The ECB is making a huge push, without any kind of democratic consent, towards a finance-based, American/UK-style financial system. This won't work because German savers have virtually no experience of such a system.
All that will happen is: banks go bust (more bust, most German banks are insolvent), and savers lose all their money. Either they hold their money in banks or they take it out and lose it all doing stuff they know nothing about (if we don't have an immediate recession, you will see French investment banks swarm Germany...French bankers have some kind of innate ability to produce bullshit derivatives aimed at savers with a conservative bank-led culture of saving).
It is kind of insane that we have got to the point where policymakers actively ignore markets. All that matters are the textbooks. But this doesn't work. You can't just transplant economic policies from another context and expect them to work the same.
That said, it will be nice to see Germany return to the early 2000s. Objectively, Germany has one of the most vulnerable and poorly functioning economies in the G10. Combine this with utterly insufferable, self-important policymakers and you have quite a nice example of natural justice.
Since the inception of the Euro it's been clear to anyone with an economics education (not me, but this is the impression I've gotten reading commentary from anyone respectable), that Europe has some serious flaws (from a financial perspective) that will take decisive action to fix. One of those things is that Germany needs to start spending more. Unfortunately I don't see it happening. But I'm crossing my fingers than Macron can somehow pull a miracle.
> One of those things is that Germany needs to
> start spending more.
Especially on the individual - many will ask: Why spend, when you save for "bad times" or your kids' future? And more recently: Why spend, when you want to reduce your footprint on this planet?
The Euro isn't sensible from an optimal currency perspective. In a good currency union, labour will be extremely mobile. But though labour can move freely in Europe, people tend to prefer their home country. Contrast to the US where people move much more readily and follow jobs.
So monetary policy has been too tight in areas like Greece that would have simply devalued their currencies in the past. Meanwhile policy seems to be too loose for Germany.
If you want to keep the monetary union, you can't crush Greece and other southern countries. So the Euro must devalue a bit to help them. But this cuts interest rates in Germany, discouraging spending.
Hence "Germany must spend more". It's more of a mechanical statement than a moral one.
Also spending could be using capital to buy a business abroad or infrastructure or somesuch, I think. Needn't necessarily be consumer goods.
In america, when a state has low revenue or high cost, it is subsidized by federal taxes. I.e., people from richer parts of the country "pays" for the poorer parts (e.g., infrastructure, or education etc).
In eurozone, this is rarely the case. I think a person in the US won't bat an eye if taxes are redistributed to a different state, but the amount of backlash that eurozone sees from this sort of redistribution (see brexit - they even believe in lies because it conforms to their worldview!).
Until the eurozone culturally and societally accepts itself as a single country with a single identity, there cannot be financial unity. Euro is a failure because of this imho.
Btw I think you've got a typo:
> for the euro to work, Germany must save more
You're framing this in moral terms whereas it should be viewed as more in economic terms. Spending by Germans creates more demand for Goods and Services, encouraging economic booms in the rest of Eurozone. These developed countries would then develop the skills and accumulate capital to compete with their peers in Asia. That would be a huge win-win from a European perspective.
Honestly, this shouldn't be viewed as encouraging the average German to spend more of their savings, rather, the German Federal Government borrowing more + spending heavily on infrastructure building in Germany + the rest of Europe.
In theory. In practice however, all that negative rate money that people will borrow will all go to real estate causing the already high prices to skyrocket overnight while wages stagnate.
Goods and Services are already cheap enough that we don't need loans for.
When rates were high, property prices in Germany were cheap or at least reasonable as they were pegged to the income levels. When rates went down property prices went to have no correlation to salaries anymore as now every average Joe and his mom could go to the bank and max out a 30 year loan on as big of a house his bank could afford to give him.
That's how Germany went from being one of the cheapest housing markets in Europe to one of the most expensive in the last 10 years.
Sure the € would depreciate a bit but there have already been currency fluctuations that did not show a big positive effect on the malingering economies.
Yep, at least in tech, German salaries are stupidly close to Eastern Europe now. All this because in EE the free market kicked in and did it's thing, forcing employers to compete for talent while German companies artificially cap salaries to fixed grids while complaining there's a talent shortage and pushing for immigration instead of wage increases.
What really happens is that 'savings' have two sides to them, and the other side is debt. So when people's savings go up by 10B, 10B of debt is created somewhere else (bank loans, government borrowing, etc) that enables that.
Having things work this way makes some intuitive sense. Savings are really a promise for goods & services in the future, so it makes sense that you have a matching promise to (forgo) goods & services in the future to counterbalance that.
In Germany's case, it's possible for the public and government to both save in aggregate only as long as trading partners go into debt (in euros). But if the debt becomes unsustainable, you will lose your savings that are the other side of that debt.
Now, everyone can try to save at the same time, but because it's impossible it doesn't work and you just go into a recession. That is, everyone stops spending, people lose their job, and even though they want to save they can't, so the impossibility is avoided.
Even though the basics aren't extremely complicated, it doesn't work like a household, and in many countries the average level of economics education seems to be about zero. There's a lot of public sentiment that everyone should should just save up and pay down debt, even though it doesn't make much mathematical sense how that could happen. I think there's a good chance people are elected at some point that handle things very badly.
On an single individual level there's no reason to avoid saving, it's a good idea. But someone has to take on the debt on the other side of that saving. If no one wants to (including the government), it seems reasonable for interest rates to trend negative.
More generally speaking, Germany has excess saving and insufficient spending which creates problems for the other members of the Eurozone. Excess deficits are bad, but excess surpluses are also not good.
Why spend, when you save for "bad times" or your kids' future?
By spending you keep companies in business where your kids will be able to work in the future. We often see a moral version of this argument framed as "buy local" or "buy American|German|Whatever"
Why spend, when you want to reduce your footprint on this planet?
Often lower impact choices cost more. By deliberately spending more money on lower footprint choices you are helping the planet. Good examples of this include high-efficiency appliances, extra house insulation, sustainable food sources etc etc.
