As the FT has reported this morning:
Growing expectations for further rate cuts in the UK sent yields on government bonds below zero on Thursday, with debt prices fired up after Bank of England governor Andrew Bailey indicated that negative rates were “under active review”.
The yield on the five-year gilt fell below zero for the first time, meaning buyers were willing to accept a nominal loss if they held the debt to maturity. Yields sank as far as minus 0.012 per cent, according to Reuters. Two-year yields hit a new intraday low of minus 0.062 per cent.
This needs some explanation.
First, negative interest rates are just what they sound like: a saver really does pay a bank to deposit money with them. This is what those buying government bonds might now do: they will willingly get back less than they save, overall.
Second, these are already happening in Europe and in places like Denmark there are even negative interest rate mortgages (yes, the bank pays you to take its money). So there is nothing that unusual about this now.
Third, this is perhaps the inevitable consequence of the centuries long downward trend in interest rates that has been exacerbated since the global financial crisis of 2008.
Fourth, this is not irrational behaviour by savers. Those who buy government bonds hold vast amounts of cash. They are pension funds, life assurance funds, banks and others. And what they know is that banks fail. And for them an £85,000 government bank deposit guarantee scheme is meaningless,. So they deposit funds in gilts for the security that gilts provide. They know, as modern monetary theory suggests, that governments with their own central banks and currencies and fairly efficient (and large) tax systems cannot go bust. So that is with whom they want to save, irrespective of the price.
Fifth, that's good for the economy when right now government borrowing is going to hit record highs.
Sixth, if only this flowed through to the rest of the economy it would be good for that too, by reducing the economic extraction of interest from the economy that acts like a tax charged by the wealthy on borrowers.
Negative interest rates are just fine, right now.
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Too many reports about the increase in Government borrowing this morning do not mention the reality your rightly point out – that borrowing is cheap and that means its affordable (even if the Government can print more money to pay it off anyway).
The fear mongers are at it again – especially the BBC.
More on this very soon…
Especially since the Today programme on Radio 4 rolled out Osborne (with no counter-balancing debater) earlier to tell us – bare-faced, for the umpteenth time – that we have difficult decisions about what we can afford.
What I would give to offer up even three questions for one of their presenters to ask him, in order to expose the fallacies of his dogma.
It feels like a sick joke giving Mr Brass Neck a platform at this point in time. How is he even considered an expert on any of this? He had earned not an ounce of journalistic gravitas before taking up an editorship!
The man who borrowed like it was going out of fashion (while falsely accusing Labour of having been ‘dangerously’ profligate in this department), to cook his books, trying to divert attention from the ideological double-whammy of constricted public expenditure and six years of furious pointing at a Laffer curve graph to justify tax breaks to Tory party donors.
Add to that the very likely sway his “Emergency Budget” rhetoric before the referendum had on that 4% (or more) swing to voting Leave. When he had carefully weighed up the carrot or the stick, he chose to offer the guillotine to the electorate. Thanks, mate.
If the public swallows more austerity now, and we cheerfully end the year flag-waving ‘let’s go WTO’, we are absolutely screwed.
The man failed
His policy failed
And they think he’s an expert?
I despair
“Negative interest rates are just fine, right now.”
(Tory) Government priorities mean they have taken rather a longer time to arrive than they might have. They looked logically necessary to me a decade ago, but I was told at the time (not by you) that negative rates were not possible (or words to that effect). Needs must when the devil drives, eh?
True
Spare a thought for those of us caught between having sold a house and not yet replaced with another as the housing market froze, with “lots of money in the bank” and therefore temporarily cash rich. My decision, but paying rent on much longer term, negative interest rates would be the final blow.
You may be very, very fortunate
House prices are going to fall
I’d rent right now…
There is a core issue with the framing of the debate. Words such as ‘borrowing’ and ‘print’ emotionally feed into and further enhance the popular narrative thus contributing to the hysteria. If there is to be a radical shift in the wider understanding of how government finances function then a new vocabulary is required – a topic often discussed but apparently never resolved.
You’re right.
It’s hard to get over the first hurdle with about 95% of people when you point out that the UK government creates money every single day in the normal course of events. You invariably have screamed back in your face the learned-by-rote: “PRINTING MONEY IS ALWAYS BAD”.
Likewise, people often cannot join up their thinking in realising the government, as the bulwark and custodian of order, must become ‘[insert role] of last resort’ in crises such as the one we are facing now. But that in offering gilts in normal times, they are also fulfilling a crucial role in the economy and for market stability.
If there is no nuance to “printing money” and “borrowing”, there can be little in the way of understanding or of an edifying debate!
I will do another twitter thread on this…
Getting your head around negative rates is hard. Conceptually, thinking of it as a storage charge can help – you pay to store gold bars, why not money?
Clearly, if you have to pay to store money than you might be more inclined to invest it elsewhere….. and that is one reason that the Stock Market is still so strong despite the dismal economic outlook. The problem is that buying/selling stocks is just shuffling paper…. real economic activity only increases if these companies raise new money (equity or debt) and actually invest in real, productive assets…. and they will not! Why would they when they see the economic carnage around them?
So, we need an “investor of last resort”. In 1933 it was The New Deal in 2020 it must be The Green Deal…… and, Richard, I know that you have argued vigorously for this.
So, negative interest rates are NOT OK! They are symptomatic of a political philosophy that thinks that interest rate policy is the only tool in the box. This is either a complete failure of imagination or worse.
Clive
Accepted
But my point is that in themselves they are not an issue
What they say is that the government has to take action – because nothing and one else is finding a used for money – and that does, as you say, mean it’s time for a Green New Deal
As for interest rates being the only tool in the box….I could be very rude, but won’t be
Richard
We all used to pay to deposit money in the bank, in the form of charges, which were often quite a lot. Why is it so hard to understand large organisations paying a bit to keep their money safe at a time of crisis?
Didnt a negative yield happen in 2016? https://www.bbc.co.uk/news/business-37031793
Technically, yes
But it was aberational
Negative interest rates on bank accounts are not that uncommon in real terms. If the inflation rate is higher than the bank interest rate paid then in effect you have a negative interest rate. Presumably that applies elsewhere in the savings and investment market from time to time (?)
Yes…