Its about time it became normal in the UK for accounts to carry fees. I dont know how retail banking can continue without them. Esp the new fintechs they will have near-zero revenue coming in and have to pay to hold cash.
Why? Many banks are already making lots of money, regardless if you know how they make their money or not. I definitely do not agree that "its about time" to pay for having an account.
I think you mean some UK banks made money before rates went negative. The ones that made the most are in corporate and investment banking. Retail is a disaster zone.
The point is precisely that the Powers That Be want you to take out MAXINT - and then unload it on the wider economy as cheap loans to stimulate the economy.
Whether that second part actually happens, or banks just use this extra cash to stuff their balance sheets, well... it's a bit of an open question, to put it mildly.
The biggest problem is that the things people want to buy are in short supply. So the extra money doesn't actually help anything, you just get asset price inflation.
I want to buy a house. If everyone has access to cheap mortgages, then everybody can buy a house! But there is a hard limit on how fast we can build housing. Even renovating a home has the same problem. Contractors in my area are raising their hourly rate now because everybody wants their home renovated! But there aren't enough contractors for everyone, so the price just goes up.
Look at the video card market. There's a hard limit on the amount of video cards that the industry can produce. That doesn't change if suddenly everyone can afford the $2,500 price tags. The price just goes up by exactly the amount of money people get loaned!
And there's a hard limit on the amount of entertainment I can consume in a day. A person has about 16-20 hours a day MAX to consume media. We literally can't listen to any more music, there's not enough time in the day. I can't spend any more money on media because I am physically unable to consume more.
I don't see how this would stimulate anything? The reason I'm not buying anything isn't because I can't afford it, it's because it's not available at all! (Probably why the stock market is experiencing volatility right now - it's the only thing providing utility right now)
It’s a negative interest rate for banks to keep their money with a central bank. It is supposed to discourage banks from hoarding money and stimulate the economy by giving out more loans. Like all things economic there are debates about if it works or not.
But it's not just the rate with the central bank, they're forcing high street banks to prove that their systems can handle negative interest rates for consumer loans and mortgages.
It's obvious that it doesn't work. In order banks be able to lend money it's necessary the existence of business and households that want to spend money instead of saving.
What we are seeing, is the result of using the wrong tool, monetary policy instead of fiscal policy, because ideological reasons.
>What we are seeing, is the result of using the wrong tool, monetary policy instead of fiscal policy, because ideological reasons.
Yeah this is pretty much it. Businesses do benefit from lower interest rates but beyond a certain point they have zero trouble financing the investments they want to make. After that you have to figure out how to convince people to spend money and if people don't have money to begin with you have to give it to them somehow (most likely candidate is government spending).
That’s the idea, yes. But it should be pretty obvious that it doesn’t work, for the same reasons QE doesn’t. Because banks can’t actually ‘loan out from reserves’ to their customers (they can loan reserves to other banks, but can’t to anyone who doesn’t have an account with the central bank). It actually can’t be made to work in terms of accounting operations. The role of reserves is settling transfers, so the bank obviously needs to have them as part of the process, but that happens later, after the loan is written (which creates the asset (loan) and liability (deposit) on the bank’s balance sheet). So having excess reserves doesn’t really increase the bank’s ability to extend more loans anyway, and taxing reserves just makes the bank want to buy more equities to get a positive rate.
A nominal zero or negative rate can still be a positive real rate.
It depends on future inflation/deflation. While it's easy to point at M1, M2 money stock figures (or the UK equivalent) as indicative of inflation, sometimes deflationary pressures are greater than the inflationary pressures from increasing money supply.
Would you really though. They're trying to avoid deflation, if/when that happens the value of property and shares falls each year. What would you do with your loan if all assets fall in value each year?
If someone gives me a $10M loan at -1% interest, I would spend $200 on suitcases and a vacuum sealer kit and $200 to hire a mini-digger. I'd then go dig a 6 foot hole in a forest somewhere and hide the money as cash. I'd install some weather stations around the site with PIR sensors and 4G ($25 each, x4) just to see if someone comes hunting for my cash.