A moral arguement towards spending is looked at like you are trying to sell them sonething and/or fleece them. And they are technically right about that - accumulating wealth is what makes an individual rich.
Investment in the actual sense would be a win-win. Not speculation or buying goods for the sake of getting cash flowing but things which provide a return. It is similiar to why lending out money/buying stocks is infinitely better as an investment than just holding gold - they provide utility. Gold just sits there.
Of course investing reliably and safely is hard, especially when the behavior of others impact it and nobody has perfect information.
Negative interest rates pulls that out under the rug, and forces people to take on extra risk than they currently do.
This doesn't seem like a reasonable assumption to me.
If you spend $ to reduce your carbon output for example, the money circulates among other people, who average about the same usage of fossil fuels as the general population because after a few exchanges they are the general population. So if you are increasing your spending in the long run, you are increasing resource usage by that amount, no matter how virtuous the things you are spending it on.
That doesn't mean it's wrong to invest in something that saves you money in the long run, but if there isn't a payoff, then by default you shouldn't think you're helping the environment.
This is a second order result, and doesn't necessarily follow. For example, higher quality goods generally last longer, which reduces waste. Higher profit margins also lead to more room for sustainability in supply chains. Apple is a good example of this.
Richer people also generally have less children, which reduces the environmental impact further.
All in all I'd say that second-level effects are guessing at this point.
Sure, but I think it's ok to think about ways in which spending more can help. The OP did ask that question after all..
b) insufficient aggregate demand can be a huge problem leading to recessions. What is sensible for the individual might not be sensible for the economy as a while.
c) Germany's infrastructure is decaying, and rates are as low as never before, even negative, ie the market is willing to pay Germany to borrow. Yet Germany refuses to borrow. It's perverse. Of course, unemployment in Germany is relatively low, but in Europe it's high. Some big construction projects in Germany would be a win-win.
Doomed is a strong word, what does it mean? Sure, there are flaws in the common currency and the ECB policies might fail. Europe might be the next Japan for the upcoming decade with ±0% economic growth, that doesn't make it doomed.
The Euro could dissolve in lieu of national currencies. Borders may be redrawn and remilitarised.
Monetary problems tend to prompt populism. That comes with its standard variants of nationalism, fascism and racism. Harsher customs are the least of our concerns from this side of the Atlantic.
The Euro set limits on how much countries were allowed to borrow and how high their deficits can be.
The only massive flaw it has is the believe that countries could be simply trusted to stick to these rules.
The EU might well be doomed - it seems that's actually what you meant? I've noticed it's quite common for the EU's biggest supporters to use the word "Europe" when they mean EU, but please don't do that. It's a poor use of language and can come across as deliberately manipulative: attempting to graft the permanence of a continent onto a transient political institution. It really grates.
As for the financial flaws. The flaw is not that Germans must spend more but the other countries must spend less. Mere spending is not a useful goal - the ECB is trying (apparently successfully) to force Germans to spend their savings only to wallpaper over the fact that the EU member states continue to have lethargic economies that don't produce much worth spending money on, and to kick the can on a huge debt crisis.
Macron can't do anything - he's in no position to dictate to the Germans what to do with their money. Unfortunately the poor Germans, who are already owed vast sums by the rest of the EU (see: TARGET-2 trade imbalances), are probably going to end up losing all their savings to fund southern/French lifestyles for another decade or two. Their emotional commitment to the EU allows them to be financially exploited without end.
Small is beautiful. Let's start by restoring the primacy of the country as an organising unit. Where there are no actual disagreements in policy, they can recognise each others standards and avoid trading friction. Where disagreements over policy do occur, then deviation in those areas should have no impact on unrelated areas.
The EU has become a monster that is willing to cut ties with important European countries entirely if they refuse any aspect of its dominion. Relations with both Britain and Switzerland are on the brink, despite both countries trying hard to be best friends with their neighbours. The EU is actually imposing trade sanctions on Switzerland because of a disagreement over something related to trade union law, so I expect it to get much worse in future as the EU continues to maintain near-totalitarian "with us or against us" politics against them.
Every attempt to unite Europe under a single government has led to disaster. This time around will be no different.
- A Brexit voter
I don't think anyone wants the EU to become another Soviet Union. EU believers want a United States of Europe(more or less).
Small might be beautiful but it's weak. It goes with the wind. (i.e with the U.S, China, Russia). Brexit will only move UK closer to the US than to the continental Europe.
U.S doesn't use the same "with us" or "against policy", right? I heard U.S doesn't impose sanctions due various disagreements either... good luck! You forgot the Suez Crisis so fast!
Despite that I would have recommended Scotland vote to remain a part of the UK. Inconsistent? To a point yes, but with better technology, I might have changed my mind.
One key problem with fully splitting the UK is there's no identity card system so no chance of an internal border. If Scotland had split from the UK, its economy would have rapidly collapsed because the SNPs economic plans were all based on a relatively high price of oil and the oil price collapsed a few months after the referendum. A socialism driven economic collapse in Scotland would have caused a mass influx of Scots into England with no way to identify them or send them back. With an ID card it can be more like in Europe where you have to register, and there can be some notion of a soft border. Same applies for Northern Ireland.
I'm not sure why you think small means weak. Germany would seem to have disproved that notion twice in the 21st century. At any rate, I'm not arguing against military alliances, and given the only armies in Europe that are worth anything are the British and French, the EU will soon be relying almost entirely on France.
Or perhaps you have bought the idea that small countries "have" to sign trade deals with bigger countries. That's simply false.
Finally, what EU fans want is irrelevant. It's what they'll get that matters. Do you see the EU ever respecting a vote that doesn't go it's way? Do you see any real movement towards putting the EU Parliament above the commission and ECB? No, the "parliament" is a sham and the EU's response to democratic rejection is to ignore the result or try and force the population to comply.
You're going to get a new Soviet Union whether you want one or not. The inertial direction of travel is quite clear.
