> In August, Jyske became the first to offer a negative rate on a home loan, in effect paying customers 0.5% to borrow money for 10 years.
Surely this can't end well?
Here in Sweden the house prices are so high in cities it's almost impossible for young people to get a house, sometimes even an apartment. We've been waiting for the housing bubble to pop a while, but how long must we wait? The longer we do the worse it'll be.
Prices have been stagnant for some time now, and tighter restrictions on new loans hopefully reduces the number of people that would be under water if prices dropped 15 or 25%. It would have a pretty bad effect on the economy as a whole though. I’d manage, but would stop spending for years.
If what happened, exactly? If you already "own" a home and are paying back a loan on it, a price drop of other housing units would not affect you in any way unless you felt that you needed to sell right at that moment. Would your payments rise from falling housing prices? Or your income decrease?
If prices dropped so my loan was 100% or 110% of the value, I’d try to get back to a reasonable level (85% say) as quickly as possible. This would require saving more and spending less than I’d otherwise do.
Even if I have no plans on selling, you never know when you might be forced to sell (death, divorce, illness, work, ...).
Call me cynical but I believe that this will not happen since the people in power are going to get hurt by such a correction. They will try their damned best to prevent it happening. The Swedish central bank (Riksbanken) has also stated as much, and the current policy is very much based on this.
> We've been waiting for the housing bubble to pop a while, but how long must we wait? The longer we do the worse it'll be.
As someone who moved to London far too long ago and has expected some miraculous drop in house prices every time the economy catches a sniffle - stop waiting. It'll never happen. I mean, it may do, but to all practical degrees, house prices will creep upwards forever.
There's no 'right time' to get on the ladder, other than when you can actually afford.
Now all I hope is that I get out of London before I get too bitter about not having simply bit the bullet a decade or so ago.
When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing. This means that low interest rates are the main reason behind surging house prices and is why people have to spend decades paying back loans and being vulnerable to a drop in house prices. It creates too much debt in society and generally makes the economy more fragile than it has to be. The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth to house owners from people seeking to enter the market, a transfer of wealth from the younger generations to the boomers. This must end if we want to avoid a repeat of the 2008 crisis. But with the current levels of government debt, it's hard to see a political solution.
I guess many people will not, and that this will lead to a higher rate of renting. That promotes economic inequality as the middle class is then prevented from entering an important way building savings: owning a house outright.
I've resorted to moving way out. I'm probably going to buy a house somewhere I can work remote from.
I'm not paying 300K+ for a small home near a city with jobs, sorry, it's just not happening. Whether I can afford it or not is irrelevant, the value just isn't there other than as a proxy for "this now allows me to get higher paying jobs in the city and... continue the cycle?"
I think this is something that really needs to be addressed from a climate perspective as well.
It is cheaper, dramatically so, for me to live way out, buy a car, and use it for everything. I use an electric car, and I chuck a load of the savings into offsetting, and I'm pretty sure I'm negative.
But a far better model would be if people just stopped the rent seeking bullshit and let me build close to town.
Hard to say, but I saved like hell and then looked for houses no bank would ever lend on, and no landlord would want. Got a dumpy old architecturally protected house on three acres an hour from the city (by train) for €68k. Of course it's a huge pain in the ass (thatcher started yesterday) but I had almost no buying competition.
Yes. But the high house prices feed through to higher land prices so the newly built houses will also be more expensive than they otherwise would have been.
Absolutely. But not all land is created equal, most people want to live near a big jobs market, meaning near a big city. So the price of this land will inevitably go up.that being said, I am sure there is a lot municipalities could do to make housing more affordable.
True. Still, one alternative model to consider is one where the recent trend of opportunity concentrating in a few big cities could reverse. Either due to market forces (cheaper everything outside of the big cities), remote work becoming more prevalent, or both.
Indications of a net change - not sure, but individual examples, yes. For example, some parts of Eastern Germany have seen a trend reversal in recent years. Also a number of previously poor ("cheap") regions in southern Europe are experiencing a massive investment and tourism fueled boom. Portugal seems like a good example for that.
>When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing.
That is how borrowing works. Otherwise the lender would not make a profit.
>It creates too much debt in society and generally makes the economy more fragile than it has to be.
and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates.
> The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth from house owners to people seeking to enter the market, a transfer of wealth from the younger generations to the boomers.
Plenty of millennials own homes. There are tons of examples on Reddit of people in their 20s and 30s with homes and investments. Low rates makes it easier to get a mortgage and compound wealth by owning a home. Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created.
This stuff is honestly way over my knowledge but the way I see it, as a renter wanting to buy in the next couple years, if I own a house I am paying a mortgage. That gives me equity every payment. So every month instead of my landlord getting my money the bank will and in the end I own the house so can sell it back. Also owning a house opens all sorts of opportunities a renter does not get. Subsidies to install solar panels and save energy would go to the home owner. If you own a house and want a loan for a car let’s say, you automatically get a better interest rate then me because I am higher risk. There are all sorts of ways owning a house can make or save you money. But based on my understanding of this article the entire value of houses will crash at one point as we can’t keep increasing the costs so when the market finally realizes we have been over selling, the people holding the houses at that point risk devaluation of their home and potentially lost all their investments. Again I am trying to figure what this all means and there are certainly a lot more knowledgeable people here that know more then my layman’s view.
I think both arguments sound right to me in some degree.
It is a wealth transfer, and asset prices can’t go up infinitely, unless wages rise equally for the population of house buyers. It seems wages have been stagnating in the US for a while now.
When there’s a shock or wide drop, the latest buyers will be left holding the bag.
But nobody knows for sure, maybe it really is different this time.
A growing economy should all other things equal lead to a higher home ownership rate as the rising productivity means that fewer man hours are required to build a house. However the low interest rate environment the US (and the whole Western world) has experienced since 2001 has led to a declining rate of home ownership.
> Historically speaking, the homeownership rate has risen above the 50-year low it reached during the second quarter of 2016 when it clocked in at 62.9 percent. Still, it's several percentage points away from its pre-recession peak of 69.2 percent. [0]
Edit: you can also have a look at the graph on page five here. It shows that the home ownership rate topped around 2003 and has been on a steady decline since then:
Whether the period since 2008 has been a true expansion is arguable. On the surface level equity prices increased, yet there hasn’t been much if any inflation or wage growth and yields have gone down for most assets.
> and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates.
The economic expansion outside in the Eurozone is already over and that's despite interests rates going lower and lower. The Fed is done raising rates and it's exactly because the markets absolutely tanked in 2018 with the prospect of rising interest rates.
> There are tons of examples on Reddit of people in their 20s and 30s with homes and investments.
Why don't you look at a statistic instead of Reddit?
> Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created. Low rates makes it easier to get a mortgage and compound wealth by owning a home.
Rising prices do not equal an increase in wealth. If you pay double the price for the same home at a low interest rate, that's still a huge markup. If the prices fall, you will lose big time. The expectation is that prices can't fall because interest rates will not be allowed to rise. However, CPI inflation can still catch up to asset price inflation, it just hasn't happened yet.
Making an investment asset out of a requirement to survive is capitalist insanity. The housing market crashes every 10-20 years, while most mortgages are 30 years, this means that many people stand to lose their entire "investment", but oh wait, its their home, not their fucking Robinhood account.
Saying that things are going well, therefore we are making good decisions is a terrible argument.
> and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates.
A crisis is not an economic fact that magically happens when some predetermined values for some set of indicators are reached.
A crisis is a mix of two things: 1) a big financial/economic issue that affects an important sector of the economy, 2) widespread panic.
