"Negative rates, which mean deposits decline over time rather than increase, “would be bad for all savers,” said Juergen Dengel, a 40-year-old civil servant from Bonn. If negative rates were introduced at his bank, he would consider withdrawing his money and using it to build a home -- even if that meant going into debt." - This seems like the goal of negative interest rates.
His statement reinforces the whole point of ZIRP: minimize the value of financial capital and maximize the value of human capital. Force investors to take on more risk. Entrepreneurs ironically may take on less risk since the value of labor relative to capital shifts in their favor.
Then buy the US risk free rate instead? Or get some nice equity premiums if you want. I seriously have a hard time understanding logic like this. Who is actually saving money in a savings account? There’s literally only one reason why you would keep money in a savings account: For FDIC (or equivalent) protection. But if that was the sticking point, then US T-notes are even better and they don’t have a 250k limit.
Maybe this guy doesn’t know anything about finance and doesn’t understand? I’m confused.
Moreover, this is exactly what rate cuts are for: to stimulate the velocity of money and encourage investment.
Europeans in general are so risk adverse that they make irrational financial decisions. As EMH posites, you get a return commensurate to your risk: without bearing risk, there cannot be any return.
I'll never understand why people expect a rate of return above inflation simply for holding in cash savings accounts. It's a fundamental concept of a market economy -- you need to take a risk in order to earn a risk premium!
A lot of comments here are saying that this is good, and/or one is not entitled to a non-negative return rate on a bank account. Ok, so as an individual, how am I supposed to store money? Under mattress? Or should I embrace the new way of spending everything I earn immediately, possibly by turning my life into a portfolio of subscriptions, and paper over all unexpected spendings (illness, car breaking down, family issues) with insurance? How are low-to-middle-class people supposed to improve their financial situation in this reality?
I like getting interest on my savings as much as anyone, but it is kind of weird how we just expect the price of storing money to be negative. No other storage service works this way. I can’t put a bunch of furniture in a warehouse and not only pay nothing, but receive a percentage of the value each month.
I understand why it often works this way for money, but I don’t see why this must be the natural order of things. The price of storing money in a bank will be the underlying cost of doing so, minus the proceeds the bank can make from your money, plus some profit margin. Nothing says this sum must be a positive number.
'No other storage service works this way. I can’t put a bunch of furniture in a warehouse and not only pay nothing, but receive a percentage of the value each month.'
The distinction is that your savings in a "storage" scenario are yours exclusively. That is not how it actually works. Banks lend out your "stored furniture" to get a return. Due to fractional reserve lending and the fungibility of currency, the illusion of you being able to receive your stored furniture back is preserved.
But there is never actually a scenario where there are truly idle resources--capital is always utilized at some ratio, and that ratio is independent of consumer behavior. The bank is investing on behalf of their customers.
As banks can only invest based upon the deposits of their customers, I think it is actually extremely unreasonable for customers to have to pay for the privilege in the form of a negative interest rate. That's not "natural" either. Guaranteed checked deposits is the only reason that this swindle can occur.
Negative rates doesn't change the reality that retirees need to save money. It just exacerbates the situation.
Negative interest rates could cause even more aggressive saving as people need to hold on to every last little penny they own. When you know that you're bank account will have less and less in it in the future, saving even more in the present day becomes even more important. If I was a retiree in germany right now, I'd cut as much of my spending to almost nothing and wait for this ridiculousness (negative interest rates) to stop.
Are actually Germans big savers? Living here for almost 10 years, I've NEVER found anyone saving money..the majority burn their salary month per month or burn their short 'savings' in more-than-they-could-afford vacations, like entire months in US or Australia.
I assume from your username that you're in your mid-30s. If that's so, then it's a largely generational thing.
The generations in Western Europe who are 45-50+ have considerable wealth and thus have been able to save. For the generations below it's not really possible, on a macro level, to save money. They need all their money for housing and what's left to try to keep up the pretense that they're as successful as their elders.
To counter your anecdata with some anecdata of my own, my savings rate right now is around 48%, as in: I spend 52% of my income. I'm currently implementing some lifestyle changes that are going to push the savings rate over 50%.
