Interest rates on some European government bonds have gone negative

http://www.vox.com/2015/2/5/7981461/negative-interest-rates-europe

by cwal37 • 11 years ago

70 78 11 years ago

vox.com

api2• 11 years ago

Economists also thought stagflation was impossible before the USA in the late 70s.

zenogais• 11 years ago

They also thought the efficient-market hypothesis was true, until the financial crisis hit in 2008.

chronid• 11 years ago

It's like the world is their laboratory, and they run experiments on all of us.

kcole16• 11 years ago

The "Black Monday" crash of 1987 was actually the turning point for the efficient market hypothesis. It basically launched the entire field of behavioral finance, as the market plummeted for essentially no reason.

bobcostas55• 11 years ago

What does the EMH have to do with the financial crisis?

_sword• 11 years ago

Europe's economy is in a very bad place

pdecker5• 11 years ago

Europe is most likely in the "Late Phase" of their recession...QE will pull up growth some....here's a macro view of the EU I did on my blog a couple of weeks back...would love any feedback.

www.theeconomicmachine.tumblr.com/post/108174705732

johnloeber• 11 years ago

In your post, you wrote "France, Germany, Italy and Spain make up 74% of GDP in the EU, so essentially they drive the economy there." I think you mean the Eurozone, not the EU. You forgot about the UK, which is an EU member state.

cylinder• 11 years ago

It seems to me that there really is no hope for developed, advanced economies. There's not a lot to be done, other than high-level technological advancement, within these countries. The high-level tech generates little tax revenue and employs negligible amounts of human labor (actually it usually eliminates jobs). So any economic gains will just be from productivity improvement (via technology and regulatory reform) and selling goods and services to developing countries.

It seems to me that the best thing these stagnating developed countries can do is band together and really push to open and develop Africa, the rest of Asia, India, etc. Adding a couple billion to the middle class is their only hope to sell more goods and services; their own birth rates are never coming back nor is immigration the answer as we've seen.

happyscrappy• 11 years ago

"Europe will pull out of this, but maybe not for a year or two, at which time the US might be heading back into a recession, which might pull Europe along with it."

What is your reasoning for the US going back into recession?

ema• 11 years ago

Not nearly as bad as it was 3000 years ago. Back then the European economy was in such a bad shape people couldn't even afford to buy toilet paper.

cwal37• 11 years ago

Thanks for changing the title, I always just err on the side of leaving it, even if it is absolutely terrible (as this one originally was).

On the actual topic, it's always interesting to see things go differently than economists expected. I fill an economist-ish role at work and it's kind of amazing to see the union of hand wavey-ness and certainty that pervades so much of the field. We drill down hard on data and stick with open source tools like Python as much as possible, but I definitely look around and see supposition treated as fact.

SixSigma2• 11 years ago

Economics is full of false assumptions.

pfortuny• 11 years ago

You want to say "full of false truths"...

fiatmoney• 11 years ago

One thing they don't mention as a cause is regulatory requirements to hold certain classes of sovereign debt or other "risk-free" securities, for instance as collateral.

bradleyjg2• 11 years ago

Do the rules forbid holding cash? At least for capital adequacy, I was under the impression that cash, like own-country sovereign debt, is not risk discounted. Normally you'd prefer debt to cash, but if it has a negative nominal yield, I'd think you'd prefer the opposite.

Ditto for bonds as currency play, why not cash instead?

Frankly the only rational reason I can think of to buy a bond with a negative yield is if the loss is less than the carrying costs of cash. And while that's not free, it's hard to see that anywhere near 100 bps per year on large sums of money.

aembleton• 11 years ago

There is some costs associated with securing that amount of cash and then I guess you'd want to insure that money in case of theft. The insurer would then need to store a large amount in safe assets, which would then go into bonds.

I guess, maybe storage companies might move into this business but it's probably just safer and more convenient to buy a piece of paper.

notahacker• 11 years ago

As any effort banks make to shift their zero risk assets to cash won't go unnoticed by the ECB, there's also the implied risk that any bank going to the effort of acquiring unusually large piles of cash to avoid negative interest on reserves, will be subject to other direct or indirect financial penalties.

I'd still expect banks' cash holdings to rise substantially at the margin, where that risk is pretty low, but its existence means it probably wouldn't economically rational for any bank to try to evade the interest on reserves even if their cost of holding cash was zero.

xxxyy2• 11 years ago

They did mention it:

Pension funds, mutual funds, and other impersonal investment vehicles have rules and formulae they're supposed to be following. To the extent that those rules call for the holding of safe bonds, some bond-buying can simply happen on autopilot.

DunbarTrout• 11 years ago

Could someone buy one of these negative bonds in hopes to short sell it? I barely understand shorting, but it seems like this would be an opportunity (I realize shorting is always risky).

driverdan• 11 years ago

Shorting means borrowing the asset from someone else and selling it, not buying then selling.

I'd guess shorting isn't allowed but could be wrong. It certainly should be allowed.

ewood• 11 years ago

There are secondary markets for most bonds so yes, you can short them. However most traders would do this through derivatives such as bond futures or ETFs.

randomname2• 11 years ago

A lot of this is also frontrunning the central banks. The ECB has already indicated they will buy german bonds (which have negative yield). Rates can (and will) go even negative-er, so if you buy now and sell later, you still make a profit.

mrb• 11 years ago

"And yet it seems the impossible has happened."