After 5 years, I return the cash. I earn $500k. Subtract off the $500 it cost me to set up and that's a pretty tidy profit for 2 days of my time. The chance of theft is well under 1% as long as nobody else knows where it is, so I still make a tidy profit even with a risk premium.
They're trying to avoid retail deflation. That is not usually related to asset deflation.
Asset inflation has been raging for at least a decade, maybe 2, inflating stock assets, housing and commodities, bitcoin and anything else which promises some return to unseen levels, since they started QE and dropped the low risk rate of return to 0. Retail inflation which they're trying to control is pretty much unaffected by QE and ZIRP and whatever levers they are pulling are not working, they just haven't noticed yet.
So at this point, if someone offers you free money, you say thanks very much and put it in the stock market, like everyone else, because where else can you get a return? And that goes on until the whole thing explodes in a panicked crash when public pretension differs too much from private reality.
Basically the problem is that governments and central banks are following policies that are generally used to stave off inflation. If you have massive inflation what you should invest into is domestic production capacity. Excess production causes prices to fall.
If you want to reliably drive inflation then you must do the opposite. Put dollars into people's hands. Consumer demand must outpace domestic production capacity. Most cases of (hyper)inflation are basically episodes of excessive government spending without the necessary investment in production capacity to back that spending up.
> Asset inflation has been raging for at least a decade, maybe 2, inflating stock assets, housing and commodities, bitcoin
In the US maybe, in the UK the FTSE100 has been pretty flat for over twenty years. Yes houses have gone up a lot, do you really think that can continue? Commodities are flat in the last few decades.
The bank isn't going to pay anyone interest to take out a loan, still less a loan for MAXINT. It still has to cover repayment defaults and make a profit.
But changing the base rate from 0.1% to -0.5% incentivises the banking system to loan to consumers and businesses at lower rates
There was an HN discussion about this where several Danes mentioned that these loans still come with assorted fees and taxes which effectively amount to a low, but still positive, interest rate.
The origin of banks are people with castles agreeing to store valuables of people that don't have castles. You pay them to do that so you don't get robbed and lose your money.
So if you take your max int loan, where are you going to put it? Anywhere you store it has risk. Cash under the mattress can get robbed and investments can go bad.
If you really really want to be sure you get your money back then banks are the only option and in this case it's worth it to pay them.
So, forgive the ingenuity, what prevents me from taking that 1000 loan, park it in my bank account, and repay the 990 due in a year (earning 10 in the process)?
Your bank is going to start charging you interest as well. They might have a teaser rate that's positive up to a certain balance, but there's limits to the arbitrage here.
1. Inflation: you will have 10 at the value of the currency in 2022, not 2021
2. Negative savings rates:
> There are fears that negative lending rates, which are expected to lower borrowing costs for households and businesses, would force high street banks and building societies to offer negative savings rates.
If you put it in your bank account you will lose some of it. The idea is that the bank is paying you to hold the money because otherwise it would have to pay the central bank more than that to hold (some of) it - or at least, that's how I understand it.
The other side of this rate is that the (central) bank will also charge you for holding that money parked, instead of paying you interest. That plus inflation is (supposedly) offsetting your gain, so you might as well loan out that cash to make real money - which is what the rate-setter wants.
This said, the technical answer to your question is something between "not much" and "nothing at all". Some central banks attach strings to what you can do with that borrowed money, but not all. This is why the effect of negative rates is still debated.
Are you going to keep the loan in cash? If you have that loan in an account, you will be paying the bank while it's stored in there until you spend it.
Can anyone counter my impression that we are witnessing in the Western world the exact same course of events that happened in Japan in the 1990s? (low growth, high debt, ageing population, low interest rates, rising of average P/E ratios).
Am I wrong to expect that corporate valuations in Europe and the U.S. will not appreciate in the coming decades as they have in past decades?
Edit: Yes, the U.S. and Europe are indeed in different economic positions, the U.S. can still avoid the spiral if it continues to attract skilled immigration and remains a low bureaucracy, easy-to do business environment.