I'm not trying to deliberately pinch pennies. (Well, maybe a little.) I just happen to live in a way that avoids big spending. I don't have kids, so I don't need to spend money on that. Because I don't have kids, I don't need a large house. Therefore I live in an apartment in the city center, which (besides being convenient) means I don't need a car. And so on.
> the majority burn their salary month per month
I obviously don't know your sample, but out of the people that I know, those who live paycheck-to-paycheck usually do so because they work in low-wage jobs that simply don't pay enough to save any money. There surely are outliers that just don't know how money works, but the majority fail to save because of low-wage jobs.
Germans are huge penny pinchers (and why not?). When Walmart tried to take on Germany and offered free bags as they do in the US, German shoppers were convinced that Walmart’s prices must be higher to support such an extravagance.
It should be no surprise that Aldi and Lidl are German companies.
Actually compared with southern Europe culture, everyone here (NRW) seems crazy about collecting all sorts of coupons and waiting until most stores offer like double discounts.
While back home most people would resort to black market or bazaar.
They might also be lying to you. ;-) I know savers that pretend that they have none. They cry with everyone about how they are broke, but are actually saving great. They don't want folks asking to borrow money, and they don't want to be the odd one out, so part of socializing is acting like everyone in public, but doing otherwise behind the scenes. I knew a few such folks in college, party animals on the outside, but quiet studious when everyone else is asleep.
From the article: "The country’s savings rate was around 10% in 2017, almost twice the euro-area average ... On average, Germans held more than 40% of their financial assets in the form of bank deposits in 2018."
It's usually perilous to extrapolate anecdotes to the population.
Where are they going to get the cash? Cash is a very small percentage of all the existing money.
Modern money is basically tree of connected electronic ledger. In the top of the tree is the central bank, lower there are the saving banks, lower all the firms and households.
I think this is the message the investor class is trying to send to ordinary people: "If we can't find a place to invest at a reasonable rate of return, we will find a way to loot your bank accounts."
For your average retail bank customer you’d be lucky to get anything on your savings as is for the last 10 years. I’m speaking from the US bank perspective, but I imagine it has been the same or worse in Germany.
The saving grace in the US is the somewhat recent trend of online banks offering around 2%. I don’t know if other developed countries in the Eurozone have similar offerings.
I have been mulling over this for quite a while. What to do if USA one day enters the negative rate territory. I'm not yet so sure.
Go all into stocks, bonds? Buy real estate, lock up in long term CDs before it hits zero? I have thought about foreign savings, but without FDIC insurance, it doesn't even seem to be worth the risk.
My allocation model requires a certain percentage in cash. I send most of that cash towards my mortgage instead. Even a low interest rate mortgage of 3-4% beats current cash savings rates of 1-2%.
So as a high earner, what would be a rational thing to do?
German savings rate is about 10%, let’s assume it’s 20% for a high earner.
If she decides to stop saving, she can reduce her workload to 80%. This is generally easier than it might look like[1].
Because of progressive taxes, she will still earn about 85% of her income, so she can still save 5%, but rather outside of Europe with its faltering economy. Especially when more high earners decide to work less and live more.
The biggest problem I find is financing the activities in the extra free time. Most of my saving capability comes from the fact I have no time to spend what I get, if I take more vacation and lower pay I am becoming bankrupt very soon, very fast. Not working and just staying at home because I cannot afford to go anywhere is not a positive use of my time, I can work and be productive.
The whole point of keeping all that cash in the bank is to avoid risk. Few people can deal with exchange rate risk.
In fact the EU fiscal crisis came from people basically doing what you said: putting their euros in Greek and Spanish banks that paid higher interest than German banks were. They assumed they’d have no exchange rate risk (they didn’t, except at a macro level) but also assumed they’d have the same bank regulation and guarantees they had at home. Oops!
This article picks up a discussion that is largely smoke and mirrors: courts have already ruled negative rates for private savings illegal under the current law. So any new law to that effect would be a politixal show only.
Same here in NL. An entire generation is growing up with the idea that saving doesn't earn you anything. Borrow borrow borrow is the credo.