I'm not looking to convince you that EU is better than you think but this open letter may help you understand some subtle differences between EU and SU.
I don't recall any talk of ID cards or transitional periods to sort things out during the Scottish Indyref. Perhaps I missed it.
The reply to the open letter is what you'd expect and isn't reassuring. It makes a few errors.
Firstly, it's not looking forward. It states the EU today is not as nearly as bad as the USSR was at its worst. That's true and nobody argues that it is. However it's also not really relevant, because if you only start to object to a government at the point it's running gulags it's already far too late. To avoid a repeat of history, movement towards such a system must be detected and stopped early whilst it's still possible. That's why we need to look at the direction of travel and extrapolate.
Secondly, it's looking backward. It talks about how the UK was able to opt-out of the EU's worst ideas and talks about Thatcher. That was true in the past, but the EU has been getting more powerful over time and taking over more and more national responsibilities. The veto has been progressively weakened and now they want to abolish it entirely. Today's EU is not the same as the EU in Thatcher's day - it's significantly larger and much more hostile to "deserters", as Juncker has described the UK. And as the EU loves to keep telling the UK there is no more "cherry picking" anymore, i.e. opting out of their bad ideas. That era is over.
So what matters is what the EU will become, not what it is today or what it was 20 years ago.
And here is where the comparisons start to look bad.
Firstly and most importantly the EU does not recognise the democratic will of the people, whilst loudly proclaiming that it does. This is a major red flag. There is no effective way to control the Commission's agenda through voting.
It must be noted here that all communist regimes have Parliaments and they all have votes. In the USSR there was an elected body called the Supreme Soviet, whose members made the laws of the Union. The USSR was a dictatorship despite the existence of the Supreme Soviet because of a simple trick: all elected politicians had to belong to the same party, so there was no real competition of policies. It had the superficial appearance a democratic system without being one.
In the EU there are multiple parties and they do compete. The EU Parliament is neutered via a different means: the elected politicians can't control the executive or change the laws. This means they aren't really politicians and it's not really a Parliament, using standard dictionary definitions. It wouldn't matter if somehow a coalition of parties totally opposed to the Commission's agenda got elected: the Parliament lacks the "right of initiation". That also means there's no real point in having any party policies, so you see a wafer thin and artificial campaigns, where parties either have detailed manifestos that happen to align exactly with what the head of the Commission already wants, or you get protest parties that openly admit they can't change anything but say: elect us anyway just to 'send a message' (which is never received).
A good example of how unseriously the Parliament is taken is the way they were given a "vote" on the new head of the EU Commission, but the vote only had one option. MEPs could either support Ursula von der Leyen, or abstain. Votes with only one option are a classic symptom of communism; the sort of system that is happy to call itself a "People's Republic" but actually doesn't trust the people.
By the way, the EU does try to obfuscate a lot of this stuff by introducing mechanisms that theoretically are usable but in practice aren't. For instance there was briefly the Spitzenkandidaten system which meant the Parliament appointed the head of the Commission ... up until they appointed the wrong one, at which point that ability vanished. There's theoretically an EU Citizen's Initiative, but unlike Citizen's Initiatives in member states, this one can't be used to change the law or trigger a referendum. Actually they accomplish nothing even if you gather the required number of signatures (which is huge).
In the end the true nature is summed up by Jean-Claude Juncker: "There can be no democratic choice against the European treaties".
Another bad sign is the love of secrecy. In theory your countries national leader can influence the choice of Commission leader, except the decision of who gets the job is always made in secret and nobody knows who voted for whom or how the decision was made. This matters: the EU's own leaders have said in the past it's common for politicians to lie to their own voters about what they support. There is no public explanation how Ursula von der Leyen became head of the Commission. It could be fixed by making EU meetings be transparent but they refuse to do it. This pattern of secret meetings sans minutes crops up everywhere when you scratch the surface.
There are lots of other pieces of evidence the EU doesn't care about votes or democracy. For instance, in a democratic system you might have expected rejection by one of the biggest members to trigger at minimum some sort of reflection or debate. There hasn't been any - at the first meeting of the EU Council after the Brexit vote it wasn't discussed at all. The only topic on the agenda was creating an EU army - one that would report directly to the Commission.
Why does the EU need an army when there is already NATO? It doesn't, but totalitarian regimes do. Expect to hear more about this army's "peacekeeping" initiatives in future, albeit not for many years. The process of transforming into a Neo USSR is a slow one, fortunately.
The EU appears to implement rule of law, until the law gets in the way of the EU's aims and then it simply gets ignored. To quote Christine LaGarde on the Eurozone bailouts: "To save the Euro we broke all the rules. The treaties are quite clear. No bailouts."
Finally, loyalty to the EU strongly resembles the sort of loyalty to communism seen in the first half of the 20th century. Brexit has made this very clear by flushing it to the surface. Strongholds in academia, a belief in the superiority of 'expert' run government over democratic decisions, constant double-speak like a "People's Vote" (of the sort held in a People's Republic), a willingness to do whatever it takes to gain victory. Orwell had a lot to say on these topics.
I could go on but you get the picture. The EU looks superficially democratic and law-based, but blocks actual democracy at every turn and the law is enforced politically. It's a deep seated set of attitudes that can't be reformed. It will inexorably continue on its present path, with the EU getting steadily more powerful until it totally controls the member states, helped by large numbers of quasi-religious loyalists who will crack down and imprison anti-EU protesters under the guise of "hate speech".
This happened during the Euro crisis some years ago, and at the time it seemed that Germans with any kind of savings were desperately looking for safe places to put it. Lacking much in the way of financial literacy, many undoubtedly fell victim to professional crooks.
It's hardly any surprise that property markets across Germany started heating up around that time. Property is widely viewed as a safe bet. They call it 'Betongold' or 'concrete gold' for a reason. I know that isn't the only factor behind the vast increase in property values in many areas, but it's undoubtedly a major one, and I think we can expect this situation with interest rates to further inflate what is beginning to look like a bubble.