I'm just a casual observer, but Japan had a "lost decade" post-bubble where average inflation and growth rates averaged 0%, but this has extended to a "lost two decades" now.
(Side note: Japan's cost of living has also not increased with the rest of the world, which is why it's much more affordable to travel there these days than it was before.)
One thing I don't understand (due to my own lack of knowledge) is related to real estate. Japan has been excellent by supplying enough medium and high density housing to keep housing prices relatively low and ensure individuals and families have access to that basic need. Presumably partially because of this (also because people generally don't want used houses), housing there isn't really considered an investment because the house is amortized over a 20-40 year period and demolished at the end of it. For those who know, how does this affect inflation and growth rates? (And feel free to correct anything I'm incorrect about.)
Europe yes. US, no. The US is in an amazing position in terms of demography and growth. Aging population, but not immigrant averse like Japan and not an island. The US borders a rising economy with perfect demographics for growth (Mexico). The US is the least involved country in global trade. The US is increasingly disinterested in being the world police, so that capability can be deployed to protect economic interests abroad.
We’re headed for global instability, but don’t expect the US to have a fate similar to Europe.
> not immigrant averse like Japan and not an island
As the past 4 years have demonstrated, there is a very large segment of the US population is very much against immigration, and would happily turn the country into an "island" by building walls around the land borders.
The last four years can’t really be compared to the last 2000 of Japan’s. Immigration is already ingrained in American culture. The aging boomers will die and be replaced by the most ethnically diverse generation in American history.
It's disingenuous to cast immigration concerns like an "aging boomer thing". The vast majority of Americans are fine with vetted, legal immigration. According to Pew, nearly 80% worry about illegal immigration "At least a little" to "A great deal". Furthermore there are real concerns, costs, and benefits to be weighed with immigration of all kind (legal and not), and dismissing them is just naive.
To list a few different people find concerning: depressing wages of domestic population, rapid cultural change of domestic population, brain drain from foreign population, strain on tax / social systems, ineffective vetting allowing cross-border contraband and criminal activity, and so on.
All of these are valid and deserve scrutiny and investigation. Obviously there are many beneficial aspects to immigration, and nearly all examples of very successful civilizations in history were at a crossroads of many cultures. Just wanted to make it clear that the immigration debate won't "die with boomers", and it shouldn't, because it is an important discussion to have.
Compared to other nations, the US has the least restrictive immigration laws. The US also benefits by bordering Canada with some of the most restrictive immigration laws. If you want to go where there is growth, there's no other option
> Compared to other nations, the US has the least restrictive immigration laws. The US also benefits by bordering Canada with some of the most restrictive immigration laws. If you want to go where there is growth, there's no other option
I thought Canada was far easier. I knew a software engineer who, about 15 years ago, got the Canadian equivalent of a green card as a "backup" without ever having actually lived there, in case she had problems with her US immigration. It sounded like a box ticking exercise, though this person had two masters degrees (IIRC, the second was to keep her status since she graduated from the first into a recession).
That 78% breaks down to something like 90% of Democrats, 80% of Independents, and 60% of Republicans.
Among the Republicans, the 40% who are anti-immigration tend to feel very strongly about it, and are likely to consider it a major issue. The 60% of Republicans who are OK with immigration are less likely to consider it a major issue.
This makes it hard nowadays to get Republican support in the House for pro-immigration policies, because a pro-immigration Republican member of the House will attract anti-immigration primary challengers who will get the vote of the 40% who are anti-immigration. With that big bloc in hand its hard for the challenger to lose.
You can see a similar thing with abortion. About 60% of Republicans favor keeping Roe v. Wade, about 30% want to overturn it, and the rest are unsure [1]. But how many Republican members of Congress will come out or vote in favor of keeping Roe v. Wade? Pretty close to zero because doing so is political suicide in their next election.
There was an article about this on HN. The perception of polarization is greater than reality. The overlap between republicans and democrats is pretty high. Most of them are only moderately against or in favor of migration.
Large in number, yes, but not in proportion to the total population.