Our entire housing market is fucked thanks to the ECB, pension funds are cutting pensions because bonds literally don't give you a return anymore. All assets worldwide have been pumped into record heights.
All this so governments in southern Europe don't drown in their own debt.
If only the countries joining the Euro had agreed to keep deficits and debts below a certain level....
This is bad. Germany goes insolvent from malinvestment and we have a global deep recession on our hands. All their creditors will default because why not when there is a run on their banks?
Isn't that the point? People are saving too much in the consumer economy, so negative rates encourage people/companies to spend or take on debt to stimulate the economy.
Over the decades we have seen in many countries a trend from saving and responsible spending towards, credit and living on a have no, pay tomorrow. This of course is not solely down to interests lowering. But the opening up and diversification along with growth in marketing of financial products and that in itself has been driven by the increased marketing and fashion conscious mentality of certain consumer products.
Is this a good thing or a bad thing. Hard to say, but certainly when your populus is more exposed on credit and less backed up with saving and secured assets, any blips in the market can and will explode into financial meltdown with more dominos in the stack to fall down in a greater knock-on effect.
What we also need to know is that in the past when things got bad, governments would raise interest rates, that would have a negative knock-on effect. So the approach switched towards lowering those interest rates, more competition in financial markets and with that growth, we saw the rise in marketing and credit accessibility and the market competed with itself for your not only the money you have today, but more so towards the money you will have tomorrow.
There is only so far you can cut interest rates, and had you asked anybody a few decades ago about the possibility of negative interest rates, they would of laughed so much that your ears would bleed. Today, such things are a reality.
What I wonder is that Quantitative Easing ( fancy way of devaluing your currency and in effect currency manipulation that is accepted...these days) is the elephant in the room. If we never had such things, would we of ever seen negative interest rates?
What's more, we are now even seeing Government bonds with negative interest rates. How far will they go and with all that.
Will we see the bartering system becoming more fashionable?
Finally, is saving now classed as an obsession! Really, are we seriously at that stage in in fiscal devolution that we all seem flummoxed in a few decades time when nobody bothered to have a pension plan? Finance is about balance, sure have fun, have credit, but equally, have some savings. This drive to now demonise savings, just seems irrisponsible.
But do remember, savings can be in many forms, assets can be a form of savings, gold, art, shares in companies even. Some have larger risk, some more stable and with any financial blip/crisis - the same old things do better like gold. Which is also an indicator of financial crisis's, and it has been trending up recently, in a way indicative of a financial crash. Now with that in mind, and finance does have some smart people who not only see that and more, I wonder - are negative interest rates the new trick to staive of a financial market heading for a crash? Maybe, but it gets down to enough people buying into it. Now with government bonds, that may well happen as many pension pots have rules that force them to have a certain percentage of such bonds. As they have always been classed as stable. Times change, rules change and if those pension pots change there safe long term bets into another approach, things could become very interesting indeed.
I do hope that this new trick in interest rates pans out, but it is hard not to be blown away by the complexities at play the further and deeper you look into it.
"Obsession" ay? The old guard newspapers make more sense if one notes their framing often tends towards increasing dependence on central power structures.
[+] [-] neaden|6 years ago|reply
[+] [-] nugget|6 years ago|reply
[+] [-] mruts|6 years ago|reply
Maybe this guy doesn’t know anything about finance and doesn’t understand? I’m confused.
Moreover, this is exactly what rate cuts are for: to stimulate the velocity of money and encourage investment.
Europeans in general are so risk adverse that they make irrational financial decisions. As EMH posites, you get a return commensurate to your risk: without bearing risk, there cannot be any return.
[+] [-] cylinder|6 years ago|reply
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] samsonradu|6 years ago|reply
I guess the message here is that rent-seeking investments (positive yielding investments, deposits) will no longer work. Value needs to be added.
[+] [-] joezydeco|6 years ago|reply
Because when everyone starts withdrawing their money, you get a bank run.
[+] [-] TeMPOraL|6 years ago|reply
[+] [-] mikeash|6 years ago|reply
I understand why it often works this way for money, but I don’t see why this must be the natural order of things. The price of storing money in a bank will be the underlying cost of doing so, minus the proceeds the bank can make from your money, plus some profit margin. Nothing says this sum must be a positive number.