Nominal property values in the mid-sized city where I live have more than doubled in a decade--seems like a wild party after decades of relatively flat (real) property values.
It's something of a shock, given that earnings have hardly budged during the same period. One could argue that Germany was abnormally cheap 10 years ago in terms of both consumer goods and real estate, and it might be true, but the reality on the ground is pretty disheartening, particularly in light of political developments in places such as Saxony. I'm afraid the squeeze on people in the middle is going to fuel more political instability, or could at the very least be used to stir up trouble.
European finance is bank based. Banks make most of the loans. Bank managers decide which projects get financed and which don’t. Investors put money in banks and let the banks make decisions.
American finance is market based. Bond buyers make most of the loans. Bond (and stock) investors decide which projects get financed and which don’t. Investors themselves make decisions.
Broadly speaking, the European bank-based model is moribund. It concentrates risks and is too conservative. The ECB is trying to change this, but it involves changing a social contract around how investors behave. This has happened without a broader debate, because Europe, and now we’re seeing a backlash in Germany.
It's not the ECB that is being unreasonable here. It's Germany. Why on earth would you run a balanced budget while getting paid for borrowing? That is just irrational beyond belief.
Fiscal policy is a national matter. It is Germans who need to have that debate you're talking about without constantly blaming the ECB for their own failings.
You still need to pay the money back after you invested it. If those investments don't make a profit, you're in trouble. I mean, they could park it in ... maybe bonds? Oh wait.. ;)
There also no telling what the future brings. Borrowing to the limit while times are good leaves you no room when times are bad. A recession is on the horizon, it sounds foolish to shoot your powder before it hits.
It's exactly like that. They save not because "omg saving is so cool", they save for rainy days. Germans value predictability and security over short term consumption, though that is changing slowly.
It's hard for individuals to save the way squirrels do. Farmers could do it, but that's it. Now it requires governments, and Germans elected a government that refused to do it, and instead imposed balanced budgets instead. Now they are suffering the consequences of that.
Times are bad. Germany is very likely in a recession right now and they have fallen back technologically. Now is the time to spend some money and it was never cheaper.
Also, I think spending money is too slow anyway, especially if it is spent on infrastructure, technology development, retooling an obsolete auto and energy sector, etc.
In my view, they are already very very late.
The analogy doesn't hold since burning wood doesn't help shorten winter.
Because later you will have to refinance your debt on worse terms.
What do you mean by that?
The incentive is just the same either way. So if they move it from say savings to some investment... not sure that requires huge experience. Most american's aren't savvy investors.
There are other retirement savings vehicles, but they're pretty much all annuities. Most Germans, including well-earning engineers like my husband, can't imagine receiving post-retirement income in anything other than a monthly pension; perhaps rent on apartments or houses they've managed to buy along the way. Remember that less than half of German adults live in home they own; renting the same apartment for 40 years is not unusual here.
Germans tend to be more skeptical about the stock market than Americans are. To balance this, they are also far more hesitant to borrow for consumption - my husband's family were slightly horrified that I'd financed the full cost of my car, on top of owing student loans. I didn't mention the credit card debt it took me a couple of years to finish off!
(Me: American who grew up watching my parents always make their payments, but pretty much always have a car loan and who took out some of the student loans I paid back because they absolutely had no discretionary savings.
Husband: German who grew up watching his parents buy 3-5 year old cars with bank drafts once their old one started spending too much time at the shop, and then gave him a bunch of their savings as a university graduation present that sat in his bank account until we bought our house 15 years later)
But what if I (German resident US citizen) leave the country before I sell the fund? They would have to refund all they had taxed; otherwise how do you reconcile that with tax in a new country of residence?
Saving doesn't always mean saving money but rather saving value. If you own your house and land outright, would you not consider that "savings"? What about government bonds? Corporate bonds? Fixed-incomes? Dividend bearing stocks? Growth stocks? All of that is savings. Cash in a mattress is an unproductive asset, it's a waste of potential. An account at a bank that lends and kicks some back to you may be the most productive allocation in some circumstances but overwhelmingly it isn't. Money is only valuable when it moves.
Well, this is the crux of the issue. In the language I learned (British English) the word savings does refer exclusively to cash. Investment is an entirely separate concept, as are assets. I would never consider a house to be savings, because savings are there to provide a buffer if your income suddenly drops below your structural spending level - the proverbial rainy day. Selling a house takes a very long time and has huge overheads, plus, of course, you still need somewhere to live.
Unless your first reaction to e.g. losing a job is to immediately sell your house, your house is therefore not savings.
Government bonds? Great until they default.
Corporate bonds? Ditto.
Growth stocks?!?! The things that can easily move in value 20% in a single day? That's not savings, that's an investment at best or a risky gamble at worst.
Money is only valuable when it moves.
No, money is a store of value, that's literally a part of the definition of what makes something money. It is valuable because it lets you obtain resources later, without having to barter for them at that exact moment.
Money saved means you can lose your job and continue to buy things: that fact alone has value even if the money itself isn't moving right now. This really isn't hard to understand.
The demonisation of savings in our society is one of the most severe problems we face, if not the most severe. It's impossible to have any kind of justice or stability in the world if nobody has any savings, because they convinced themselves a tech stock is the same thing.
Nobody owes you a risk-free positive return. If investors don't need your money, then they don't need your money. Money is only a store of value over short time periods (and if inflation is high not even then). Money only has value because you can get it today and use it in transactions tomorrow. If you take that money and stick it in a mattress for a year, nobody owes anything for doing so.
Not according to Merriam Webster - https://www.merriam-webster.com/dictionary/money
Nor the OED - https://www.lexico.com/en/definition/money
Nor Collins - https://www.collinsdictionary.com/dictionary/english/money
In fact that little factoid you present is a hallmark of Austrian economic thinking and usually cryptocurrency enthusiasm...
To an extent, you are right. Here in the US, anyway. But it is possible to go too far in the other direction as well.
