros of working capital is worth less to you than 500 euros/year then you're really, really bad at capitalism.
Isn’t now a good time to forbid the usury?
They could also think about investing their excess money for some real returns.
Which is the behaviour the negative interest rate policy is intended to encourage.
The article also fails to mention that bank deposits are only gauranteed up to 100k as well, so if you have a bunch of cash sitting around it is wise to spread it around different institutions anyway.
The article also fails to mention that bank deposits are only gauranteed up to 100k as well, so if you have a bunch of cash sitting around it is wise to spread it around different institutions anyway.
Which is the behaviour the negative interest rate policy is intended to encourage.
I’ve never quite understood -- can’t the bank do that for you?
If the obstacle is that savings accounts are expected to have a guaranteed rate with zero risk, the banks ought to provide very easy access to investment accounts, with the ability to move money around frictionlessly.
Is there just no demand for that kind of service, or regulatory problems, or something of that kind?
Edit to add: I always felt that offset mortgages (https://en.wikipedia.org/wiki/Flexible_mortgage#Offset_mortg...) were a nice solution to this problem; it gives you a place to stash your savings and get a reasonable rate of return (basically matching your mortgage rate) while still being accessible if needed. But they seem to have gone out of fashion again, at least in the UK. Anyone know if there was some problem or disadvantage (either to consumers or to the banks)?
I’ve never quite understood -- can’t the bank do that for you?
If the obstacle is that savings accounts are expected to have a guaranteed rate with zero risk, the banks ought to provide very easy access to investment accounts, with the ability to move money around frictionlessly.
Is there just no demand for that kind of service, or regulatory problems, or something of that kind?
Edit to add: I always felt that offset mortgages (https://en.wikipedia.org/wiki/Flexible_mortgage#Offset_mortg...) were a nice solution to this problem; it gives you a place to stash your savings and get a reasonable rate of return (basically matching your mortgage rate) while still being accessible if needed. But they seem to have gone out of fashion again, at least in the UK. Anyone know if there was some problem or disadvantage (either to consumers or to the banks)?
> I’ve never quite understood -- can’t the bank do that for you?
You want them to tell you you have a fixed, gauranteed rate of return and use it to buy some apple stock or some bitcoin with it?
The answer is they can do it for you, they do, do it for you, but you have to sign up for the gambling account not the instant access cash savings account.
You want them to tell you you have a fixed, gauranteed rate of return and use it to buy some apple stock or some bitcoin with it?
The answer is they can do it for you, they do, do it for you, but you have to sign up for the gambling account not the instant access cash savings account.
Well... yes, sort of! Or at least, it’d be great if the bank let you choose how much money to put in a safe account with low but guaranteed interest, and how much in an investment account with higher but risky interest; and make it really easy to move money back and forth. I don’t know of any bank that offers anything like that.
I guess there ought to be some safeguards, e.g. at least XX% of your money in a safe place. But there’s a point at which safeguards become friction that just stop you investing at all.
For example, in the UK you have ISA accounts, which should work like that, but the restrictions are so annoying (yearly cap on deposits) and the benefits so weak (tax exempt, but on a pitiful interest rate so it makes no difference for most people) that they’re not very useful. Unless I’m missing something.
I guess there ought to be some safeguards, e.g. at least XX% of your money in a safe place. But there’s a point at which safeguards become friction that just stop you investing at all.
For example, in the UK you have ISA accounts, which should work like that, but the restrictions are so annoying (yearly cap on deposits) and the benefits so weak (tax exempt, but on a pitiful interest rate so it makes no difference for most people) that they’re not very useful. Unless I’m missing something.
Natwest.com ...
Products: Bank Accounts, Mortgages, Savings, Investments, Loans ...
Your investment options are limited to actual investments basically, so essensially shares. Term deposits dont seem to be a big thing in the UK for whatever reason, and we dont have the US tax breaks to buy municipal bonds etc.
ISA's are great, you can go buy some apple stock or some FTSE funds or depending on the provider one of 1000's of funds with it. 'Cash ISAs' while rare are still around are no better or worse than a savings account (IMO).
Your investment options are limited to actual investments basically, so essensially shares. Term deposits dont seem to be a big thing in the UK for whatever reason, and we dont have the US tax breaks to buy municipal bonds etc.
ISA's are great, you can go buy some apple stock or some FTSE funds or depending on the provider one of 1000's of funds with it. 'Cash ISAs' while rare are still around are no better or worse than a savings account (IMO).
Yes, I was thinking of cash ISAs, which do seem a bit pointless.
This is a good nudge for me to look around for better/easier options to store petty cash in, so I’m going to do that. Thanks!
This is a good nudge for me to look around for better/easier options to store petty cash in, so I’m going to do that. Thanks!
