FRANKFURT, Germany (AP) – Imagine a mortgage that pays you the interest, not the other way around. Or a savings account where the bank and not the saver collects interest.
Welcome to the wrong world of extremely low and negative interest rates, which is finding its way into many parts of the world. Now, more than a decade old, economists believe that this could be a feature of the global economy in the coming years and could change the way people save and invest.
“This means that we have to save more, work longer and expect less,” said Olivia Mitchell, an economics professor at the University of Pennsylvania Wharton Business School.
The latest chapter is the fall in interest rates on some bank deposits below zero as central banks, particularly in Europe and Japan, are trying to support the economy in the face of trade uncertainty by making borrowing cheaper to stimulate spending and investment. Economists believe that there are also longer-term factors that cause low rates, such as aging populations in rich countries and high savings rates in China and other emerging markets.
Low interest rates were achieved for the first time after the global financial crisis. The US Federal Reserve, the Bank of England, the Bank of Japan and the European Central Bank cut interest rates close to zero. In 2014 the ECB turned negative.
In Germany, some banks tell companies and others with large amounts of cash that they have to pay an interest rate on large deposits instead of receiving interest. According to the financial website Biallo.de, the penalty usually applies to large customers such as more than 500,000 euros. Banks do this because they themselves have to pay a 0.5% penalty for deposits with the European Central Bank. If banks cannot find a home for deposits, this ends up in their ECB holdings and leads to a burden.
Small depositors such as individual consumers have so far not been burdened with savings. The idea is politically toxic, especially in Germany.
However, the low interest rate environment raises questions about maintaining prosperity, especially for those trying to save for retirement. German news media are full of stories about “punishment rates” and criticism of the European Central Bank because, as they put it, they expropriated savers.
Gerhard Michel, a financial coach in Düsseldorf, says people need to be aware that inflation leads to savings even in normal times, although people may be less aware of this when interest rates are above zero.
“If you look at it historically, people with savings accounts have never had an interesting performance,” he said. “The inflation rate ruins any returns on the government bond market or the savings market – and that has always been the case historically.” What shocked people now is that people have to say the word zero or even negative interest. “
The 53-year-old Michel teaches his coaches about value investing, a more time-consuming approach that analyzes deals to find companies that the market may be underestimating.
His approach with his own money: “I will buy stocks until the end of my days.”
Pushing people to invest in riskier assets is part of the incentive effect that central banks are trying to instill. But there are also fears that very low interest rates can cause the markets to bubble up and collapse again with painful consequences. So far, the terrible predictions have not been fulfilled. The current bull market for US stocks will be 11 years old on March 9th.
Government bonds from the 19 countries that use the euro, worth four trillion euros, are now less than zero. Japan and other government bonds are trading trillions more below zero worldwide. Even Greece, which was in default with government bonds in 2012 and has the highest debt burden in Europe, was able to sell three-month bonds at a negative price.
Why should anyone pay for the privilege of buying a bond?
One way to look at the phenomenon is for the investor to pay for the security of the investment. Or buyers hope to sell the bond at a profit. This is possible if interest rates continue to fall – as some analysts believe.
On a positive note, low or negative interest rates can make it easier for businesses and consumers to borrow, which stimulates economic activity. The European Central Bank states that its policy has created 11 million new jobs since 2013. Home sales increased in the US as mortgage rates fell to 3.7%.
Now even some home buyers can get into the game with negative interest rates.
The Danish Jyske Bank offers a mortgage with minus 0.5% interest and still makes a profit. Customers have to make monthly principal payments, but the amount they owe is reduced from month to month by the negative interest rate over the life of the mortgage. The bank can finance the mortgage by selling a minus 0.5% bond, passing the interest rate to the customer, and making money with modest mortgage fees.
The Danish bank offers the negative interest rate unusually, but mortgage rates for creditworthy borrowers in Germany are also not far above zero. For example, a 10-year mortgage with a high down payment can only earn interest at 0.7%.
It is worth noting that real interest rates – in other words, when official and market rates are below the inflation rate – have been negative at several points in history, for example in the 1970s, when inflation in the industrialized countries became double-digit.
What is unusual today is that the interest rates actually quoted are below zero and that interest rates have been low for so long.
Interest rates are always a compromise, says economist Adalbert Winkler, professor of international finance and development finance at the Frankfurt School of Finance & Management. “Low real interest rates favor borrowers and mortgage holders at the expense of savers, and when interest rates rise, the opposite is the case.”
“This is always the case when you have an expansive monetary policy and there is no point in denying it,” he said.
Low interest rates make it easier for governments to borrow and build infrastructure that can boost economic growth, despite political pressures that have led Europe’s largest economy, Germany, to balance its budget than borrowing. Other governments like Italy are constrained by high debts.
No negative interest rates have yet occurred in the United States, but some economists say they could if the economy went into recession. The Federal Reserve would almost certainly lower the short-term interest rate to almost zero, as has been the case for seven years since the Great Recession began.
Since US 10-year returns are already very low at 1.6% by historical comparison, it wouldn’t cost much to push them below zero, said Ryan Sweet, senior economist at Moody’s Analytics. The Fed could try to prevent this from happening, possibly by selling government bonds, but it is not clear whether it would succeed.
“We are not immune to it,” he said. “It’s kind of an Alice in Wonderland-like world that we don’t want to go to.”
So far, Federal Reserve officials have downplayed the potential for negative interest rates in the United States.
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The German Economic Institute in Cologne examined several factors that are believed to cause low interest rates and concluded that this is not only due to the central banks, but is a longer-term trend. Such low or negative rates could persist for years.
With this in mind, Mitchell, the professor, persuaded her two daughters to save 18% of their salary when they found their first jobs.
“We are now in a completely different capital market regime than in the past 30 years,” she said.
Rugaber reported from Washington.