If all of your disposable money is going into savings, you have no need to borrow money, so the bank isn't making loans, so the interest rate you receive has to fall. More importantly, if you are not spending money, the people you aren't buying from have no incentive to invest. The result is a stagnant economy.
Saving too much is almost as bad as saving too little.
That is, if you judge an economy purely on the basis of "how much stuff is getting done" without caring about what that stuff is, or whether it's actually useful, then yes confiscating savings and making it impossible to actually keep stable money anywhere (which is actually called "economic stimulus"), well, it will appear to make your economy more dynamic. If you start taking into account economic stability though, well, the highs and lows of boom/bust QE-driven economics don't look so great.
So there's really no such thing as saving too much. How much to save is a very personal decision. If you over-save it means lost opportunities, unless you deliberately want to pass your wealth onto your children. But if you save too little, the results can be catastrophic unless the government bails you out, which creates the massive moral hazard that wrecks our global economy today.
Remember the categorical imperative: "Act only according to that maxim whereby you can, at the same time, will that it should become a universal law."
¹ Beyond a point anyway. Keep 3 to 6 months' income readily available.
People should not be forced to go further out on the risk spectrum than they want to by government policy (which is what you are suggesting by saying that we shouldn't have what economists call sound money). Forcing them to do that distorts the economy. People should buy bonds because they think the extra risk is justified, not because there is no alternative.
The lever that policy has is interest rates, and by lowering it even more, it forces savers to adjust their view on risk - if they can handle the lowered interest because their risk tolerance is so low that they cant buy bonds or anything, then they will need to suffer the low rates.
It's just that a lot of people are in the situation where they cannot take on any risk with their savings. Historiaclly, banks being risk free is just a gimmick (even if the gov't is insuring the deposit). Banks's risks are diversified, and minimized. But if the economy is doing poorly, they cannot magically produce the low risk returns.
I think the only way forward is actually gov't spending sprees - invest in long term projects, like 100 year long projects, and make these projects the backbone of fiscal policy (print money, if needed). Long term projects that can derive value for all of society, such as establishing bases on moon/mars, mining asteroids, etc.
At this point, even high-quality corporate bonds are going negative in Europe, so people who want to save have to take a big risk.
In my opinion that is unnatural; it's a creation of central planners who forced everyone away from gold and into fiat currencies.
Gold is pretty risky now because it's not actually used as a currency and thus has low liquidity. If we all used gold as a currency, it would have high liquidity and it would be very stable. (I don't want to go back to gold because digital currency is far more practical, but I'm just making a historical point.)
> I think the only way forward is actually gov't spending sprees
That is going further in the direction of central planning and also further inhibits regular people from saving and investing safely and wisely. How is the middle class going to save and invest under this paradigm? I think the most likely answer is that they won't/can't, and the middle class disappears (like what happens with hyperinflation, e.g. Weimar Germany).
A recurring theme: I am really against central planning. The planners do not always get it right, and when they screw up big time, it makes the system collapse. When people are free to make their own choices the economy adjusts dynamically.
However, there is no sound money right now. Bitcoin was designed to be sound money in theory, but it has to get a lot more liquidity first. Gold once was sound money, but also would need a lot more liquidity to be sound money once again. So we just have to wait. I'm not suggesting that we force it.
Fiat money seems destined to eventually collapse. There is a long road, but every time fiat money stumbles, it will be a little victory for alternatives. Investors have been fleeing into gold lately. Wealthy Chinese people have been fleeing into bitcoin to at least some small extent.
The middle class didn't disappear because of Weimar. (It was a mixed bag, because the hyperinflation wiped out a lot of debts.) They disappeared because of the Great Depression. Sound money caused that.
I don't agree at all. But let's wait and see. That is a risk I'm happy to take. Sound money is honest money. A system that can't survive sound money is an unsound system.
Anyway, we probably disagree on the definition of 'capitalism.' We don't have capitalism now, we have a mixed economy with partial capitalism.
> the Great Depression. Sound money caused that.
I completely disagree. This is but one theory, and I don't think it's a good one.
> It was a mixed bag, because the hyperinflation wiped out a lot of debts.
Hyperinflation = no debts, but also no savings. So only the very wealthy with large portfolios in real estate or industry could survive financially. Everyone else reduced to poverty. (Granted, I'm no expert on Weimar history, so if that's not exactly accurate, I welcome corrections.)
The German economy recovered from hyperinflation, and was booming by the end of the twenties, only to be taken down by the Great Depression. Under Hitler, they abandoned the gold standard, and their economy recovered.
At least it's better than putting money in an index ETF, because bankers making loans do actually contribute to the capital allocation process in a meaningful way.
What you're not doing is provide capital to companies or contribute to the information processing that makes markets efficient (at least not very much).
Crucially, bank loans (as well as IPOs, rights issues and bond issues) provide capital. Trading existing stocks doesn't.
So when it comes to capital allocation, you're not picking winners and losers by buying an index ETF, because no capital is created at all.
If it is true, I wonder if similar laws exist in other countries.
Dig it down ... atleast I would.
If you don’t trust that sort of stuff then the gold standard is totally irrelevant anyway.
Regardless, most people won't do this due to liquidity issues. Why can't we just put the currency back on gold? That's like saying we shouldn't put an embargo on Iran because "Every one could just stop buying oil from her."
Why. To what end? Assuming a fixed amount of gold and a growing economy, you end up creating deflation, which in turn serves to exacerbate wealth inequality in the country. It makes old money wealthier over time. Deflation reduces lending (because it's a "risk free" ROI) and reduced lending slows down the economy. If you don't trust the government to administer the fiat supply, why on earth would you trust them to administer a gold-backed supply? The government is the one that ended it last time around.
If you believe gold is a better store of value by all means buy gold, or buy gold ETFs, mutual funds, shares in gold miners, go 100% gold. Drop it into a margin account, and borrow against it. That gets you everything you want and more. There's no reason to switch over to gold from fiat, in fact you're advantaged if you're the only one doing this and it is in fact better. History however shows us that's not the case.
