Thoughts on negative interest rate and the state of our economics.

In Europe the ECB introduced a negative interest rate, over 2 years ago, on lenders deposits in attempt to give a positive impulse to the economy. A few weeks ago an article on Bloomberg, stated that a German bank will start with negative interest rates towards the consumer market. Meaning their retail customer will actually have to pay money for holding cash in a bank account.The last few years the media mentioned negative interest rates for retail customers quite a few times, but it never really happened. Until now…

But why is this important? Because this gives a signal to the global market that it can happen to everyone. Not only the big companies, but also regular people like you and me.

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In the video below, Buffet explains what kind of effect interests rates actually have on value. Namely that interest rates have a gravitational pull on value. It does have the effect of making all assets more valuable  So if interest rates are down, or almost near to nothing, values could be almost infinite. With a higher interest rate, values would be pulled down. Hence the bear market everyone fears when the FED or ECB would increase the rates. As long as they keep going with this sustainable lower interest rates, the markets will probably keep going upwards.

With investing the market seems to have become somewhat bubblicious, where a lot of investors are shifting their focus onto higher yields, like high dividend paying companies. Lately the ‘noise’ of dividend investing being the next best thing, tends to be the only place providing a safer and higher yield.

For us? We are dividend investors. We search for solid companies that pay out a regular dividend and with an upwards potential on the long term. Because we only started out 2 years ago, we haven’t really profited from the 7 good years that are past us. Even though there are a lot of claims that we enter a bear market, we continuing investing every month. On the long term it could be interesting to pick up a few stocks on sale when the market is going down. So when raising interest rates, and markets going down because of it. It doesn’t necessarily mean it’s a bad thing.

The discussion going stronger now is that QE and holding to lower rates for so long, could actually damage the economy and because manipulating markets by creating bubbles and infinite higher stock prices although values don’t grow accordingly.

On twitter I’ve read the below tweet shared by @_real_John, which – to me – really captures the contradictory situation we’re currently in. While a lot of central banks are desperately try to ‘fix’ the economy, they might not see on time they’re already destroying it at the same time.

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With all the attention on bringing the economy back to the same state it was in as before the financial crisis in 2008, I believe there is one major misunderstanding here. Namely that the world we live in is constantly evolving and adapting, as are we as people. And that just maybe, it isn’t a bad thing to transition into a new state of economy.

 


Sources:
http://money.cnn.com/2016/06/16/news/economy/negative-interest-rates-europe/
http://www.bloomberg.com/news/articles/2016-08-11/negative-rates-for-the-people-arrive-as-german-bank-gives-in

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4 thoughts on “Thoughts on negative interest rate and the state of our economics.

  1. Great discussion!

    I always love discussions about negative interest rates because it seems absolutely ridiculous.

    There are a few things that worry me about negative rates. First, we’re basically forcing businesses to spend money rather than keep it in the bank, which means we’re eating into future growth.

    Second, I’m worried about the impact on the market from an interest rate hike.

    Third, I’m really wondering how central banks are going to handle fighting the next recession. Usually central banks lower interest rates to encourage lending and spending. However, with rates near zero or negative, it would be almost impossible to lower interest rates further.

    Like

    • The negative interest rates are interesting for sure, especially all the bloated talks around it.

      I agree on your thoughts. I might add that we’re not only force businesses to spend more, but also make it more attractive to take on debt as a way of financial leverage. Your third point wasn’t even on my mind until recently though.

      Thanks for sharing 🙂

      Like

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