Moreover, mostly in the places where productivity is not happening. Their growing irrelevance and sociocultural aversion to change are primary reasons for their vocality.
Pretty much all the countries in America have a fertility rate around 2 more or less.
Even Mexico is approximately at 2.1
They will start to lose population in a few decades.
Why Europe yes but US no? Europe is also not immigrant-averse and not an island. It doesn't border on Mexico, but it does border on many other countries.
I don't see why Europe would suffer a much different fate from the US.
I think the main thing holding the EU back is their love for austerity. They could do a lot more to invest in their economy.
Europe as a going United concern is headed towards a breakup. Germany’s demographics (and patience) will not not hold to support countries like Greece and Italy, which funded pensions instead of spending their bailouts responsibly. France will flourish, like it always does, because it’s more or less self sufficient and is strategically located and internally configured, but other countries like Spain will flounder due to internal conflicts. All of these will lead to a mixed to poor economic condition of slow growth and low to negative interest rates.
EU as a concept is still highly supported amongst adults and young adults. And if anything Brexit strengthened that, since UK is a now a clown that everyone laughs at with all the issues they are going through.
A lot of young people migrate between EU countries and just that is the biggest visible positive that all working adults recognise. Its something people would not want to lose willy-nilly. Something realllly serious would have to happen for EU to fail catastrophically.
Nationalism is on the rise. We are 7 decades removed from the horrors of conflict on the continent. Everyone who remembers that is dying.
The EU is a globalization project in an era where globalization is on the decline. It was held together by US warships and will fall apart as they recede, a vacuum filled by local, competing powers. Europe will not be immune to it, since it is after all composed of many cultures and many economies with competing aims.
It’s not a matter of what people want, it’s a matter of economic realities that will impugn any high-minded desire for unity and collaboration.
Die Zeit: "In the dispute over the delivery delay of the AstraZeneca vaccine, the EU Commission is currently making the best advertisement for Brexit: It is acting slowly, bureaucratically, and protectionist. And if something goes wrong, it’s everyone else’s fault. This is how many Britons see the EU, and so the prejudices were confirmed at the beginning of the week"
MSN Money: "Bild tore apart Von Der Leyen's explanation of the vaccine delays and threat to stop supplies heading to the UK line by line, accusing her of placing 'junk' orders for vaccines three months behind Britain. 'She says: "We know that there is no time to lose in a pandemic," but what she means is: "We may have wasted time. But we will NEVER admit that",' the newspaper wrote. Meanwhile 'Brexit Brits continue to receive full supplies,' the paper added.
The Telegraph: De Standaard, a Belgian newspaper, said the success of the Prime Minister’s move was a source of great frustration to the French, in particular, who are lagging far behind in their vaccine programme. It suggested that Brexiteers would take heart from that because Paris had regularly taken a hardline stance in the Brexit negotiations. The Flemish newspaper said that Mr Johnson liked to take risks and in this case, as opposed to in Brexit, the gambit had worked.
An El Mundo editorial accused the EU of a "failure" on vaccine procurement, citing a "lack of coordination between member states to articulate a homogeneous process" which is "ruining the prospect of achieving herd immunity after the summer"
Daniel Stelter, Manager Magazin: It is dawning on the German and European population that the political class has failed across the board in meeting the enormous economic and social challenges of the Corona crisis. It marks the accelerating decline of the EU. Everybody in the economic sphere now knows that whenever there is a problem at a production site in the EU, there is a risk of being hit with an export ban: vaccines today, biotech tomorrow, and the day after tomorrow what? This destruction of trust in the EU as a place of business (Standort EU) is all of a piece with its tendency towards over-regulation and planned-economy control. The gap between wish and reality in the EU is greater than ever. By failing to procure vaccines, the EU has validated Brexit and given all EU citizens an objective reason for euroscepticism.
I command you for putting effort to writing a post.
But you probably have no idea of british politics beyond headlines for newspapers. Uk dealing with covid was a circus on fire.