This is a great example showing how little we understand economics, which is very ironic: economics is the study of something that is 100% man-made, yet we cannot explain many of its aspects. Heck I am more confident in physicists able to explain physics, and mathematicians able to explain mathematics, than in economists able to explain economics. This is why topics such as basic income guarantee [1], Bitcoin and cryptocurrencies, inflation vs deflation, capitalism vs socialism, etc, are all so debated. Nobody agrees on anything because quite frankly, we don't know how to make the economy work optimally. I would not be surprised if, 50 or 100 years from now, widely accepted views on economics will completely change.

[1] There was a great HN post from yesterday: https://news.ycombinator.com/item?id=9004287

manachar• 11 years ago

we don't know how to make the economy work optimally

What's optimally? Seems that many people passionately disagree on this point and may help explain our difficulty in determining what should be done.

Additionally, economics is a young discipline that's more about trying to figure out unreproducible complex human behavior than something that can be replicated in a lab.

collyw• 11 years ago

This would be fine except that economists and politicians seem to imply that they are running thing "optimally" and they know what they are doing.

Igglyboo• 11 years ago

economics is the study of something that is 100% man-made, yet we cannot explain many of its aspects. Heck I am more confident in physicists able to explain physics, and mathematicians able to explain mathematics

You could easily argue that mathematics is something that is man-made.

john_b• 11 years ago

True, but mathematical objects, unlike people, always behave rationally.

If anything, events like negative interest rates simply illustrate how ridiculous the classical economic notion of the "rational actor" is in the real world.

fooqux• 11 years ago

This is a great example showing how little we understand economics, which is very ironic: economics is the study of something that is 100% man-made, yet we cannot explain many of its aspects. Heck I am more confident in physicists able to explain physics, and mathematicians able to explain mathematics, than in economists able to explain economics.

Physicists and mathematicians often have the advantage that if they run an experiment / solve a problem by using the same inputs, they can expect the same output. Obviously this is not the case for economics, which at its core is driven by human interactions. Not only does it often have many, many variables, but they're also difficult to control.

In my estimation, it's actually impressive we have as good a grasp as we do on economics.

orbifold• 11 years ago

What I find surprising is that a Soviet style state run economy has not proven to be more successful. By exercising central control they should have been able to drastically reduce the number of variables and with sufficiently sophisticated planning maybe eventually gained a competitive advantage. I guess unfortunately it collapsed before the advent of powerful enough computer systems.

resu• 11 years ago

How do you explain something that has potentially unlimited inputs, and whose many inputs/actors do not act sensibly or in their best interest at all?

If you could fully explain an economic system down to the finest detail, you could more less accurately forecast all the human behavior within that system.

ArkyBeagle5• 11 years ago

Economics describes emergent phenomena. And widely-held beliefs about economics affects the behavior of the thing being studied. This is self-referential interaction highly amplified.

bko• 11 years ago

...economics is the study of something that is 100% man-made

I take exception with the idea that economics is a human construct. Economics, in the broader sense of the term is about decision making and getting most out of limited resources.

Macro-economics is probably more like story telling or history rather than a hard science. It's a shame that it went the quantitative route over the years. No one tries to attribute an R^2 to a general's decision and their outcomes. I think modern macro-economics is suffering from scientism.

From Wikipedia: Scientism is belief in the universal applicability of the scientific method and approach, and the view that empirical science constitutes the most authoritative worldview or most valuable part of human learning to the exclusion of other viewpoints

RaCaS123• 11 years ago

Certain corporate baonds have as well. Notably, Nestle's are negative.

wereHamster• 11 years ago

Oh, so you read the article? First paragraph...

nostromo• 11 years ago

I can't shake the feeling we're going to see another black swan in '15 or '16. Maybe the epicenter will be Greece this time instead of Bear Stearns.

http://i.imgur.com/UyM0j2M.jpg

I'm curious to see what the Fed will do if we have a correction while interest rates are at zero. I suppose 0% + QE will become standard policy rather than a response to a crisis.

ollifi• 11 years ago

You might be right, but I don't know if that counts as black swan. Greece and euro troubles were mainstream headlines five years ago spring of 2010. Through out the years the situation has been evolving and nobody of course knows how it will unravel. I'm more surprised how slow the buildup is.

kazinator• 11 years ago

This should be no news to consumers who have been accustomed to parking their money in negative bonds. These are called "checking and savings accounts", where interest is next to nonexistent, and the balance is nibbled away by various fees.

People still put their money in the bank for similar reasons why people buy these negative interest bonds: for example, it's secure, and cheaper than building your own safe, putting cash in it, and guarding it.

If you want to hold some foreign currency, you could just buy it and have it sitting in a trading account. But there are perhaps some fees involved which are worse than parking it in a negative bond. The account may also not be secured compared to a bond.

tosseraccount• 11 years ago

US Treasury yields went negative in 2008 ...

http://www.nytimes.com/2008/12/10/business/10markets.html

http://blogs.wsj.com/marketbeat/2008/12/09/three-month-bill-...

remarkEon• 11 years ago

Right, but what's interesting right now is that EU corporate paper had a negative yield for a while there. That hasn't happened before.

jhundal• 11 years ago

I'm not sure this article gets the definition of the zero lower bound right (though I'd love to be corrected if it does.) As I understood it, the ZLB only applies to central bank lending rates to other banks, which if they become negative the other banks only have the incentive to hoard cash.

Interest rates on some European government bonds have gone negative

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