Makes sense. In UK it's GBP 85k for single account, double if joint.
Current best instant access rate is around 0.65%.
Current best instant access rate is around 0.65%.
How do you want a savings bank to invest?
Government bonds? Corporate bonds? Stocks? Crypto?
Are you willing to cover their potential losses with government guarantees?
Savings accounts are supposed to be a safe storage of money. They have certain insurance guarantees because of that. Encouraging banks to use that money to speculate is exactly what you don’t want them to do. Savings banks are not known to employ the most brilliant investment minds.
Government bonds? Corporate bonds? Stocks? Crypto?
Are you willing to cover their potential losses with government guarantees?
Savings accounts are supposed to be a safe storage of money. They have certain insurance guarantees because of that. Encouraging banks to use that money to speculate is exactly what you don’t want them to do. Savings banks are not known to employ the most brilliant investment minds.
Perhaps they need the money liquid? Or the risk reward ratio is not good? Or they don't have a CFO that can do treasury and the opportunity cost / effort is not worth it?
> Or they don't have a CFO that can do treasury and the opportunity cost / effort is not worth it?
What's the CFO going to do when Eurobonds are negative too ?
Converting it un-necessarily into another currency introduces exposure to forex risk.
"Investing", aside from the risk, is not cash or cash-equivalent, so that's out of the question.
Hence the best answer is generally just splitting out into multiple Euro bank accounts.
What's the CFO going to do when Eurobonds are negative too ?
Converting it un-necessarily into another currency introduces exposure to forex risk.
"Investing", aside from the risk, is not cash or cash-equivalent, so that's out of the question.
Hence the best answer is generally just splitting out into multiple Euro bank accounts.
Investors want their business growth and a 10 bagger (or bust) on their money, not paying a c-suite salary for 0.01% interest, or worse, a bunch of greek bonds that someone on the sales desk at Goldmans said was a great buy.
Small entrepreneurs typically have more much more risk exposure than average already.
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It's crazy how lack of transparency and secrecy can allow a minority to use scheme to evade laws.
I once met a woman for some short class on business plans on zoom, and she was actually taught how to create a holding and the whole loophole package to optimize taxes. I asked about the morality of such thing, and I was shocked to realize she did not seem to care at all.
The banality of evil allows some people to just get access to an easier life by not caring.
I once met a woman for some short class on business plans on zoom, and she was actually taught how to create a holding and the whole loophole package to optimize taxes. I asked about the morality of such thing, and I was shocked to realize she did not seem to care at all.
The banality of evil allows some people to just get access to an easier life by not caring.
The behavior of the people with multiple bank accounts in the article is both legal and perfectly ethical. Are you saying we have an ethical responsibility to pay as high bank fees as possible?
This thing with bank accounts: Why wouldn't everyone do it? Why would I lose money that I paid tax on just because someone, somewhere decided that want to "encourage" spending?
"Optimize taxes" - What exactly would be wrong with wanting to reduce the taxes you pay?
Did you ever calculate how much you are paying % wise in taxes? If you add all taxes including VAT, fuel taxes, random taxes and such you'll be suprised at the % you get "the priviledge" to pay as an employee every year.
"Optimize taxes" - What exactly would be wrong with wanting to reduce the taxes you pay?
Did you ever calculate how much you are paying % wise in taxes? If you add all taxes including VAT, fuel taxes, random taxes and such you'll be suprised at the % you get "the priviledge" to pay as an employee every year.
Maybe we should start with making companies like Apple, Amazon, Microsoft, ... pay some taxes before getting riled up about some individual using the same tax tricks.
Exactly this. They are doing that by the billion.
> I was shocked to realize she did not seem to care at all.
I do not understand why you would personally care about profiting from tax fraud/optimization? I understand that it would be good to prevent this on a societal level, but no personally.
I do not understand why you would personally care about profiting from tax fraud/optimization? I understand that it would be good to prevent this on a societal level, but no personally.
Banality of evil is about ordinary people performing profoundly evil acts, like participating in mass genocide. It has nothing to do with the banality of legally optimizing your interest rate by opening a few bank accounts.
What it's inmoral is to pay taxes.
In fact, evading paying taxes in a legal way should not be an excepction, but the norm.
Stop romanticizing taxes.
In fact, evading paying taxes in a legal way should not be an excepction, but the norm.
Stop romanticizing taxes.
Stop romanticizing stable societies? That's a weird take, but you do you I guess.
Stable societies existed long before anything and everything was taxed.
Yeah there's a lower limit to the interest, otherwise every consumer will take their money out and save it in cash (or gold or even crypto) the moment they are hit with this negative interest (I know I would!). But I bet eventually it'll come through to consumer accounts, once they've locked down crypto enough and enforced card payments everywhere. The EU is heavily doing both right now.
