Economy ECB gets negative interest rates

[Lead]

http://www.nytimes.com/2014/06/05/u...rest-rates-what-does-that-even-mean.html?_r=0

The first is

 

[Uchi Mata]

It makes a lot of sense from a monetary perspective. Indicidentally, the elmination of physical cash would make this process a lot easier and is one of the main reasons that might be a good idea.

 

[Lead]

It makes a lot of sense from a monetary perspective. Indicidentally, the elmination of physical cash would make this process a lot easier and is one of the main reasons that might be a good idea.

I've read about it being used if our system was entirely electronic and the theory is definitely interesting. I just seems like interest rates are nowhere close to returning. We've nearly bottomed out and ECU went even farther.

 

[KOQ24]

I've read about it being used if our system was entirely electronic and the theory is definitely interesting. I just seems like interest rates are nowhere close to returning. We've nearly bottomed out and ECU went even farther.

we lose more money through inflation that we gain with these interest rates

 

[Lead]

we lose more money through inflation that we gain with these interest rates

I think a lot of politicians don't understand this argument and it is a cause for some of our problems. I watched a speech Clinton gave explaining his economic policy and he specifically mentioned this when it came to the middle class with one of his campaign proposals. I wish I could remember the specifics.

 

[Jack V Savage]

It makes a lot of sense from a monetary perspective. Indicidentally, the elmination of physical cash would make this process a lot easier and is one of the main reasons that might be a good idea.

Yeah, though given how minimally negative they are, it's not worth the hassle of converting to physical cash to avoid charges so this should be workable.

we lose more money through inflation that we gain with these interest rates

I don't understand this point. Who is "we"?

 

[Uchi Mata]

Yeah, though given how minimally negative they are, it's not worth the hassle of converting to physical cash to avoid charges so this should be workable.

Yeah, probably.

I don't understand this point. Who is "we"?

Everyone. Society. Inflation rate > interest rate = effectively negative interest rate for holding money.

 

[Jack V Savage]

Everyone. Society. Inflation rate > interest rate = effectively negative interest rate for holding money.

Everyone/society doesn't gain or lose anything from the transaction or from inflation. That's what has me confused.

 

[Zankou]

Although negative v. positive is just a technicality, I have to say that it isn't exactly encouraging to see banks handing out currency as a loss-leader. It has the indicia of a baby ponzi scheme.

 

[Uchi Mata]

Everyone/society doesn't gain or lose anything from the transaction or from inflation. That's what has me confused.

The money you have in the bank loses purchasing power when inflation rate > interest rate. It encourages spending, right? That's the whole point.

 

[MadSquabbles500]

I may be misunderstanding this zero interest rate, but wont that mean banks will loan out uncontrollably? Isnt that bad, wont that just cause inflation to skyrocket? Pardon muaah if I am going in the wrong direction.

 

[Jack V Savage]

The money you have in the bank loses purchasing power when inflation rate > interest rate. It encourages spending, right? That's the whole point.

No, I got that. I didn't get what the other guy was saying.

 

[KOQ24]

I don't understand this point. Who is "we"?

germans,might be true for more nations.

the interest rates are so low at the moment that we simply lose purchasing power through inflation alone

 

[shera]

With depositing money with the ECB now costing banks, wouldn't that also encourage them to park their money elsewhere e.g. US Treasuries? It's not like lending is the only option to them, especially if the economy is in a situation where repayment ability in impaired.

 

[Jack V Savage]

Although negative v. positive is just a technicality, I have to say that it isn't exactly encouraging to see banks handing out currency as a loss-leader. It has the indicia of a baby ponzi scheme.

So what's happening is that banks get charged a very small fee for excess reserves. I'm not sure how that relates to a Ponzi scheme. Can you elaborate? "Ponzi scheme" seems like "terrorism," "neoconservative" or "bailout"--something that used to actually mean something but now just gets tossed around to insinuate something negative about something the speaker doesn't like.

 

[Seriously-Dead]

And so begins the most counter-intuitive monetary experiment ever. It will be interesting to see how this turns out.

 

[IDL]

The money you have in the bank loses purchasing power when inflation rate > interest rate. It encourages spending, right? That's the whole point.

Money in the bank is like a hot potato. The longer you hold onto it the more you get burned!

 

[Jack V Savage]

And so begins the most counter-intuitive monetary experiment ever. It will be interesting to see how this turns out.

It's not counter-intuitive at all. The idea that that's what's needed is pretty basic. The problem has always been that the existence of physical cash sets a zero limit on how low rates can be because banks can always just keep their reserves in cash. But as noted earlier in this thread, preventing that hassle is worth an extremely low negative rate.

 

[Zankou]

So what's happening is that banks get charged a very small fee for excess reserves. I'm not sure how that relates to a Ponzi scheme. Can you elaborate? "Ponzi scheme" seems like "terrorism," "neoconservative" or "bailout"--something that used to actually mean something but now just gets tossed around to insinuate something negative about something the speaker doesn't like.

There's an element of desperation that you project when you go to negative interest rates. "We'll pay you to take and use our money." Why? Because we have faith that things will turn around ...

Now that's to some extent artificial, and you can't say that -0.1% is really that much different than 0%, but the willingness to ignore the message and say yes, we literally will loan our currency out at nominal negative interest rates suggests extreme desperation. It's the monetary policy equivalent of this:

 

[Damnami]

I don't know if I really understand this, but European banks aren't lending enough even with a low required reserve ratio so the ECB made it so that it will cost banks to hold excess reserves in the hopes that this will provide an incentive to them to lend more?