[+] [-] abernard1|6 years ago|reply
The distinction is that your savings in a "storage" scenario are yours exclusively. That is not how it actually works. Banks lend out your "stored furniture" to get a return. Due to fractional reserve lending and the fungibility of currency, the illusion of you being able to receive your stored furniture back is preserved.
But there is never actually a scenario where there are truly idle resources--capital is always utilized at some ratio, and that ratio is independent of consumer behavior. The bank is investing on behalf of their customers.
As banks can only invest based upon the deposits of their customers, I think it is actually extremely unreasonable for customers to have to pay for the privilege in the form of a negative interest rate. That's not "natural" either. Guaranteed checked deposits is the only reason that this swindle can occur.
[+] [-] Gys|6 years ago|reply
I think 'the Germans' were never a big supporter of keeping the economy running at all costs. Like the way the ECB operated in the last few years.
Sooner or later there will be a crash. But somehow everyone thinks that will never ever happen.
EDIT: typo
[+] [-] benj111|6 years ago|reply
I don't doubt a crash/recession will come eventually, it doesn't seem obvious to me that that will take it back to how it was before.
[+] [-] Ididntdothis|6 years ago|reply
[+] [-] danmaz74|6 years ago|reply
[+] [-] pascalxus|6 years ago|reply
Negative interest rates could cause even more aggressive saving as people need to hold on to every last little penny they own. When you know that you're bank account will have less and less in it in the future, saving even more in the present day becomes even more important. If I was a retiree in germany right now, I'd cut as much of my spending to almost nothing and wait for this ridiculousness (negative interest rates) to stop.
[+] [-] IloveHN84|6 years ago|reply
[+] [-] radicalbyte|6 years ago|reply
The generations in Western Europe who are 45-50+ have considerable wealth and thus have been able to save. For the generations below it's not really possible, on a macro level, to save money. They need all their money for housing and what's left to try to keep up the pretense that they're as successful as their elders.
[+] [-] majewsky|6 years ago|reply
I'm not trying to deliberately pinch pennies. (Well, maybe a little.) I just happen to live in a way that avoids big spending. I don't have kids, so I don't need to spend money on that. Because I don't have kids, I don't need a large house. Therefore I live in an apartment in the city center, which (besides being convenient) means I don't need a car. And so on.
> the majority burn their salary month per month
I obviously don't know your sample, but out of the people that I know, those who live paycheck-to-paycheck usually do so because they work in low-wage jobs that simply don't pay enough to save any money. There surely are outliers that just don't know how money works, but the majority fail to save because of low-wage jobs.
[+] [-] jaclaz|6 years ago|reply
https://en.wikipedia.org/wiki/List_of_countries_by_gross_nat...
Germany: 27.4 % GDP
As a comparison:
USA 16.9 % GDP UK 15.8 % GDP
[+] [-] gumby|6 years ago|reply
It should be no surprise that Aldi and Lidl are German companies.
[+] [-] pjmlp|6 years ago|reply
While back home most people would resort to black market or bazaar.
[+] [-] segmondy|6 years ago|reply
[+] [-] macspoofing|6 years ago|reply
It's usually perilous to extrapolate anecdotes to the population.
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] rocqua|6 years ago|reply
Is their any regulatory reason against doing this (lets ignore the cost of securing such cash against physical risks).
[+] [-] AdrianB1|6 years ago|reply
[+] [-] RobertoG|6 years ago|reply
Modern money is basically tree of connected electronic ledger. In the top of the tree is the central bank, lower there are the saving banks, lower all the firms and households.
[+] [-] acd|6 years ago|reply
[+] [-] 345218435|6 years ago|reply
now, remember when everybody was wondering why they axed the 500€ bill?
[+] [-] umadon|6 years ago|reply
[+] [-] tempsy|6 years ago|reply
The saving grace in the US is the somewhat recent trend of online banks offering around 2%. I don’t know if other developed countries in the Eurozone have similar offerings.
[+] [-] segmondy|6 years ago|reply
Go all into stocks, bonds? Buy real estate, lock up in long term CDs before it hits zero? I have thought about foreign savings, but without FDIC insurance, it doesn't even seem to be worth the risk.