There are already multiple candidates for 1), but what hasn't happened is 2).
Why? That's anybody's guess.
My guess is Trump.
For people to panic, there needs to be sustained media coverage and focus. But now whatever Trump says is more important than anything else for the media.
If you look at the media since Trump became president, the most important issues have been all stuff related to his government, and whenever the media has focused on anything for too long, he's come out with some other thing that the media shifts their attention to.
So we've had lots of small panics, which by now have mostly desensitized the public.
If someone like Trump can continuously interrupt the media, they effectively control it through disruption, and then the media cannot focus for long enough on anything for people to fully panic and cause a full blown crisis.
Actually 'crisis' just means 'decisive change is impending'. There doesn't have to be panic.
Coordinated or systemic movement of money in any form can be a crisis. There doesn't have to be reporting or emotion for the situation to spiral out of control. That is to say, the panic can follow the crisis.
> If someone like Trump can continuously interrupt the media, they effectively control it through disruption, and then the media cannot focus for long enough on anything for people to fully panic and cause a full blown crisis.
Coming out of two straight years of one collusion “bombshell” report after another I agree with you. I avoided the markets when I was unsure if what was being said was true (it definitely seemed true to me).
Now it seemed to be largely politically motivated and I’m totally “insensitive” to the MSM reports on Trump and I’m ready to make long term investments in the country again. Too bad I stayed out of the markets for the last year because those looked to be good times.
Scenario 1: If interest rates go up significantly this would bankrupt entire nations such as Italy, France and Greece (again) + runaway deflation. Conclusion: interest rates cannot and will not go up. This would be political suicide. Also deflation is the number 1 enemy of central banks and the economy in general.
Scenario 2: Lowering interest rates causes rich people, businesses and governments to lend as much as they possibly can to convert debt into "stuff" that they can charge more currency for. This causes zombification of governments, businesses and rich people: productivity of real estate is 0, productivity of businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) goes towards 0, same for governments. Startups struggle to compete with larger companies, because they don't have the capital (and political lobby) and if they can somehow compete they just get bought. Also perhaps most importantly: this increases the divide between rich and poor and thus social unrest. The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. AKA: the rich are home owners and the poor are home renters at ever increasing rents.
I don't believe for a second that interest rates will go up in the years to come. So scenario 2 is where we are (heading). Smells of hyperinflation to me. Scenario 1 = 1930 all over again.
I don't see any possible positive outcome, unless by some miracle the trade wars (and other government control over markets) end. And even then...
Disclaimer: economics n00b interpreting central bank president talks and stock trader news websites.
Japan has close to zero immigration where Europe has a large migration from countries with a much higher birth rate. For Japan this implies that their population will shrink while staying ethnically homogeneous while the European population is likely to increase and diversify. Europe will see more ethno-religiously motivated conflict, Japan will suffer from having a decreasing work force which needs to take care of an increasing number of people in need of care. If Japan continues on this path they'll eventually dwindle as a country and stand the risk of being conquered by one of its more populous neighbours. Europe should have a long hard look what happened in Lebanon when that country was torn apart by a civil war [1] between different ethnic and religious groups.
China, Russia and possibly Korea (which army is far larger than Japan's) come to mind. While Japan still does have 100+ million people the population is going to shrink and those who live there are getting older and older. The low birth rate will make it hard for Japan to maintain a standing army, the ageing population also makes it harder to maintain a reserve force.
South Korea or a reunited Korea - keep in mind that I'm talking about possible future scenarios, decades from now. There has been and still is a lot of animosity between Korea and Japan [1], this goes back centuries.
The difference with Japan is that while they have a large amount of debt, they also have large amounts of assets. Japan is the world's largest creditor nation : https://en.wikipedia.org/wiki/Net_international_investment_p.... If you look at that list, you will find that US is the most indebted country in the world and that many Western countries tend to be very indebted.
bboygravity: I agree with everything you just said except that deflation is bad for the economy in general. It doesn't have to be. The Guilded Age (Belle Epoque in Europe), 1871-1914 had several percentages of deflation each year and this was a period where a massive number of people went from being poor farmers to middle class city dwellers and the period saw a massive growth in productivity.
Deflation will destabilize the economy if there is massive borrowing, and since most Western government owe about 100 % of GDP, they will prevent deflation for the very reasons you describe. But the middle class should embrace deflation and so should the general economy as it encourages savings which encourages investments which is where the growth in productivity comes from.
I think the main reason behind the better economic situation in the 1871-1914 period was not a deflationary economy, but the steady increase in factory output -- the industrialization was on its height -- and medical knowledge -- proper sanitation, proper medical procedures, hygiene. Add to that the benefits Europe and the US reaped from colonial imperialism: the "masses" gained access to commodities like sugar, tea, coffee but also cheap alcohol and opium.
Usually it was not a gradual improvement in the lifes of common people from poor farmers to well-off middle class. By far the most people not employed in the agrarian sector were working class (working in factories, mines, etc.) and their situation was, compared to today, a hellish nightmare: overcrowded slums, poor access to water and medicine, unstable food-supply. These conditions only improved slightly by the end of that period, usually out of pressure/fear of socialist/communist mass agitation.
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You are right, the life of most people living in that time period improved significantly. But I would say despite of a deflationary economy, not because of it. And only a minimal percentage of those were middle class.
Couldn't you use the same argument against inflation as well? That the improved life and economic growth in the 20th and 21th centuries have been driven by technological advances, and not by the inflationary economy?
Yes, technological advances have improved life and have allowed economic growth.
No. Society as it is currently could not have been financed by those things alone. Massive loans that cannot and will not ever be paid back cannot exist without an inflationary economy (powered by fiat currency with no limit to currency supply and fractional reserve banking). And those types of loans and the inflationary economy have been crucial for the US/The West to attain and maintain their world domination politically, economically and militarily. That's where the term "military industrial complex" comes from.
Nixon moved away from the gold standard for a reason: the US was unable to afford its wars (Vietnam at the time) and keep its military happy and in check without an inflationary economy.
Inflationary economy = massive free buying power out of thin air for whoever controls the world currency, until they control the world currency no more and an empire falls.
Again: I'm no expert at all, this is just my limited understanding.
That is a good point, particularly your ending that it's for those who control the world currency... Until they fail.
But did that really improve the lives for people globally? Couldn't it be seen as a global redistribution of wealth, from countries who used the USD to the U.S? If you were cynical you might even say the U.S. robbed the other countries.
I wouldn't be so sure to conclude that inflation has allowed economic growth from your example, but more a redistribution of one.
> Deflation will destabilize the economy if there is massive borrowing, and since most Western government owe about 100 % of GDP, they will prevent deflation for the very reasons you describe. But the middle class should embrace deflation and so should the general economy as it encourages savings which encourages investments which is where the growth in productivity comes from.
You're right. Deflation is not always a bad thing. But runaway deflation is. And runaway deflation is especially likely when there is no increased productivity (like their was in the period you mention) combined with massive debts (which didn't exist in the period you mention, because there was not fractional reserve banking like we have now and value of currencies where intrinsically backed by scarcity of gold).
A little deflation shouldn't be bad for a healthy economy with "sound money", but as you describe yourself: that's not what we're working with here.
It's not just governments who have massive amounts of debt. It's also large businesses and most real estate owners. The middle class should definitely not embrace deflation right now, because deflation could very quickly spiral into runaway deflation.
