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February 22, 2016 at 12:30 AM
I rushed out of the office yesterday early enough to go eat dinner. With other people. With actual forks, knives and even spoons. We weren’t even playing with our phones. We were “talking.”
One topic of conversation (given that this dinner took place in New York) was negative interest rates.
See also: Forget the Great Recession — welcome to the ‘Great Repricing’
Central bankers in some countries are so sick of commercial banks playing it safe (by, say buying government bonds believed to be ultra-safe, or, by depositing money in the central bank itself) that they have set benchmark rates below zero.
Instead of earning a small, insulting bit of money to buy government bonds, big banks now have to pay what amounts to a small service fee for the privilege of protecting their assets within the warm, loving embrace of government bonds.
One big issue that came up is: If some world financial information technology systems had problems with the year changing from 1999 to 2000, what the heck is going to happen to financial IT systems when interest rates are at rates that the system designers never imagined to be possible?
What if, say Giant Bank’s, or Giant Insurance Company’s, computer decides that the gap between an interest rate of positive 6 and negative 2 is actually 4, not 8, because the computer automatically assumes a number that looks like a negative interest rate has a minus sign in front of it by mistake? What then?
But another problem is that the negative rates are terrible for long-term care insurance (LTCI) issuers, retirement savers, and others trying to earn a little money on reasonably secure investments to meet long-term obligations. Low rates rob long-term thinkers to help people who are drowning in the short-term, and negative rates do even more to favor the people trapped in short-term crisis over the people who’ve avoided crises, for the most part, by planning ahead.
LTCI issuers may have made some mistakes, but they would look a lot less mistaken if their average new-money portfolio yield was 8 percent.
See also: The real story behind LTC rate increases
And the real problem at the heart of the economy is clearly not high rates, but piles of “zombie debt” that’s not exactly in default, but that no one is ever going to be able to pay off through the normal course of business.