Here [0] UK has highest death per capita behind Belgium (super high pop density) and Slovenia (they had also excelent ideas on dealing with covid - have slovenian friend).
Johnsons gov did multiple 180 when dealing with covid, recently promised schools will stay absolutely open, only to closed them after 1 day that they were open.
I think I understand British politics pretty well, being British.
Here [0] UK has highest death per capita behind Belgium
No, it has one of the highest numbers of "people who died within 28 days of a positive test" which isn't the same thing. COVID is highly infectious but not very deadly, so with this definition the more you test the more such events can be found. This problem becomes obvious when you look at excess death stats and discover more people have died of COVID than the overall increase in deaths.
The UK does more than double the amount of testing Belgium has done [1]. This will automatically lead it to reporting more deaths in proximity to a positive test.
Johnsons gov did multiple 180 when dealing with covid, recently promised schools will stay absolutely open, only to closed them after 1 day that they were open
Like almost everywhere except Sweden the UK has a problem with any attempt to reopen being sunk by supposedly 'expert' scientists who seem to consider lockdowns to be free. Johnson is trapped by the public's expectation that scientists know what they're doing, which in this case they don't. Constant see-sawing, announcing garbage numbers and other problems have been seen in many countries, not just the UK. Really only Sweden has managed to avoid this, thanks to Anders Tegnell who has been both (a) consistent and (b) correct. It'd be great if the UK had Tegnell too, but no such luck.
I am not going to change you mind anyhow so have a great day living in your political thriller.
You could change my mind if you raised points I hadn't previously considered months ago, or weren't claiming things that are obviously false about how the UK and Brexit are currently being reported.
Still, the US seems to have a lot more internal conflicts. People are openly discussing civil war there. I think the EU does a better job of learning from its past, and support for the EU is pretty high.
Of course there will always be problems in the EU, but I don't see it breaking apart any time soon.
You might want to mention some sources in case people are interested in reading more on this theory.
Namely: Peter Zeihan. I'm a fan of the guy - his logic and rough predictions certainly seem to be bearing fruit over the last decade. If he's right about the coming decade we are in for a bit of a bumpy ride.
Agreed! I'm plagiarizing wholesale from Peter Zeihan, I'm not a geopolitical expert. I recently read Disunited Nations. His YouTube videos and podcasts are very interesting.
Re: your comment about being in for a bumpy ride: I think his logic is solid in that the bumpy ride is only in relation to the unprecedented post-WWII/post-cold-war era. We know from history that the norm in the world is instability.
An economic system simply can't be based around population growth. We're already living unsustainably (with respect to carbon) and population growth works against that. Immigration to keep borrowing money is postponing the inevitable.
Encouraging brain drain and people to flee their developing nations works against world stability, competition, prosperity, and quality of life.
Well, the Bank of England is also predicting a rebounding economy in the Summer for the UK because of the vaccine. A whole load of pent-up demand to live again, a dearth of travel opportunity so the money is spent in the UK, and everyone vaccinated so things open up ...
At the current rate of vaccinations, 1.5m a week, with people needing 2 shots (750,000 people a week), it'll take approximately a year to get to 90% of the adult population vaccinated with 2 shots: 50m adults * 0.9 / 750,000 = 60 weeks (I've knocked off 8 weeks because vaccinations have already started). The idea that people will be back out spending again in the summer is ... ambitious.
You do not need 90% of the population vaccinated in order to live life again. As soon as you've protected the high-risk demographic and all that's left are the under 50s or under 40s for whom the CFR is 0.3% or 0.1%, you can pretty much go back to normal.
If the R0 number is somewhere around 3 (and I think this is perhaps a rather conservative estimate), then you should expect the R number to approach near R0 again if we lift all the lockdown restrictions. If R is around 3 with nobody vaccinated, then the virus will grow if fewer than 2 in 3 people have antibodies (something like 90%+ of those who are vaccinated and an unknown proportion of those who have had the disease). If we declare the high risk demographic safe because they have all been vaccinated, and therefore we can go back to licking each others' eyeballs, then you would expect the entire population to become infected in a matter of a few months.
