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RE:RE:RE:RE:RE:RE:Why Negative Rates Most likely not going happen here....

[RagingBull3]

My theory is Based on very very General Common Sense.     It applies Generally.   

If cost is Zero, then people at first borrow and invest and make 10%.  Time goes by and other people see these people making 10% and say I'll be happy with 9% so they borrow also and invest and accept 9%.    Cycle continues until eventually we get down to maybe 3-4% where then people stop borrowing because they think it's not worth 3-4% for the risk.

This is very general, a slow process.   But at first, lowering rates boost the economy.

Throwing around Free Money (not debt, but free money)..... Now that's a whole new story.

wheeloffortune wrote: So why does the US have more growth when their interest rate was lower than Canada?  Our factories like GM Oshawa are shutting down.  We're only seeing natural resource growth.

RagingBull3 wrote: Low Rates = Low Reward = Low Risk = LOW GROWTH ....... not low unemployment.    

Low Growth is not a Bad thing necessarily....  It's all relative.       In my example below, in both cases personal growth was 5-10%.     One in High interest rate environment, the other in a Low interest environment.    

This is why Japan and Germany are scratching their heads.   Low interest rates are doing their thing... Unemployment is down, economy running..... but growth rate seems to be slowing, even after decades of low interest rates.

MONEY SUPPLY is another big factor.    More actual money in the system, higher the inflation..... But this is not Growth by production.... This is "Growth" by printing money.  All that money juicing the stock market and realestate.  

wheeloffortune wrote: Yet, the EU has had negative interest rates for 6 years now, Japan 4 years (but zero interest rates since 1999).  Not a short term fix.  Seems companies more willing to expand, hire more employees, and invest in R&D when money is cheap, not expensive.  From 2014, Germany's unemployment rate fell to 5% all the way down to 3.5% before C-19.  Canada hasn't had low numbers like that.  Canada in 2014 = 6.93% with the lowest in 2019 at 5.67%.

quote=RagingBull3]It's a short term "fix" for more immediate problems.   In the short term, theory is lower interest rates promotes borrowing in which that money supposedly is put to use.  Also it lower the cost of existing debt.   So, Short term lower interest rates is seen as Boosting the Economy.    

But there's a flip side to Lower interest rates....   Overall Productivity is based on Risk and Reward.   Higher the Reward, the higher the Risk people are willing to take.    So while lowering interest rates may cause people to borrow and invest.... Overall "Reward" (Yield) has dropped (rates lowered).    

For example.  

If it cost you 1% to borrow $100, then you want put that money to work and make maybe atleast 5-10%.    So, you making the economy grow at 5-10%.    If you try to make 10-15%, someone else will come in and undercut you be willing to make 5-10%.  So, economy only grows 5-10%.    Making Less than 5% probably not worth it so nobody will go less than 5%.

If it cost you 10% to borrow $100, then you want to put that money to work and make maybe 15-20%.  So you making economy grow at 15-20%.    If you try to make more, someone else will come in and undercut you.

All just my opinion on how very very gernerally the "system" works.    So while more money flows into the system (through borrowing) when rates are lowered.....The RISK is also lowered.... and fundamentally,   Lower the Risk, Lower the Reward   (growth).

wheeloffortune wrote: If it's bad for the economy, then why does Japan and the European Union do it??  We just copy the US.  If the US does it, we'll do it.  And Trump wants negative rates...

RagingBull3 wrote: 1)   Bank of Canada stated many times that they were at their "Effective Lower Bound" and have other tools that they will use.

2)  Negative Rates runs against the ultimate goal of wanting a Healthy growing market.  Negative means Negative.....which will put pressure on the economy to go negative.     Market growth is determined by Risk and Reward (risk vs yield).    Low/Negative Rates = Market want low/no Risk,    No Risk no Growth.........

3)  History has shown Negative Rates (or in other words no reward) are/will be BAD for the economy.     It does not have to be Interest Rates that the government manipulates, it could be anything.  No Reward = BAD.        History is littered with examples where the government tries to "HELP" but ends up doing more damage.     

4)  Rates already took a jump up......hopefully going back up to pre-Covid19 levels.


This are my opinions.... But you should always prepare for ANYTHING.   Anything is possible these days.



 

 

 

 

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