Runaway deflation = lower wages, lower housing prices, less government budget (less absolute taxes coming in). Less government budget = greater inequality, worse educational quality, leading to decrease in productivity, more crime, more corruption, more waste of resources and aside from government issues: less investments by companies, lower stock market prices, insufficient pension fund reserves due to investments going down (= lower pensions), people losing their house (lower wage = some people can't afford payments on house credit and are foreclosed), housing prices going down more because of foreclosures and bad economy, people increasingly start selling their house at an increasing loss, housing prices go down further, more people start losing and so on.
End result: Japan. Or perhaps worse: the 1930's crash (a prime example of runaway deflation), subsequent poverty, social unrest and wars.
I feel this is not a great explanation though, perhaps someone else can do better.
My employer is paying for really expensive publications on economics for electronics industry.
Some of the best paid economists in the world say to avoid capex with longer than 5 year payback time as rates are almost destined to go up due to multiple strong factors, including emerging markets becoming more attractive investments.
Add Sweden as well, same story here. The national bank (Riksbanken) can not increase interest rates because it would have disastrous consequences for the large majority of over-extended loan takers. The low interest rates in their turn lead to the value of the Swedish currency plummeting. No matter what they do, a 'correction' is unavoidable - either the Swedish crown goes to junk status or the number of foreclosures and bankruptcies will skyrocket, followed by the collapse of the housing market, followed by the collapse of those banks which have to write down all those loans with real-estate backing.
I’m not so sure that a rate hike would be devastating for Swedish loan takers; banks typically don’t give out loans to households that can’t handle large increases. Real estate prices would probably come down a bit, but people would hardly be forced to sell as long as they keep their income. People with large loans typically have large financial buffers.
I’m also suspecting that politicians will step in with deductions, etc.
High and growing household indebtedness continues to pose the greatest risk in the Swedish economy. To come to grips with the problems associated with household indebtedness, it is, above all, important that measures are taken within housing and tax policy. At the same time, there are structural vulnerabilities and risks linked to the banking system in Sweden. It is therefore important that the banks have sufficient capital and insure themselves against liquidity risks in different currencies. As the risks linked to international developments are assessed to be greater now than in the spring, it is even more important to manage the risks and vulnerabilities in the Swedish financial system.
> Also deflation is the number 1 enemy of central banks and the economy in general.
I've always thought this was a weird claim, put this simply. Consumer electronics and computers have been deflationary for ever: You can always get a better TV, phone, or computer for less money if you are willing to wait for a year. Yet people can't stop buying them. Because they want them enough. Deflation should only hurt businesses producing stuff that customers aren't really interested in.
> businesses that can't go bankrupt (because you can't miss interest payments if there's no interest)
I would expect that on business loans you don't just pay interest, you are also expected to regularly pay back actual fractions of the principal. But I admit that I don't know how this works.
> The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them.
I've never understood this angle either. Buying stuff doesn't make stuff appear out of thin air. Buying stuff means buying stuff from the people who already have it, which for valuable things like housing is already the rich. The difference between buying an apartment and renting it is whether I give the rich person 30 years' worth of rent right now in a lump some or slowly over time. I don't see how I "win" against the rich person by giving them my money earlier.
The real issue in a deflationary situation loans effectively become more not less expensive vs 0 inflation situations.
Lending always carries the risk of not being paid back, where you can always just keep your own money. So, a 100$ loan needs to return the original 100$ + the risk + some incentive not to use this money for something else.
Thus loans are effectively the absolute value of (inflation or deflation rates) + a constant factor.
> I've never understood this angle either. Buying stuff doesn't make stuff appear out of thin air. Buying stuff means buying stuff from the people who already have it, which for valuable things like housing is already the rich. The difference between buying an apartment and renting it is whether I give the rich person 30 years' worth of rent right now in a lump some or slowly over time. I don't see how I "win" against the rich person by giving them my money earlier.
There are 2 ways to make a profit on a property investment:
1. Sell at a higher price in the future which offsets all of the costs of holding the property (rented out or not).
2. Rent out at a higher monthly price than whatever the monthly cost is (cost spread out over whatever your investment horizon is), right now.
Number 2 means (assuming the house was purchased on credit, which at negative interest rates it should always be as much as possible) that you as the renter(s) are paying back the owners credit he took out for the house, the house's maintenance, the owner's house insurance and taxes and all other costs + THE APPRECIATION IN VALUE OF THE HOUSE FOR THE TIME YOU RENT (higher housing prices = higher monthly rent) + a profit.
When you buy a house, you're not giving the owner 30 years worth of rent. You're giving the owner the value of the house, which is way less than the accumulated rent would be over 30 years.
Buying a house (on credit) is only ever a net loss if the house's value goes down significantly for whatever reason. Reasons can be: uninsured destruction (war, fire, bad renters) or deflation (due to oversupply of houses such as is the case in Japan right now or due to the overall economy going bad).
In other words: assuming a healthy economy, buying a property as an investment (with a 15 - 30 year investment horizon to be able to spread all initial costs over a longer period of time) is ALWAYS a win assuming you can find renters. In the current market (at least in most cities of Western Europe) you will always find renters, because a significant part of the population who would like to buy a house simply can't get the credit they need to buy a house close to where their employment is. Due to the housing prices being too inflated relative to average income from employment.
Summary: housing prices higher than the credit people can afford = people can't get credit to buy a house = lots of renters on the market (people rent instead) = makes it interesting to own houses to rent out for profit = housing prices higher = poor people can't get credit to buy a house = lots of renters on the market and so on.
See what's happening? Those who can afford real estate investments start receiving an ever larger portion of the income of people who can't afford real estate investments. AKA: the poor and middle class get poorer and the rich get richer.
> When people borrow money for a house, they only consider the monthly payments for the mortgage and not the absolute amount of money they are borrowing.
Yep exactly.
The same thing happens with cars too. The salesman does everything in their power to focus only on the monthly payment amount instead of what you're really paying total in the end.
It's way worse for houses because you can end up in a situation where if you make non-optimal choices with mortgages you can be paying off your mortgage for multiple generations on a low end house. Interest is crazy, but unfortunately most people don't pay enough attention to it or their debt (which makes sense since you need to go out of your way to really learn about it).
That's really only the case when you have regulation limiting supply growth upwards, and/or limited amounts of land you can sprawl outwords. I grew up in chicago and we love to build high rises (chicago engineers were the ones that designed the Burj Khalifa to give you an example of our love for architecture), and we have hundreds of miles of farmland we can sprawl out to forever increasing supply of homes.
In Denmark, we have introduced regulation that limits buyers to only be able to borrow 4 times their yearly household income, when buying a house in the largest cities. That puts a limit on how much the house prices can rise.
The situation is, on one side, concentrations of wealth that are too large to invest in anything that captures a positive return; and on the other side, an endless list of things that desperately need investment but cannot capture returns to the individual investor, such as decarbonisation and healthcare.
Negative rates are the market signalling that it's time for a wealth tax. Although these are tricky to implement because wealth can be moved very easily.
> people have to spend decades paying back loans and being vulnerable to a drop in house prices
So what if your housing price drops? If you are in for the long term, just ride it out. The risk in a long term loan isn't fluctuating prices, it is income stability. People don't lose homes because their home value drops, they lose them because they lose their jobs and can't afford to make payments.
The special thing about housing though is you have to pay monthly payments for housing. This is the reason why those monthly payments are privileged in consideration.
So the alternative is rent, which at the moment in many places is looking like a less appealing alternative.
The transfer of wealth in the housing market happens from one group to another regardless.
I agree with a lot of your sentiment and what you're saying, but I think the monthly payment focus isn't irrational.
