Negative interest rates and what it means

March 4th, 2016 at 3:22:44 AM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 1068
Posts: 12569
Quote: AZDuffman
Back in the boom there were some weird terms. I saw one 100 year and several for 40 instead of 30. The issue as you point out is after a certain period the principal falls by so little that more term does not matter much.


You meant to say the payment falls by so little.

Years Principal & interest Principal Yearly Rate Per Year Total interest
30 -$733.76 $100,000 8.00% 12 -$164,155
40 -$695.31 $100,000 8.00% 12 -$233,750
30 -$7,337.65 $1,000,000 8.00% 12 -$1,641,552
40 -$6,953.12 $1,000,000 8.00% 12 -$2,337,496
100 -$6,668.96 $1,000,000 8.00% 12 -$7,002,757
interest only -$6,666.67 $1,000,000 8.00% 12


Quote: AZDuffman
At 100 years all you are really doing is sort of locking in your rent payment with the bonus that you get any increase in value for yourself and not a landlord.


I think that the interest only loans for those Manhattan apartments have a balloon at 12 or 15 years. In the above example the payment on the 100 year note is only $2.30/month more, but the homeowner gets to decide when to sell, even if it is at 15 years and 3 months.So "locking in a rent payment" is a good analogy.
March 4th, 2016 at 3:40:03 AM permalink
AZDuffman
Member since: Oct 24, 2012
Threads: 135
Posts: 18136
Quote: Pacomartin
You meant to say the payment falls by so little.


Right, I am just used to talking like a banker and not a normal person.....


Quote:
I think that the interest only loans for those Manhattan apartments have a balloon at 12 or 15 years. In the above example the payment on the 100 year note is only $2.30/month more, but the homeowner gets to decide when to sell, even if it is at 15 years and 3 months.So "locking in a rent payment" is a good analogy.


Balloons on real property should almost always be able to be rolled over. Examples of when you cant would be if your credit falls. the collateral value falls, or there is a capital shortage like the Panic of 2008. In the USA the Feds are not keen on 100 year credit. IIRC after a few corporations put out 100 year bonds the Feds told them to cut it out. Even the Treasury limits to 30 years when it might be time to have a CONSOL-type offering of prepetuals.

Some places have real estate that will forever skyrocket. Japan, Brazil, and California all have the problem of topography that limits home building. Large numbers of people have to cram into valleys. Prices skyrocket and people have to do what they have to do. People in Omaha just pay off in 30 years.
The President is a fink.
March 4th, 2016 at 3:56:43 AM permalink
Pacomartin
Member since: Oct 24, 2012
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Posts: 12569
Sweden's numbers as of 29 Feb 2016

US $545 per capita in 500 Crown banknotes (worth about $60 apiece)
US $63 per capita in coin
US $728 per capita in coins and valid banknotes
Banks have almost no cash at all

It remains to be seen if the government is going to go wholesale slaughter on the 500-kr banknote leaving most people with only petty cash in banknotes. Numbers in the table are millions of Swedish Crowns for both inside and outside of banks.
Banknote Size Current Maximum From Max
500 kr 44,961 kr 59,447 kr -24%
1,000 kr 3,714 kr 48,358 kr -92%
Small den valid notes 11,445 kr 13,282 kr -14%
coin 5,186 kr 6,073 kr -15%
Total (valid notes only) 65,306 kr 112,146 kr -42%


A think one important thing from the Swedish example is that it is too confrontational to actually cancel denominations. What you do is keep the denomination, then reduce the circulation by 90%. Since most people don't use the high denomination notes they don't actually notice.

But the 500 kr banknote is a different story. It's just barely large enough to be a store of value, but it's small enough to use for transactions. People are used to handling them or getting them from an ATM.

It's important to keep up the idea that cash is dirty and obsolete. It's a race to see if they can get rid of the cash before the repo-rate drops below -1%.
March 4th, 2016 at 5:36:58 AM permalink
odiousgambit
Member since: Oct 28, 2012
Threads: 153
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An article today in the WSJ [online you only see a preview, below, unless you subscribe] says Insurance companies in particular cannot go forever with negative interest rates in effect ... they depend too much on bonds. This is one of the few things I have seen that really gives caution to the move ... this article says "be afraid" in the title.

http://www.wsj.com/articles/negative-rates-and-insurers-be-afraid-1457030114

PS: that 'something that cannot go on forever will stop' is something more than a quip, but is considered a fact in economics it seems

https://en.wikiquote.org/wiki/Herbert_Stein
I'm Still Standing, Yeah, Yeah, Yeah [it's an old guy chant for me]
March 4th, 2016 at 3:44:35 PM permalink
petroglyph
Member since: Aug 3, 2014
Threads: 25
Posts: 6227
Quote: Pacomartin
It's important to keep up the idea that cash is dirty and obsolete. It's a race to see if they can get rid of the cash before the repo-rate drops below -1%.
I agree that folding money is dirty, as are grocery cart handles and anything else the public touches, however.