0.3% of the entire population is more people than have died in the UK so far from the virus.
But more importantly, a much greater proportion of people will require medical help, and then survive, when infected. If you allow the virus to run rampant, then you will end up with the health service overwhelmed with people who need help. Those poor health service workers need a break. If we overwhelmed them, then we might discover just what proportion of infected people die without medical intervention.
To stop the virus growing in the population, we need at least 2 in 3 people to have antibodies. In order for that to happen, we need to have about 75% of people vaccinated, in order to account for the small proportion of people who won't develop effective antibodies after vaccination. We can only lift all the restrictions once that has happened. That is the point at which the herd immunity prevents the virus from growing, and protects the unvaccinated.
90% vaccinated isn't zero risk. People will still get the virus. 90% is the upper bound on the level necessary to stop the viral spread increasing again (70% to 90% according to literally every source I've ever seen). You can choose to accept the lower bound instead if you want to, but using the upper bound instead just makes me a bit more cautious rather than 'silly'.
If chartered banks charge for ... holding cash ... don't people next create a new industry of unchartered financial institutions to hold money without charging so much? Like, safe deposit? Or insurance?
This seems like an ivory tower exercise that has not yet met the messy realities of the world.
My understanding is that Dutch banks already have negative interest rates. They charge a negative interest to large account holders (over 1M euros) and a minimal positive rate for less wealthy clients. In reality I suspect that few end up in the 1M+ category since you can spread your money and keep the rest invested in the stock market or T-Bills if you really want security.
I assume you just find rock solid corporate bonds. Apple issues bonds and they have assets far in excess of their debt load + massive profitability. Realistically as an individual you just move into equities. Institutions have different equations. Hoarding physical cash is probably not a good idea, since you have inflation (which probably exceeds the negative rate by quite a bit). It’s worth mentioning that cash holdings in a bank already have negative real growth because inflation exceeds interest (at least in my shitty low interest savings account)
Hoarding highly liquid physical assets like gold or paper requires security which costs money. The negative interest rates are cheaper than buying equivalent security.
I don't have that much but mind you, even at a slight positive rate (like 0.1%) you're already losing money every year due to inflation!
It's really ridiculous.. My confidence in the banking system is super low. I feel like they're just screwing us with the ECB's blessing (who initiated the low interests).
Switzerland and Denmark already have negative interest rates higher than Japan [1]. In Switzerland is will start to affect you if you have more than ~250k in the bank.
That is exactly my thought. All this can do in practise is reduce mortgage and other loan rates further and punish anyone holding cash. I'm not saying that's a good or bad thing, but I don't think any normal people will be able to borrow a billion pounds and then just live off the negative interest rate...
This is the fundamental problem. 0% interest rates make it easier to start a business, but your startup doesn't get to borrow at 0% because there is the very real risk that your startup will fail. You'll get a nice 8% interest loan at best and no loan at all in most cases.
That risk doesn't exist for large companies but they don't have to invest their dollars domestically or even productively. They can spend them anywhere outside the US or just dump them into acquisitions and other stock market shenanigans.
> This seems like an ivory tower exercise that has not yet met the messy realities of the world.
Honestly, that's how the economy is run today, it's one big ivory tower exercise. It's shameful, toying with people's lives that way, exploiting them, and then we cry about why everything is messed up.
Covid plus brexit is a pretty massive recession for us to eat. The current administration is in power for another 3 years minimum and they really have no clue what they're doing so...
I am honestly unimpressed with the general strategy of central banks to imbalance an economy by only putting inflationary pressure on the supply side. You have to work on both the supply side and the demand side. Doing an excessive amount of supply side stimulus does not reduce the need for demand side stimulus.
This is especially important in an economy where a pandemic has forcefully lowered demand for products and thus potential income for workers. American style stimulus checks are a far better idea, especially when they go to people who truly need them.
The UK pretty much hit its 2% inflation target back in 2019. There is an obvious slump because of the combination of Brexit and the pandemic at the same time but low interest rates alone are not going to save the UK.
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