On the one hand this sounds eminently stupid. On the other hand, it means there is some sort of de-linking of money and time.
Negative interest rates roughly imply that Denmark crowns have no ability to preserve wealth over time. If anyone gets paid in crowns they should attempt to spend them immediately and buy something durable.
It is hard to see how this is an improvement over letting money hold value over time. Now there will be more competition over scarce real resources instead of wealthy savers holding a "fake resource" of cash in a bank account. And anyone who doesn't understand interest rates might lost out from confusion.
Quite unlikely if they are following the current monetary trend. Negative interest rates are going to be matched with large amounts of monetary creation by the banks and central banks (note they are paying people to borrow money).
If someone were to try that policy in an English speaking country I'd be very confident that the creation would outweigh the destruction and that there will be massive wealth transfers from people who have cash savings to people who borrow money. Denmark will probably go that way too.
The negatives look to be monthly seasonally-unadjusted. I wouldn't read too much in to them. Annual numbers are still in positive territory. Denmark has had negative rates for more than a year.
Negative interest rates indicate deflation. In deflation, cash is king - people are willing to hold cash rather than make investments or buy stuff. This generally reduces economic activity and also makes it difficult for governments to stimulate by reducing rates.
(In an inflationary environment, the wise thing is to put your cash into hard assets, since it will be worth less in the future. Deflation in the opposite.)
Interest rates are being set/managed by small technocratic committees in pretty much every country I've looked into. I'm a cynic and I don't believe they are as politically independent as most claim to be either. Interest rates set in that manner don't indicate anything about the underlying real economy.
EDIT And as I'm arguing elsewhere in the thread, they measure inflation and it is positive.
As far as I am aware the danish national bank have needed to print more money to devalue the danish krone because it is by law pegged to the euro, but as there is more trust in the krone they have needed to print more to make it within the 1% of the euro.
Other than spreading it around multiple banks, the natural outcome of this will be increased investment, most likely in real estate at one end of the spectrum and on the other things like money market funds, treasury bonds, and to a lesser extent index tracker style ETFs.
If the trend spreads across other countries, and if you believe this is a trend that is hard to revert (falling interest rates), I'd say we're in for a few more years of the stock market climbing with bigger and bigger valuations at crazier revenue multiples. Even though lately it seems like everyone is predicting that a crash is right around the corner, I don't think it's likely without a big external event happening to disturb this trend. Either some cyber / regular war or some other event nobody is forseeing.
The 2008 big short dude recently predicted that the inflows of money into ETFs by a lot of very passive investors is gonna create a situation where big valuations are based on nothing other than people not having any other place to put their savings, but I think like in 2008, his prediction is very early again.
Soon enough we may find out that too much is invested into the expectation that interest rates will go down indefinitely.
When inflation finally strikes, there will be no tools left to fight it. Getting deeply into debt and buying as many assets as you can would then be the right thing to do.
Isn't the primary tool to fight inflation with an increase in interest rates? And if interest rates are negative doesn't that mean that there is lots of room to adjust them?
It strikes me that the problem is that the tools to fight deflation are inadequate.
How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose?
> And if interest rates are negative doesn't that mean that there is lots of room to adjust them?
No, because the economy has already adapted to these low interest rates. All the money that was put into high-risk instruments at relatively low yields will be desperate to move into these "low risk" bonds, which causes a huge selloff, which will be especially disastrous to those who bought in on margin.
Furthermore, those entities that have gotten used to financing old debt with ever cheaper new debt will have trouble finding new affordable debt.
> It strikes me that the problem is that the tools to fight deflation are inadequate.
What deflation? You mean the "deflation" of CPI staying below 2%? What about asset price inflation?
> How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose?
What real economic growth has been achieved by this unprecedented money-creation spree? Rising prices do not equal prosperity.
What about Japan, or the Eurozone? They have even lower interest rates and they're once again stagnating. You really believe if money was even cheaper, even more growth could be achieved?
We do have massive asset price inflation. We also have significant service-sector and rent price inflation. The CPI is only stable because productivity improvements have kept prices at bay for many consumer goods:
However, many of these consumer goods aren't made in the US. The dollar has been strong because, globally speaking, interest rates on it are high. If the US went back to QE and zero-interest, you could easily see a 25% drop in the value of the dollar, which immediately shows up as inflation for imported goods.
The argument that the central banks couldn't fight inflation by raising rates is sort of undermined by the fact that central banks have raised rates in very recent history and there was no catastrophe, in 2011 the ECB raised rates 1/2% and all the Eurozone got was a stunted recovery. The US Fed had been steadily raising rates since 2016 and has since admitted that it was a mistake and reversed course.
The tools to fight deflation/low-inflation are mostly left in the hands of government spending, which unfortunately governments refuse to do for political reasons, the central bank's tools are limited.
What about Japan, or the Eurozone?
What about them? The story you are telling is the some one from the 90's about Japan and it has been wrong so far, at what point is there enough evidence to prove that Japan was right to keep interest rates low? Furthermore Abenomics has been largely a success, which is doubling-down on those policies plus being willing to pile on even more debt, raising an expectation of future inflation to create investment (not quite exactly but more or less as Krugman encouraged them to in the 90's).
The Eurozone's problem is clearly austerity in the face of the structural issues that the single currency creates, as long as the wealthy members are unwilling to spend and the rules prevent the poorer members from spending they are caught in a low-demand trap of their own creation.
https://www.jstor.org/stable/24385696
They have even lower interest rates and they're once again stagnating.
You really believe if money was even cheaper, even more growth could be achieved?
I believe that higher rates will hurt them (supported by the evidence from the 2011 ECB & 2015 Fed rate increases and the study of their consequences) and, as I stated in my original post they, like the Danish, should be spending money on things they need to stimulate their economy and invest in the future.
If you can borrow money at negative interest rates and build assets of any future value then you should do it and make citizens' lives better now and in the future.
> The argument that the central banks couldn't fight inflation by raising rates is sort of undermined by the fact that central banks have raised rates in very recent history and there was no catastrophe, in 2011 the ECB raised rates 1/2% and all the Eurozone got was a stunted recovery.
They raised them very briefly for a couple of months. And half a percent? That's basically background noise. In the past, to fight inflation, rates went up as high as fifteen percent.
> The US Fed had been steadily raising rates since 2016 and has since admitted that it was a mistake and reversed course.
They've reversed course in 2018 because the markets were tanking in 2018. The Fed never admitted making any mistakes, as far as I know.
> "Keynesianism totally works!" (paraphrased)
Remember, Keynesianism says you boost the economy short term to get it up to speed, then throttle it when times are good. Keynesianism is about pulling future demand into the present. Except times never get good enough for politicians to put in the throttle.
So you end up with a pile of debt that can't be serviced in any other way than inflation, and we haven't seen the end of that yet.
Do you believe that situation is better for the owning class, who bought up all the assets in exchange for cheap debt, or the serving class, who have to rent those assets, whose wages are losing more and more purchasing power?
> If you can borrow money at negative interest rates and build assets of any future value then you should do it and make citizens' lives better now and in the future.
That's not what's happening. You borrow money so you can own more of the future, and charge citizens for it.
Setting economic policy based on fighting 1970's inflation battles instead of accepting the evidence that the US economy is finally near or at full employment by sustaining a low interest rate environment contrary to evidence and experience. Full employment is good for workers and less-good for asset owners.