A pre 64 Washington .25 piece will still buy 2 gallons of gasoline.

http://coinapps.com/silver/coin/calculator/

http://www.gasbuddy.com/GasPriceMap?z=3&lng=-51.28397081249998&lat=30.67549905852339


Money should be able to be a store of value. The central banks are desperate. Inflation or deflation is a monetary policy, hyperinflation is a loss of faith in the currency.



The last official act of any government is to loot the treasury. GW
March 12th, 2016 at 1:07:41 AM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 1068
Posts: 12569
Quote: odiousgambit
An article today in the WSJ [online you only see a preview, below, unless you subscribe] says Insurance companies in particular cannot go forever with negative interest rates in effect ... they depend too much on bonds. This is one of the few things I have seen that really gives caution to the move ... this article says "be afraid" in the title.


Latest repo rates in central banks around the world. The repo rate is the rate at which the central bank of a country lends money to commercial banks in the event of any shortfall of funds.

-0.75% Jan 2015 Switzerland
-0.50% Feb 2016 Sweden

Sweden's . Repo-rate history
10/28/2014 0.00%
02/12/2015 -0.10%
03/18/2015 -0.25%
07/02/2015 -0.35%
02/11/2016 -0.50%

-0.10% Jan 2016 Japan
0.01% Jul 2015 Bulgaria
0.05% Nov 2012 Czech Republic
0.05% Jan 2015 Denmark
0.05% Sep 2014 Eurozone
0.10% Feb 2015 Israel
0.50% Jul 2015 Canada
0.50% Mar 2009 United Kingdom
0.50% Dec 2015 United States

It should be noted that Sweden's repo-rate was 0.50% (same as current USA, UK and Canada) as far back as 2009. A special law had to be implemented just to take it that low as one of the ancillary interest rates (seldom used) was always 0.75% lower than repo rate and would hence be negative.
March 24th, 2016 at 2:26:39 PM permalink
Pacomartin
Member since: Oct 24, 2012
Threads: 1068
Posts: 12569
Quote: Pacomartin
But Swedish Banks are only holding 370SEK =$43.50 per capita in 2014, down from 927SEK per capita in 2010. As most Swedish banks do not have cash transactions at the teller, nor do their ATMs accept cash deposits. In the event of a run on the banks, they can simply reduce the daily limit from their ATMs. Sweden also has only about 3000 ATMs for a country of almost 10 million.


Swedish banks opposed to the new law, but the government has cracked down on mortgages. From now on you can pay interest only for just 5 years, after that they have to pay off the balance in 100 years.

Swedish regulators calculated in 2013 that the average mortgage term was around 140 years. Nearly one-third of mortgages issued in 2014 allowed borrowers to repay only interest. Hence the serious crackdown.

I suppose if they really cracked down (like 30 year mortgages) their whole financial system with the negative interest rates and the near cashlessness would come crashing down.

What a world we live in! How did we get to this position?

March 24th, 2016 at 2:33:43 PM permalink
Evenbob
Member since: Oct 24, 2012
Threads: 146
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Quote: Pacomartin

What a world we live in! How did we get to this position?


By giving people mortgages who couldn't
afford them and then selling the bad paper
worldwide. So everybody has to pay for
our PC mistakes. Prior to WWII, the rate
of home ownership in the US was quite
low per capita. People just couldn't afford
it. So they rewrote the lending laws and
they eventually caught up to us. Took
decades and decades.

Just like the open border problem. We don't
see the effects of it right now, but we will
further down the road and then it will be
way too late.
If you take a risk, you may lose. If you never take a risk, you will always lose.
March 24th, 2016 at 3:00:12 PM permalink
Dalex64
Member since: Mar 8, 2014
Threads: 3
Posts: 3687
Quote: Evenbob
Just like the open border problem. We don't see the effects of it right now, but we will further down the road and then it will be way too late.


Some people might say the same thing about global warming/climate change.
"Everyone is entitled to his own opinion, but not to his own facts." Daniel Patrick Moynihan
March 24th, 2016 at 3:22:19 PM permalink
Evenbob
Member since: Oct 24, 2012
Threads: 146
Posts: 25010
Quote: Dalex64
Some people might say the same thing about global warming/climate change.


Except GW is unproven theory, and thousands a
day coming across the border is fact.
If you take a risk, you may lose. If you never take a risk, you will always lose.