And then what, we mine one asteroid  and your gold pile and all the money associated therewith is worthless?
Stopping inflation. The idea that my money is worth less today than it was yesterday is ridiculous. It's not a store of value, and violates one of the three tenets of currency.
> exacerbate wealth inequality
This does not strike me as a reason not to pass a policy. It is true only because Americans are by-and-large spendthrifts. We have gotten away from saving and personal responsibility. Maybe we wouldn't see the large increases in housing prices etc. if we didn't have this runaway creation of fake value based on leverage. I don't think it's sustainable, the economy is overheating, and we will hurt for it. Stagflation proved keynesianism wrong; time for a different approach of the government out of the economy.
More importantly, inflation is already a huge tax on the poor and unbanked. Every one else can recover at least some of the inflation tax; these people cannot.
Finally, deflation may not be as bad as every one thought. 
> If you don't trust the government to administer the fiat supply, why on earth would you trust them to administer a gold-backed supply?
I do in part, but there is no reason banks could not issue their own gold certificates. More importantly, the government is not the monolith as which you address it. The fed is separate and independent, and would fill this job (although I still would dispute the constitutionality of a federal reserve, some degree of weaning is probably necessary). This would reign in the profligate spending of the American congress, as the supply of loanable funds would shrink. It would also mean we can't just screw pension funds and individuals by inflating our way out of the problem. The wealthy can personally invest in the market and manage their own money (or hire those smart enough to do so), while every one else pays. Here's an excellent paper with more info: https://mises-media.s3.amazonaws.com/qjae11_1_1.pdf
Finally, inflation tends to encourage economic "fake growth". This is the kind of "growth" shown by sv unicorns, by hedge funds during an expansion, by those who push around rather than make money. Too much fake growth -> overheated economy -> a broader crash. Changes of that sort give the most powerful and most opportunistic the opportunity to profit rather than those with real value to contribute.
> And then what, we mine one asteroid  and your gold pile and all the money associated therewith is worthless?
By then we could probably switch over to a (non-bitcoin) crypto-currency. Though I'd blanch at the idea of the gov't creating one now, as it would be doubtless be used to track all spending to "combat money laundering" or some baloney.
My overall point is that we've taken the wrong approach to the economy. We've let this lefty-keynesian approach lure us away from a laissez-faire system with short-term gains and false promises of growth.
Seems like a 1.2% growth rate.
Because politicians will take it back off gold again when it suits them.
Sorry to be "that guy," but this is why bitcoin was created.
> Don't be the guy advocating putting money into bitcoin to store value
Well, I didn't. Bitcoin was designed to be sound and honest money on theoretical grounds. But it hasn't yet achieved the needed liquidity to be relatively stable in value. I hope it does some day, but I don't know if it will.
Anyway, the issues you are raising with your references do not worry me in the least. I have been watching bitcoin a long time and I think that's just short-term news. It's not part of the macro picture. It's like if you came back from a 20 year stint in a monastery tomorrow and watched the news---you would think for sure the world is ending tomorrow. Everything seems like a crisis in the moment, but it isn't.
I like the idea of cryptocurrency, but bitcoin is an awful store of value compared to gold. I haven't found a recent calculation for the beta of bitcoin, but it's something pretty crazy. Also, china controls over 2/3 of btc hashing power; I don't trust her with a penny.
Perhaps everyone will consider working less when your excess fiat has so little value.
How else would interest rates be set? If you want your money to grow all by itself just because you deposited in an account with an interest rate, how does that interest rate get decided if not by someone in an office? Someone, in an office, whatever tools they use to decide, has to make that decision, surely.
This is a good way to blow up a bank.
It is, and it’s difficult. Perhaps fundamentally impossible, given it would have to predict consumers’ tastes and preferences to estimate B2C companies’ creditworthiness.
Rates are negotiated instruments, a combination of the return on safe assets today, the risk of that rate changing tomorrow, and the credit profile and availability of borrowers. There is no known algorithm which can robustly balance these variables. If it were discovered, it would be worth billions, perhaps more, and fundamentally change finance. Pretty much every crisis has a story about smart people thinking they’ve solved this problem in some narrow niche of the economy and then being shown disastrously wrong.
It can't be done by one individual for the whole market, but the invisible hand does a pretty good job. The principle of a market as a whole establishing prices, rates, etc. is widely accepted.
The only way banks could pay a higher interest rate would be to bear more risk, but that's how you get a banking crisis.
Also the TIBOR and LIBOR and all the other *IBORs aren’t set by the government either. Certainly government monetary policies affect these rates, but ultimately it’s a free market function.
Having the government directly set private lending rates is a very bad idea and would certainly result in disaster (much like how all other price controls are terrible ideas).
Under normal conditions, they have an extremely strong influence on medium term interest rates as well by convincing the market that they will keep short rates high(low) in the future, while will then raise(lower) medium terms rates.
If that proves inadequate, like it did after the crisis, the Fed can buy and sell bonds directly to move medium to long-term interest rates.
The Fed may have a historical preference for relying on the first mechanism alone, but through some combination of these techniques, they can set any interest rate to any reasonable value almost at will.
By a free market, the same way it was set for a very long time. It gets decided by how many people borrow at a given rate, which will typically raise or lower the rate. Some one will make small adjustments around the broader market rate; if enough people make those small adjustments in one direction, the range moves.
Lots of interest rates are influenced by markets, where lenders and borrowers base their activity on available rates (if no one borrows at a given rate, a lender may seek business by reducing the rate...).
Maybe this guy doesn’t know anything about finance and doesn’t understand? I’m confused.
Moreover, this is exactly what rate cuts are for: to stimulate the velocity of money and encourage investment.
Europeans in general are so risk adverse that they make irrational financial decisions. As EMH posites, you get a return commensurate to your risk: without bearing risk, there cannot be any return.
The amount in savings accounts is probably much lower than what you are thinking. Median net worth in Germany is only around EUR 50.000.
Investment returns are also heavily taxed.