Governments can borrow money to build infrastructure that make people's lives better, I don't know how you can dispute that this policy option exists or say that it "doesn't work that way" when you know, governments do that stuff all the time. When in doubt, and you have low interest rates, build a sewage treatment plant!
> Setting economic policy based on fighting 1970's inflation battles instead of accepting the evidence that the US economy is finally near or at full employment by sustaining a low interest rate environment contrary to evidence and experience. Full employment is good for workers and less-good for asset owners.
You can always point to numbers that are supposedly good (such as questionable government-issued employment statistics) and I can always point to numbers that are bad (the PMI, the Russell 2000, the unprecedented levels of sovereign and individual debt).
If the economy really was that great now for people on main street, why is Trump losing approval among the people that voted for him to fix this exact issue?
> Governments can borrow money to build infrastructure that make people's lives better, I don't know how you can dispute that this policy option exists or say that it "doesn't work that way" when you know, governments do that stuff all the time. When in doubt, and you have low interest rates, build a sewage treatment plant!
I'm not against emergency measures by any means, but the tendency with governments is to make the emergency measure of today the status quo of tomorrow. This idea that you can spend yourself wealthy at the national level is just as flawed as the idea of trickle-down-economics.
Sure, in the short term, debt-financed government programs can stimulate the economy, but that debt has to be paid off. You have moved demand from the future into the present. It will be missing from the future, because money spent on debt service cannot be spent on anything else. That is unless you don't pay off the debt, or you erase it through inflation, in which case that is still money missing from someone's pocket, and it's not just foreign pockets - most US debt is internal. It's also not going to be the rich guys' pockets, because they saw it all coming and bought up all the hard assets already.
IDK, the closest approximation of full employment we've seen since the second world war has been the product of low interest rates.
Conversely fretting about debt in the way you describe, with a concern about the value of present investment in physical infrastructure for the future, has proven over and over again to be unfounded (tax cuts are otherwise clearly a case of leaving money on the table now that will not benefit the future). You'll see.
> Conversely fretting about debt in the way you describe, with a concern about the value of present investment in physical infrastructure for the future, has proven over and over again to be unfounded
Not true. If you want to see that idea of economic policy fail, look at Turkey under Erdogan:
The reason that Erdogan couldn't pull off this con for as long as the US is that he can't print Dollars or Euros. However, even those "reserve currencies" eventually can lose investor faith. You're just speculating that they never will.
Yeah, don't borrow in someone else's currency is a pretty important point, the 10 year Danish Krone Bond is at a -0.48%. If you have to borrow in someone else's currency then you are absolutely /not/ the same position that Denmark is right now.
The reason Turkey has to borrow in someone else's currency is that their own currency doesn't have the credibility it needs to support low interest rates, so if they want to borrow at affordable rates to boost their economy, they need to use foreign currency.
If the US keeps up the deficit spending, it will either need to pay a huge amount of money on debt service, or it needs to monetize its debt - which means credibility will be lost and new debt will be more expensive.
It strikes me that with an absurdly low debt-to-gdp ratio of 34% and negative interest rates maybe the Danish government should invest more money in their economy. Maybe leverage the market to build the enormous amount of green infrastructure they and the world needs, the returns don't need to be that high to pay off.
"high reserves" that according to Denmarks government after 2032 will not be able to cover Denmarks own oil consumption and likely be exhausted before 2050.
Every barrel of oil they don't use now either delays that or brings them money to invest, and using the income now to prep for later seems like a sane strategy.
Because they identified the transition to green energy (grøn omstilling) as a strategic national goal almost 40 years ago and the policy is very popular.
They can benefit from export revenue or make the moral choice to leave their reserves in the ground.
> Why would they benefit in green energy infrastructure?
The worlds largest Wind Turbine Manufacturer Vestas is danish.
Besides them, there's lots of green energy infrastructures companies that are expanding. Also of note, the Large Danish companies LEGO and Novo Nordisk have already gone 100% CO2 neutral on productions through various offsetting initiatives[1]. Oil money is not something to flush down the toilet, but the country is moving very heavily in the green direction. The oil will dry up, or we'll reach a point where it's political suicide to keep going after it. But the wind will keep blowing and the sun will keep shining.
[1] yes that's not enough, but a good milestone on the road forwards
In a world with crypto currencies, would a frugal Dane be wise to put their cash into a cryptocurrency?
I realize crypto is still seen as risky, however if it takes hold and overall market volatility stabilizes, how would easy access to borderless liquid digital assets affect the neg interest rate strategy?
Edit: remove mention of specific cryptocurrency in an attempt to shift focus to broader strategy.
What is the advantage to buying Tether with Krones instead of just converting them to USD? I think people jump to crypto as a solution when oftentimes the financial markets have already had the same solution for hundreds of years (in this case, foreign exchange).
With Tether you're essentially converting your cash into USD, but with massive risk added on top. Tether is, as stated by themselves, already not backed one-to-one by USD and you cannot actually redeem them, only trade them in exchanges.
What you instead should ask what effect real cryptocurrencies like Bitcoin can have.
I'm personally quite positive to cryptocurrencies, but I don't have a crystal ball. If a single country is about to go under of course it's a good alternative, but of the global economy tanks it's all up in the air.
This is a really bad articles. The short term rates are not driving this. They don't drive long term rates because be short term rates are largely driven by technical considerations (eg the recent fed interventions in the overnight markets because of liquidity issues).
I spoke to someone about this a while ago. These loans are often required by the government to message certain targets, and are meet positive for the banks because of other regulatory issues that may exist. These negative rates home loans wouldn't exist without some regulation various regulation and government incentives.
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[ 2.9 ms ] story [ 160 ms ] threadSurely this can't end well?
Here in Sweden the house prices are so high in cities it's almost impossible for young people to get a house, sometimes even an apartment. We've been waiting for the housing bubble to pop a while, but how long must we wait? The longer we do the worse it'll be.
If what happened, exactly? If you already "own" a home and are paying back a loan on it, a price drop of other housing units would not affect you in any way unless you felt that you needed to sell right at that moment. Would your payments rise from falling housing prices? Or your income decrease?
Even if I have no plans on selling, you never know when you might be forced to sell (death, divorce, illness, work, ...).
As someone who moved to London far too long ago and has expected some miraculous drop in house prices every time the economy catches a sniffle - stop waiting. It'll never happen. I mean, it may do, but to all practical degrees, house prices will creep upwards forever.
There's no 'right time' to get on the ladder, other than when you can actually afford.
Now all I hope is that I get out of London before I get too bitter about not having simply bit the bullet a decade or so ago.
Of course it's not possible for everyone and there are sacrifices with living in a small community as we do.
I've resorted to moving way out. I'm probably going to buy a house somewhere I can work remote from.
I'm not paying 300K+ for a small home near a city with jobs, sorry, it's just not happening. Whether I can afford it or not is irrelevant, the value just isn't there other than as a proxy for "this now allows me to get higher paying jobs in the city and... continue the cycle?"
I think this is something that really needs to be addressed from a climate perspective as well.
It is cheaper, dramatically so, for me to live way out, buy a car, and use it for everything. I use an electric car, and I chuck a load of the savings into offsetting, and I'm pretty sure I'm negative.
But a far better model would be if people just stopped the rent seeking bullshit and let me build close to town.
Clearly I live in the wrong city. 300k would get you a leasehold to someone backyard with a tent in it where I live.
I need to move.
That is how borrowing works. Otherwise the lender would not make a profit.
>It creates too much debt in society and generally makes the economy more fragile than it has to be.
and yet the post-2009 economic expansion is the longest ever, and this is in spite of all the anxieties over tariffs and trade wards and the fed raising rates.