I'm not an entrepreneur and don't have that much money in the bank but this really worries me because I want to buy a house at some point. This is becoming crazily difficult.
I think it's pretty insane that the ECB still does this negative interest thing. Even at zero interest we're already losing savings all the time due to inflation. It's really undermining my trust in the banking system, basically I'm leaving my money in a tank that's slowly draining.. Totally counter to the concept of a bank which should be trusted and safe. I can understand they need to be paid too, but they already charge a fee for the account. But actually taking money away is ridiculous.. Meanwhile house prices are increasing dramatically yet banks need ever more personal investment to provide a mortgage. How can I ever get this if I can't even save money anymore?
They should really stop trying to appease multinationals who benefit from this for cheap exports, and gain consumer trust back. These multinationals are also the ones avoiding taxes on a wide scale (e.g. Apple not paying any tax in Ireland on all their European profits) and not even contributing to our system.
I'm not an entrepreneur and don't have that much money in the bank but this really worries me because I want to buy a house at some point. This is becoming crazily difficult.
I think it's pretty insane that the ECB still does this negative interest thing. Even at zero interest we're already losing savings all the time due to inflation. It's really undermining my trust in the banking system, basically I'm leaving my money in a tank that's slowly draining.. Totally counter to the concept of a bank which should be trusted and safe. I can understand they need to be paid too, but they already charge a fee for the account. But actually taking money away is ridiculous.. Meanwhile house prices are increasing dramatically yet banks need ever more personal investment to provide a mortgage. How can I ever get this if I can't even save money anymore?
They should really stop trying to appease multinationals who benefit from this for cheap exports, and gain consumer trust back. These multinationals are also the ones avoiding taxes on a wide scale (e.g. Apple not paying any tax in Ireland on all their European profits) and not even contributing to our system.
Banks should NEVER give a negative interest rate. They make money on loans, time-value-of-money and other sound economic principles. There is something very very wrong when banks give negative interest rates.
The things that are very wrong that are causing it, have come into existence. It started in EU country central bank lending to banks. Now end consumers are seeing that in their personal banking.
Imaging a world where the Dutch now have a "bank" that is over the internet in another country. Their money is stored in USD stable coin, or another countries stable coin. Citizens could flee there, in mass.
First, the country (Netherlands), would try to stop the on-ramps. But sooner or later, there will be other entrepreneurs who make easy ACHes/wires that re-route to a crypto account and buy-into crypto (like a USD stable coin).
Then the country in mass, could move their bank accounts out of the Netherlands. Then banks in the Netherlands could collapse... ....or be replaced by a healthy alternative (foreign USD Stable coin backed accounts).
Then the massive fundamental problems going on in macroeconomics that cause the negative interest rates will become visible. These problems remain hidden from the citizen-base because of how technical they are. It would require they be fixed, instead of draining money from citizens to put-their-finger-in-the-dike patching the problem.
The things that are very wrong that are causing it, have come into existence. It started in EU country central bank lending to banks. Now end consumers are seeing that in their personal banking.
Imaging a world where the Dutch now have a "bank" that is over the internet in another country. Their money is stored in USD stable coin, or another countries stable coin. Citizens could flee there, in mass.
First, the country (Netherlands), would try to stop the on-ramps. But sooner or later, there will be other entrepreneurs who make easy ACHes/wires that re-route to a crypto account and buy-into crypto (like a USD stable coin).
Then the country in mass, could move their bank accounts out of the Netherlands. Then banks in the Netherlands could collapse... ....or be replaced by a healthy alternative (foreign USD Stable coin backed accounts).
Then the massive fundamental problems going on in macroeconomics that cause the negative interest rates will become visible. These problems remain hidden from the citizen-base because of how technical they are. It would require they be fixed, instead of draining money from citizens to put-their-finger-in-the-dike patching the problem.
that's the thing, banks don't make enough money with loans if the interest rate is that low for such a long time. It's nothing very very wrong if banks do that it's just an effect of keeping interest rates low.
I don't fully understand your dutch over the internet bank stablecoin comparison, but if you mean that people could flee into different currencies than this is not new at all, some years ago this happened already with the swiss franc. It's also not hidden because there're well enough economists talking about the implications, it's not as complex as you think and yes people with money in the bank are going to be expropriated but this happens anyway if you print more money.
I don't fully understand your dutch over the internet bank stablecoin comparison, but if you mean that people could flee into different currencies than this is not new at all, some years ago this happened already with the swiss franc. It's also not hidden because there're well enough economists talking about the implications, it's not as complex as you think and yes people with money in the bank are going to be expropriated but this happens anyway if you print more money.