So it would probably be a better idea to hedge some of that out unless you have some specific long view on Euros. Also you could argue that Euro debt isn’t sovereign debt since only the European Central Bank can make more of it. Consequently USD should be a less risky and more stable currency in the long-term.
And if you don't like the Mexican bond example , let’s say it’s for the same reason that Joe from Baltimore was not interested in buying Australian government bills a few years ago (when they were yielding 2% more than US treasury bills). Note that the rating for the Australian debt is better than for the US...
 it’s true that a comparison of 3m bills (8% yield in Mexico vs 2% in the US) would be more appropriate.
> For FDIC (or equivalent) protection.
Though you could also say it’s about the market incorporating all known information because that and there only being one Sharpe ratio mean pretty much the exact same thing. Moreover the implications of CAPM and EMH are pretty much the same.
I guess the message here is that rent-seeking investments (positive yielding investments, deposits) will no longer work. Value needs to be added.
That’s an odd way to phrase keeping housing affordable.
Stable housing prices are good for an economy. Next to negative rates, that’s a win. That’s the point.
Save on rent? Not every asset is a commodity to be traded.
Because when everyone starts withdrawing their money, you get a bank run.
The EU’s lack of a currency-wide deposit guarantee is a separate problem. One uniquely spawned by the Germans.
* What are you saving money for?
Retirement? Children(s)'s education? House downpayment? Vacation? New/replacement car? The purpose of the money that you are saving determines what you should do.
The rates that this article is talking about is bank savings, so if you're talking about retirement or child education, that is usually many years away. For that money you will need to put it into a portfolio of stocks and bonds, because if you don't inflation will eat away at it over time.
If you're talking about saving for next year's vacation, then a savings account (even negative rate) is fine, because over the course of a year you're not going to lose much.
If it's in the time frame of 2-5 years, then a term deposit will be fine:
It's locked in, so by promising to not touch it, the financial institution gives you a higher rate. Of course if (e.g.) your car breaks down, and you do have grab it, you forgo any interest, but the emergency use is probably a higher interest; if your car does not break down, you earn higher interest than a simple savings account.
And yes: after you've saved an emergency fund, funded your vacation plans, funded any replacement vehicles or other large expenses (new roof/HVAC for your home), you should spend whatever is rest.
You can't take it with you when you die, so once you've planned for certain contingencies, you might as well spend the money on improving your happiness and enjoyment of life.
I am a German, and my visceral reaction to this is: "But what if something unexpected comes up!?"
You may roll your eyes at this, but (I believe that) this is a mindset shared by the majority of Germans.
Some kind of social safety net would, ironically enough, allow the most efficient use of capital by allowing citizens to invest all their extra cash into the economic machine.
It is prudent to set aside some number of months' worth of expenses:
Per another comment, this is why you have life/disability insurance, health insurance, social safety net (welfare, unemployment).
And what "unexpected" thing are you worried about? You could be hit by a car Monday on your way to/from work and it won't matter any more and all that cash will no longer be useful to you.
In that case, why should the customer need to decide on a portfolio?
Why doen't bank to that internally and offer risk-free, variable rate investments for their customers?
The expected stock return is 5-7% p.a., why can't banks offer 3-4%?
> If it's in the time frame of 2-5 years, then a term deposit will be fine:
Except that it's not. In germany I know of two popular alternatives term deposit ('Festgeld', more flexible - can be extended) and savings bond ('Sparbrief').
The interest rate of term deposites is 0,1%, for saving bongs it's 0.1-1%. Both are considerably lower than the inflation rate of approx 1.5%.
Sure, there are different fond/stock based alternatives - but they often carry risk.
Because banks are banks and investment companies are investment companies, and there are generally regulations about mixing the two (the removal of those regulations helped along the Financial Crisis). And just because something is "expected" does not mean it is guaranteed, further those expectations are averaged out over several years.
If you want safety, you will have to pay for it:
> Of course, all this exists today. If you want to hold gold and watches and sentimental things at a bank, you pay to rent a safe deposit box. If you want to hold oil or grain to use it or sell it next year, you can pay for storage in a tank or some other facility. [...]
> Well, it’s important to remember that money in the bank isn’t really something you have. It’s something that you are owed. When you log into your bank and see that you have $10,000 in your savings account, what that means is that your bank owes you $10,000. [...]
> In other words, to store money at a bank requires the existence of some other borrower who will pay the bank. As such, just as you’ll pay more to store grain when grain is abundant and warehouse space is scarce, you have to pay more to hold money when savings are abundant but demand for borrowing is scarce. [...]
> In the meantime, there’s lots of money out there and a limited capacity to store it all. So increasingly, savers are going to have to pay for money storage services. And although it’s not much consolation, we can at least remember that whether it’s fees for oil tanks, safe deposit boxes, security guards, insurance, or wealth managers, there's nothing unnatural about being forced to pay to preserve your wealth. [...]
> Sure, there are different fond/stock based alternatives - but they often carry risk.
If you want more return, you will have to take on more risk. Buy a portfolio of 10% stocks/equities and 90% bonds. Vanguard actually offers an ETF very close to this called VCIP in Canada: only 20% stocks/equities.
If you want safety you will have to pay for it, with low or negative rates. If you want returns you will have to take some risk.
Suck it up.
Yes. I mean, this is the goal of an inflation-forced financialized economy. The "low-to-middle-class" isn't supposed to be able to save - they're supposed to keep working.
The negative interest rate paradigm enjoys support on HN due to the upper-middle-class culture of saving into brokerage accounts holding fauxvestments, and the tech community being generally more in tune with whatever bubbles are currently building. Better access to the printing presses, and all.
The fundamental truth is that prices naturally trend downwards due to technological progress - competition wins out by doing more for less. Actively driving the economy via inflation only made sense before we learned how to make enough stuff. Now the policy is directly opposed to sustainability.
In a bank account with a negative rate! Storing money for you is then a service. If you have $1000 under your mattress for 10 years and the risk of theft or fire is 1% over those 10 years, then the storage service would be worth $10 to avoid that risk (assuming the risk in the bank is zero which is a simplification).