> The low interest rates may seem like a helping hand to house buyers but it is in fact the opposite: a transfer of wealth from house owners to people seeking to enter the market, a transfer of wealth from the younger generations to the boomers.
Plenty of millennials own homes. There are tons of examples on Reddit of people in their 20s and 30s with homes and investments. Low rates makes it easier to get a mortgage and compound wealth by owning a home. Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created.
It is a wealth transfer, and asset prices can’t go up infinitely, unless wages rise equally for the population of house buyers. It seems wages have been stagnating in the US for a while now.
When there’s a shock or wide drop, the latest buyers will be left holding the bag.
But nobody knows for sure, maybe it really is different this time.
> Historically speaking, the homeownership rate has risen above the 50-year low it reached during the second quarter of 2016 when it clocked in at 62.9 percent. Still, it's several percentage points away from its pre-recession peak of 69.2 percent. [0]
[0]: https://www.thebalance.com/the-homeownership-rate-what-is-it...
Edit: you can also have a look at the graph on page five here. It shows that the home ownership rate topped around 2003 and has been on a steady decline since then:
https://www.census.gov/housing/hvs/files/currenthvspress.pdf
The economic expansion outside in the Eurozone is already over and that's despite interests rates going lower and lower. The Fed is done raising rates and it's exactly because the markets absolutely tanked in 2018 with the prospect of rising interest rates.
> There are tons of examples on Reddit of people in their 20s and 30s with homes and investments.
Why don't you look at a statistic instead of Reddit?
> Rather than a wealth transfer ,which suggests a zero sum game, more wealth is being created. Low rates makes it easier to get a mortgage and compound wealth by owning a home.
Rising prices do not equal an increase in wealth. If you pay double the price for the same home at a low interest rate, that's still a huge markup. If the prices fall, you will lose big time. The expectation is that prices can't fall because interest rates will not be allowed to rise. However, CPI inflation can still catch up to asset price inflation, it just hasn't happened yet.
Saying that things are going well, therefore we are making good decisions is a terrible argument.
A crisis is not an economic fact that magically happens when some predetermined values for some set of indicators are reached.
A crisis is a mix of two things: 1) a big financial/economic issue that affects an important sector of the economy, 2) widespread panic.
There are already multiple candidates for 1), but what hasn't happened is 2).
Why? That's anybody's guess.
My guess is Trump.
For people to panic, there needs to be sustained media coverage and focus. But now whatever Trump says is more important than anything else for the media.
If you look at the media since Trump became president, the most important issues have been all stuff related to his government, and whenever the media has focused on anything for too long, he's come out with some other thing that the media shifts their attention to.
So we've had lots of small panics, which by now have mostly desensitized the public.
If someone like Trump can continuously interrupt the media, they effectively control it through disruption, and then the media cannot focus for long enough on anything for people to fully panic and cause a full blown crisis.
Coordinated or systemic movement of money in any form can be a crisis. There doesn't have to be reporting or emotion for the situation to spiral out of control. That is to say, the panic can follow the crisis.
You are technically correct. Maybe I should have used the word recession instead.
What I mean is that a lot (most?) of the damage in a crisis is actuallly done by big masses of people reacting to it rather than the crisis itself.
Think about bank runs, widespread stock shorting and selling, people not investing because of uncertainty, lenders abruptly calling their loans, etc.
Coming out of two straight years of one collusion “bombshell” report after another I agree with you. I avoided the markets when I was unsure if what was being said was true (it definitely seemed true to me).
Now it seemed to be largely politically motivated and I’m totally “insensitive” to the MSM reports on Trump and I’m ready to make long term investments in the country again. Too bad I stayed out of the markets for the last year because those looked to be good times.
Scenario 1: If interest rates go up significantly this would bankrupt entire nations such as Italy, France and Greece (again) + runaway deflation. Conclusion: interest rates cannot and will not go up. This would be political suicide. Also deflation is the number 1 enemy of central banks and the economy in general.
Scenario 2: Lowering interest rates causes rich people, businesses and governments to lend as much as they possibly can to convert debt into "stuff" that they can charge more currency for. This causes zombification of governments, businesses and rich people: productivity of real estate is 0, productivity of businesses that can't go bankrupt (because you can't miss interest payments if there's no interest) goes towards 0, same for governments. Startups struggle to compete with larger companies, because they don't have the capital (and political lobby) and if they can somehow compete they just get bought. Also perhaps most importantly: this increases the divide between rich and poor and thus social unrest. The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them. AKA: the rich are home owners and the poor are home renters at ever increasing rents.
I don't believe for a second that interest rates will go up in the years to come. So scenario 2 is where we are (heading). Smells of hyperinflation to me. Scenario 1 = 1930 all over again.
I don't see any possible positive outcome, unless by some miracle the trade wars (and other government control over markets) end. And even then...
Disclaimer: economics n00b interpreting central bank president talks and stock trader news websites.
Would make sense to some extend.
[1] https://en.wikipedia.org/wiki/Lebanese_Civil_War
The only threat is China and China's aging too...
Korea? Which one? North Korea? Please :-)
[1] https://en.wikipedia.org/wiki/Anti-Japanese_sentiment_in_Kor...
Deflation will destabilize the economy if there is massive borrowing, and since most Western government owe about 100 % of GDP, they will prevent deflation for the very reasons you describe. But the middle class should embrace deflation and so should the general economy as it encourages savings which encourages investments which is where the growth in productivity comes from.
Usually it was not a gradual improvement in the lifes of common people from poor farmers to well-off middle class. By far the most people not employed in the agrarian sector were working class (working in factories, mines, etc.) and their situation was, compared to today, a hellish nightmare: overcrowded slums, poor access to water and medicine, unstable food-supply. These conditions only improved slightly by the end of that period, usually out of pressure/fear of socialist/communist mass agitation.
-----
You are right, the life of most people living in that time period improved significantly. But I would say despite of a deflationary economy, not because of it. And only a minimal percentage of those were middle class.
Yes, technological advances have improved life and have allowed economic growth.
No. Society as it is currently could not have been financed by those things alone. Massive loans that cannot and will not ever be paid back cannot exist without an inflationary economy (powered by fiat currency with no limit to currency supply and fractional reserve banking). And those types of loans and the inflationary economy have been crucial for the US/The West to attain and maintain their world domination politically, economically and militarily. That's where the term "military industrial complex" comes from.
Nixon moved away from the gold standard for a reason: the US was unable to afford its wars (Vietnam at the time) and keep its military happy and in check without an inflationary economy.
Inflationary economy = massive free buying power out of thin air for whoever controls the world currency, until they control the world currency no more and an empire falls.
Again: I'm no expert at all, this is just my limited understanding.
But did that really improve the lives for people globally? Couldn't it be seen as a global redistribution of wealth, from countries who used the USD to the U.S? If you were cynical you might even say the U.S. robbed the other countries.
I wouldn't be so sure to conclude that inflation has allowed economic growth from your example, but more a redistribution of one.
You're right. Deflation is not always a bad thing. But runaway deflation is. And runaway deflation is especially likely when there is no increased productivity (like their was in the period you mention) combined with massive debts (which didn't exist in the period you mention, because there was not fractional reserve banking like we have now and value of currencies where intrinsically backed by scarcity of gold).
A little deflation shouldn't be bad for a healthy economy with "sound money", but as you describe yourself: that's not what we're working with here.
It's not just governments who have massive amounts of debt. It's also large businesses and most real estate owners. The middle class should definitely not embrace deflation right now, because deflation could very quickly spiral into runaway deflation.