What are your plans? bitcoins? gold?
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] tunesmith|6 years ago|reply
[+] [-] faissaloo|6 years ago|reply
[+] [-] lixtra|6 years ago|reply
German savings rate is about 10%, let’s assume it’s 20% for a high earner.
If she decides to stop saving, she can reduce her workload to 80%. This is generally easier than it might look like[1].
Because of progressive taxes, she will still earn about 85% of her income, so she can still save 5%, but rather outside of Europe with its faltering economy. Especially when more high earners decide to work less and live more.
Luckily few people act rationally.
[1] https://www.globaladvocaten.com/blog/labour-law-parttime-wor...
[+] [-] AdrianB1|6 years ago|reply
[+] [-] acd|6 years ago|reply
[+] [-] marcrosoft|6 years ago|reply
[+] [-] gumby|6 years ago|reply
In fact the EU fiscal crisis came from people basically doing what you said: putting their euros in Greek and Spanish banks that paid higher interest than German banks were. They assumed they’d have no exchange rate risk (they didn’t, except at a macro level) but also assumed they’d have the same bank regulation and guarantees they had at home. Oops!
[+] [-] haasted|6 years ago|reply
[+] [-] skybrian|6 years ago|reply
[+] [-] gmueckl|6 years ago|reply
[+] [-] apexalpha|6 years ago|reply
Our entire housing market is fucked thanks to the ECB, pension funds are cutting pensions because bonds literally don't give you a return anymore. All assets worldwide have been pumped into record heights.
All this so governments in southern Europe don't drown in their own debt.
If only the countries joining the Euro had agreed to keep deficits and debts below a certain level....
[+] [-] qaq|6 years ago|reply
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] crb002|6 years ago|reply
[+] [-] sdinsn|6 years ago|reply
[+] [-] Zenst|6 years ago|reply
Is this a good thing or a bad thing. Hard to say, but certainly when your populus is more exposed on credit and less backed up with saving and secured assets, any blips in the market can and will explode into financial meltdown with more dominos in the stack to fall down in a greater knock-on effect.
What we also need to know is that in the past when things got bad, governments would raise interest rates, that would have a negative knock-on effect. So the approach switched towards lowering those interest rates, more competition in financial markets and with that growth, we saw the rise in marketing and credit accessibility and the market competed with itself for your not only the money you have today, but more so towards the money you will have tomorrow.
There is only so far you can cut interest rates, and had you asked anybody a few decades ago about the possibility of negative interest rates, they would of laughed so much that your ears would bleed. Today, such things are a reality.
What I wonder is that Quantitative Easing ( fancy way of devaluing your currency and in effect currency manipulation that is accepted...these days) is the elephant in the room. If we never had such things, would we of ever seen negative interest rates?
What's more, we are now even seeing Government bonds with negative interest rates. How far will they go and with all that.
Will we see the bartering system becoming more fashionable?
Finally, is saving now classed as an obsession! Really, are we seriously at that stage in in fiscal devolution that we all seem flummoxed in a few decades time when nobody bothered to have a pension plan? Finance is about balance, sure have fun, have credit, but equally, have some savings. This drive to now demonise savings, just seems irrisponsible.
But do remember, savings can be in many forms, assets can be a form of savings, gold, art, shares in companies even. Some have larger risk, some more stable and with any financial blip/crisis - the same old things do better like gold. Which is also an indicator of financial crisis's, and it has been trending up recently, in a way indicative of a financial crash. Now with that in mind, and finance does have some smart people who not only see that and more, I wonder - are negative interest rates the new trick to staive of a financial market heading for a crash? Maybe, but it gets down to enough people buying into it. Now with government bonds, that may well happen as many pension pots have rules that force them to have a certain percentage of such bonds. As they have always been classed as stable. Times change, rules change and if those pension pots change there safe long term bets into another approach, things could become very interesting indeed.
I do hope that this new trick in interest rates pans out, but it is hard not to be blown away by the complexities at play the further and deeper you look into it.
[+] [-] jakeogh|6 years ago|reply