Runaway deflation = lower wages, lower housing prices, less government budget (less absolute taxes coming in). Less government budget = greater inequality, worse educational quality, leading to decrease in productivity, more crime, more corruption, more waste of resources and aside from government issues: less investments by companies, lower stock market prices, insufficient pension fund reserves due to investments going down (= lower pensions), people losing their house (lower wage = some people can't afford payments on house credit and are foreclosed), housing prices going down more because of foreclosures and bad economy, people increasingly start selling their house at an increasing loss, housing prices go down further, more people start losing and so on.
End result: Japan. Or perhaps worse: the 1930's crash (a prime example of runaway deflation), subsequent poverty, social unrest and wars.
I feel this is not a great explanation though, perhaps someone else can do better.
Some of the best paid economists in the world say to avoid capex with longer than 5 year payback time as rates are almost destined to go up due to multiple strong factors, including emerging markets becoming more attractive investments.
Inflation: bails out debtors, punishes savers
Deflation: punishes debtors, rewards savers
I’m also suspecting that politicians will step in with deductions, etc.
https://www.riksbank.se/en-gb/press-and-published/notices-an...
High and growing household indebtedness continues to pose the greatest risk in the Swedish economy. To come to grips with the problems associated with household indebtedness, it is, above all, important that measures are taken within housing and tax policy. At the same time, there are structural vulnerabilities and risks linked to the banking system in Sweden. It is therefore important that the banks have sufficient capital and insure themselves against liquidity risks in different currencies. As the risks linked to international developments are assessed to be greater now than in the spring, it is even more important to manage the risks and vulnerabilities in the Swedish financial system.
I've always thought this was a weird claim, put this simply. Consumer electronics and computers have been deflationary for ever: You can always get a better TV, phone, or computer for less money if you are willing to wait for a year. Yet people can't stop buying them. Because they want them enough. Deflation should only hurt businesses producing stuff that customers aren't really interested in.
> businesses that can't go bankrupt (because you can't miss interest payments if there's no interest)
I would expect that on business loans you don't just pay interest, you are also expected to regularly pay back actual fractions of the principal. But I admit that I don't know how this works.
> The poor can't get significant credit so they are forced to finance the "stuff" that the rich own by renting it from them.
I've never understood this angle either. Buying stuff doesn't make stuff appear out of thin air. Buying stuff means buying stuff from the people who already have it, which for valuable things like housing is already the rich. The difference between buying an apartment and renting it is whether I give the rich person 30 years' worth of rent right now in a lump some or slowly over time. I don't see how I "win" against the rich person by giving them my money earlier.
Lending always carries the risk of not being paid back, where you can always just keep your own money. So, a 100$ loan needs to return the original 100$ + the risk + some incentive not to use this money for something else.
Thus loans are effectively the absolute value of (inflation or deflation rates) + a constant factor.
There are 2 ways to make a profit on a property investment:
1. Sell at a higher price in the future which offsets all of the costs of holding the property (rented out or not).
2. Rent out at a higher monthly price than whatever the monthly cost is (cost spread out over whatever your investment horizon is), right now.
Number 2 means (assuming the house was purchased on credit, which at negative interest rates it should always be as much as possible) that you as the renter(s) are paying back the owners credit he took out for the house, the house's maintenance, the owner's house insurance and taxes and all other costs + THE APPRECIATION IN VALUE OF THE HOUSE FOR THE TIME YOU RENT (higher housing prices = higher monthly rent) + a profit.
When you buy a house, you're not giving the owner 30 years worth of rent. You're giving the owner the value of the house, which is way less than the accumulated rent would be over 30 years.
Buying a house (on credit) is only ever a net loss if the house's value goes down significantly for whatever reason. Reasons can be: uninsured destruction (war, fire, bad renters) or deflation (due to oversupply of houses such as is the case in Japan right now or due to the overall economy going bad).
In other words: assuming a healthy economy, buying a property as an investment (with a 15 - 30 year investment horizon to be able to spread all initial costs over a longer period of time) is ALWAYS a win assuming you can find renters. In the current market (at least in most cities of Western Europe) you will always find renters, because a significant part of the population who would like to buy a house simply can't get the credit they need to buy a house close to where their employment is. Due to the housing prices being too inflated relative to average income from employment.
Summary: housing prices higher than the credit people can afford = people can't get credit to buy a house = lots of renters on the market (people rent instead) = makes it interesting to own houses to rent out for profit = housing prices higher = poor people can't get credit to buy a house = lots of renters on the market and so on.
See what's happening? Those who can afford real estate investments start receiving an ever larger portion of the income of people who can't afford real estate investments. AKA: the poor and middle class get poorer and the rich get richer.
Yes, that's what I said. If the rich control apartments, they can always arrange to get richer. I cannot cheat them out of that.
Yep exactly.
The same thing happens with cars too. The salesman does everything in their power to focus only on the monthly payment amount instead of what you're really paying total in the end.
It's way worse for houses because you can end up in a situation where if you make non-optimal choices with mortgages you can be paying off your mortgage for multiple generations on a low end house. Interest is crazy, but unfortunately most people don't pay enough attention to it or their debt (which makes sense since you need to go out of your way to really learn about it).
And there are no financial constructs to spread the risk?
Negative rates are the market signalling that it's time for a wealth tax. Although these are tricky to implement because wealth can be moved very easily.
So what if your housing price drops? If you are in for the long term, just ride it out. The risk in a long term loan isn't fluctuating prices, it is income stability. People don't lose homes because their home value drops, they lose them because they lose their jobs and can't afford to make payments.
So the alternative is rent, which at the moment in many places is looking like a less appealing alternative.
The transfer of wealth in the housing market happens from one group to another regardless.
I agree with a lot of your sentiment and what you're saying, but I think the monthly payment focus isn't irrational.
Negative interest rates roughly imply that Denmark crowns have no ability to preserve wealth over time. If anyone gets paid in crowns they should attempt to spend them immediately and buy something durable.
It is hard to see how this is an improvement over letting money hold value over time. Now there will be more competition over scarce real resources instead of wealthy savers holding a "fake resource" of cash in a bank account. And anyone who doesn't understand interest rates might lost out from confusion.
If someone were to try that policy in an English speaking country I'd be very confident that the creation would outweigh the destruction and that there will be massive wealth transfers from people who have cash savings to people who borrow money. Denmark will probably go that way too.
Inflation in Denmark august 2019 - july 2019 was -0.39%. That is, the value of money is increasing.
The value of money in terms of assets has been steadily decreasing.
Granted, most people don't think in terms of assets. It takes a while for asset prices to bleed through to consumer prices.
(In an inflationary environment, the wise thing is to put your cash into hard assets, since it will be worth less in the future. Deflation in the opposite.)
EDIT And as I'm arguing elsewhere in the thread, they measure inflation and it is positive.
If the trend spreads across other countries, and if you believe this is a trend that is hard to revert (falling interest rates), I'd say we're in for a few more years of the stock market climbing with bigger and bigger valuations at crazier revenue multiples. Even though lately it seems like everyone is predicting that a crash is right around the corner, I don't think it's likely without a big external event happening to disturb this trend. Either some cyber / regular war or some other event nobody is forseeing.
The 2008 big short dude recently predicted that the inflows of money into ETFs by a lot of very passive investors is gonna create a situation where big valuations are based on nothing other than people not having any other place to put their savings, but I think like in 2008, his prediction is very early again.
We'll see, interesting times ahead.
When inflation finally strikes, there will be no tools left to fight it. Getting deeply into debt and buying as many assets as you can would then be the right thing to do.
Obviously, this is not financial advice.
It strikes me that the problem is that the tools to fight deflation are inadequate.
How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose?
No, because the economy has already adapted to these low interest rates. All the money that was put into high-risk instruments at relatively low yields will be desperate to move into these "low risk" bonds, which causes a huge selloff, which will be especially disastrous to those who bought in on margin.
Furthermore, those entities that have gotten used to financing old debt with ever cheaper new debt will have trouble finding new affordable debt.
> It strikes me that the problem is that the tools to fight deflation are inadequate.
What deflation? You mean the "deflation" of CPI staying below 2%? What about asset price inflation?
> How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose?
What real economic growth has been achieved by this unprecedented money-creation spree? Rising prices do not equal prosperity.
What about Japan, or the Eurozone? They have even lower interest rates and they're once again stagnating. You really believe if money was even cheaper, even more growth could be achieved?
We do have massive asset price inflation. We also have significant service-sector and rent price inflation. The CPI is only stable because productivity improvements have kept prices at bay for many consumer goods:
https://perspectives.pictet.com/wp-content/uploads/2015/04/U...
However, many of these consumer goods aren't made in the US. The dollar has been strong because, globally speaking, interest rates on it are high. If the US went back to QE and zero-interest, you could easily see a 25% drop in the value of the dollar, which immediately shows up as inflation for imported goods.
The tools to fight deflation/low-inflation are mostly left in the hands of government spending, which unfortunately governments refuse to do for political reasons, the central bank's tools are limited.
What about them? The story you are telling is the some one from the 90's about Japan and it has been wrong so far, at what point is there enough evidence to prove that Japan was right to keep interest rates low? Furthermore Abenomics has been largely a success, which is doubling-down on those policies plus being willing to pile on even more debt, raising an expectation of future inflation to create investment (not quite exactly but more or less as Krugman encouraged them to in the 90's).The Eurozone's problem is clearly austerity in the face of the structural issues that the single currency creates, as long as the wealthy members are unwilling to spend and the rules prevent the poorer members from spending they are caught in a low-demand trap of their own creation. https://www.jstor.org/stable/24385696
I believe that higher rates will hurt them (supported by the evidence from the 2011 ECB & 2015 Fed rate increases and the study of their consequences) and, as I stated in my original post they, like the Danish, should be spending money on things they need to stimulate their economy and invest in the future.If you can borrow money at negative interest rates and build assets of any future value then you should do it and make citizens' lives better now and in the future.
They raised them very briefly for a couple of months. And half a percent? That's basically background noise. In the past, to fight inflation, rates went up as high as fifteen percent.
> The US Fed had been steadily raising rates since 2016 and has since admitted that it was a mistake and reversed course.
They've reversed course in 2018 because the markets were tanking in 2018. The Fed never admitted making any mistakes, as far as I know.
> "Keynesianism totally works!" (paraphrased)
Remember, Keynesianism says you boost the economy short term to get it up to speed, then throttle it when times are good. Keynesianism is about pulling future demand into the present. Except times never get good enough for politicians to put in the throttle.
So you end up with a pile of debt that can't be serviced in any other way than inflation, and we haven't seen the end of that yet.
Do you believe that situation is better for the owning class, who bought up all the assets in exchange for cheap debt, or the serving class, who have to rent those assets, whose wages are losing more and more purchasing power?
> If you can borrow money at negative interest rates and build assets of any future value then you should do it and make citizens' lives better now and in the future.
That's not what's happening. You borrow money so you can own more of the future, and charge citizens for it.
Governments can borrow money to build infrastructure that make people's lives better, I don't know how you can dispute that this policy option exists or say that it "doesn't work that way" when you know, governments do that stuff all the time. When in doubt, and you have low interest rates, build a sewage treatment plant!
You can always point to numbers that are supposedly good (such as questionable government-issued employment statistics) and I can always point to numbers that are bad (the PMI, the Russell 2000, the unprecedented levels of sovereign and individual debt).
If the economy really was that great now for people on main street, why is Trump losing approval among the people that voted for him to fix this exact issue?
> Governments can borrow money to build infrastructure that make people's lives better, I don't know how you can dispute that this policy option exists or say that it "doesn't work that way" when you know, governments do that stuff all the time. When in doubt, and you have low interest rates, build a sewage treatment plant!
I'm not against emergency measures by any means, but the tendency with governments is to make the emergency measure of today the status quo of tomorrow. This idea that you can spend yourself wealthy at the national level is just as flawed as the idea of trickle-down-economics.
Sure, in the short term, debt-financed government programs can stimulate the economy, but that debt has to be paid off. You have moved demand from the future into the present. It will be missing from the future, because money spent on debt service cannot be spent on anything else. That is unless you don't pay off the debt, or you erase it through inflation, in which case that is still money missing from someone's pocket, and it's not just foreign pockets - most US debt is internal. It's also not going to be the rich guys' pockets, because they saw it all coming and bought up all the hard assets already.
Conversely fretting about debt in the way you describe, with a concern about the value of present investment in physical infrastructure for the future, has proven over and over again to be unfounded (tax cuts are otherwise clearly a case of leaving money on the table now that will not benefit the future). You'll see.
Not true. If you want to see that idea of economic policy fail, look at Turkey under Erdogan:
https://en.wikipedia.org/wiki/Turkish_currency_and_debt_cris...
The reason that Erdogan couldn't pull off this con for as long as the US is that he can't print Dollars or Euros. However, even those "reserve currencies" eventually can lose investor faith. You're just speculating that they never will.
If the US keeps up the deficit spending, it will either need to pay a huge amount of money on debt service, or it needs to monetize its debt - which means credibility will be lost and new debt will be more expensive.
Either way, it's not a free lunch.
Yes there is no free lunch, in particular for any country that is in a completely different circumstance than the country we are discussing.
Every barrel of oil they don't use now either delays that or brings them money to invest, and using the income now to prep for later seems like a sane strategy.
The worlds largest Wind Turbine Manufacturer Vestas is danish.
Besides them, there's lots of green energy infrastructures companies that are expanding. Also of note, the Large Danish companies LEGO and Novo Nordisk have already gone 100% CO2 neutral on productions through various offsetting initiatives[1]. Oil money is not something to flush down the toilet, but the country is moving very heavily in the green direction. The oil will dry up, or we'll reach a point where it's political suicide to keep going after it. But the wind will keep blowing and the sun will keep shining.
[1] yes that's not enough, but a good milestone on the road forwards
Either way, I was unsure which way rates had moved just from reading the title.
2% inflation and 1% interest rate on savings is the same as 0% inflation and -1% interest rate.
Even getting a -1% mortgage creates inflation, because who sells houses can ask somewhat higher prices and buyers will be able to pay them.
I realize crypto is still seen as risky, however if it takes hold and overall market volatility stabilizes, how would easy access to borderless liquid digital assets affect the neg interest rate strategy?
Edit: remove mention of specific cryptocurrency in an attempt to shift focus to broader strategy.
What you instead should ask what effect real cryptocurrencies like Bitcoin can have.
I'm personally quite positive to cryptocurrencies, but I don't have a crystal ball. If a single country is about to go under of course it's a good alternative, but of the global economy tanks it's all up in the air.
I spoke to someone about this a while ago. These loans are often required by the government to message certain targets, and are meet positive for the banks because of other regulatory issues that may exist. These negative rates home loans wouldn't exist without some regulation various regulation and government incentives.