If you keep large amounts of long-term savings in cash you are leaving a lot of money on the table anyway, although apparently a lot of Germans do that. Even in the US, high-yield savings accounts barely outpace inflation.
The purpose of the negative rate is to reduce the chances of an deflationary spiral, which would hurt savers even more than a negative rate because it would tank the economy and cause unemployment. A negative rate is probably better for savers than a recession.
And if people want to tell me I should rather spend some money to push the economy... seriously? I don't need a new tv/phone/car/whatever every few years..
They tell you in the news to save the environment by doing "xyz" daily but just restrain on buying shit you don't need?? No that's too easy..
And in the process of everyone spending money to buy stuff they don't need, we're destroying the world we live in.
I can't find the article, but it was about extracting X(forgot which) material. And if you want just 1% yearly growth.
If I recall correctly once you outgrow a planet, its less than 250 years before you outgrow whole of our galaxy, and less than 500 before whole known universe.
Just give it away and collect that sweet immaterial feeling of a job well done. Support causes you believe in.
There was a good article in the Telegraph the other day by someone who used to work for the EU Commission on monetary policy back in the 90s, until he was fired for writing a book arguing that the ERM was terrible :) It argued that central banks are putting the world on a conveyer belt to communism.
The argument ran like this. Because they believe their mandate is to create spending ("growth") at any cost, any form of savings - even low risk investments - is an enemy to their goal and must be suppressed. So they print money to buy up all the low risk investments, to force investors into higher risk investments. That creates bigger bubbles and to try and push back or shrink the resulting recessions they must keep pushing spending levels ever higher, so they buy more and more assets people are using to try and store value. The terminal state is one in which central banks own most of the economy, which is communism.
And if they had been, that would not exactly been a bad thing, given how much shortage there was of basic consumer goods in communist countries.
I think it seems considerably more absurd in modern rich western countries today, that we are still pushing for ever high consumption.
For all its flaws, the communist countries at least seem to focus more on items being more easy to reuse and repair. Western society is getting deeper and deeper into really short product cycles with products which are next to impossible to repair. We are essentially pushed to an artificially high consumption level.
This has the effect of pulling the cash in banks into the ECB and thus out of investments. Cash that is not invested, but stored in the ECB is not contributing to the economy. Moreover, it is essentially unfair competition by the ECB. Finally, governments might be miffed that investors don't buy government bonds.
There is another justification that is essentially focusing entirely on the "Cash that is not invested, but stored in the ECB is not contributing to the economy." line of reasoning. Here, the idea is simply to reduce the ECB interest so banks will want to invest more, thus growing the economy. This differs from the first argument because it doesn't care about the 'risk free interest rate' of the current market. It just wants more money in the economy.
And you know, the oldest investment of all: have kids that you raise to be loyal to their parents.
I mean sure, I can get 3% on the stock market long term, but that isn't where I want my emergency found, because I might need it tomorrow.
In a current account. If you want to make money you should be investing.
I could just burn the money, then at least I´d be warm.
It's not like it's some sort of god-given right.
But to answer you question: Bitcoin
If only it was that easy. With several governments regulating against cash, e.g. banning cash transactions above a certain amount, and limiting withdrawing/depositing cash in bank accounts, can we really say we have right of property (of money at least)? It seems yet another right to throw under the bus for the sake of mitigating "money laundering" and "terrorism".
I understand why it often works this way for money, but I don’t see why this must be the natural order of things. The price of storing money in a bank will be the underlying cost of doing so, minus the proceeds the bank can make from your money, plus some profit margin. Nothing says this sum must be a positive number.
The distinction is that your savings in a "storage" scenario are yours exclusively. That is not how it actually works. Banks lend out your "stored furniture" to get a return. Due to fractional reserve lending and the fungibility of currency, the illusion of you being able to receive your stored furniture back is preserved.
But there is never actually a scenario where there are truly idle resources--capital is always utilized at some ratio, and that ratio is independent of consumer behavior. The bank is investing on behalf of their customers.
As banks can only invest based upon the deposits of their customers, I think it is actually extremely unreasonable for customers to have to pay for the privilege in the form of a negative interest rate. That's not "natural" either. Guaranteed checked deposits is the only reason that this swindle can occur.
You’re paying for access to a checking account, an
electronic payment mechanism.
Savings should be invested, not stored with banks. That’s the nudge ZIRP and negative rates provide. Forcing investment decisions into the hands of the savers over banks’ lending managers. Decentralising the economy’s pool of investing decision makers.
With regard to fees: the only reason banks charge them is due to the fact they believe that the possible returns from low income customers will never match their cut of the investment. The fact that this interest rate also applies to high income customers exposes the "what about fees" argument. This is about incentivizing moving capital out of the safer investments that bank make (homes, relatively light personal loans, modest business loans) into equity markets. As true "savings" rates in the form of completely unallocated capital is low, my guess is this is pushing on a string.
And highly privileged ones. First in line. Guaranteed by the government.
If savers want to be pari passu with the bank’s capital, they can buy bank bonds and stock. Those yield well, even in the EU.
This is not strictly true, read about the money multiplier myth. As another (much more informed than I) HN commenter put it, banks think about constraints on lending in terms of the cost of money, not the quantity of money.
what actually happens is, when you borrow money, they put the numbers into your account and the negative on their balance sheet. that‘s the basic process of money-creation in a fiat system. out of thin air. debt-based on top so that nobody ever gets away.
but yeah, everybody likes to believe that the amount of money in the system represents goods and services.
So if you give them $1, the bank can now lend $5 (without actually having it) and then make many times that $5 in interest.
So sure, they will pay you a little, so they can make a lot.
At least that's how it works today.
This is not how it works. (It’s a common misconception, however.) Loans create deposits, not the other way. Most money is created by banks, not the central bank or mint .
From a consumer perspective, imagining a bank as taking your $1 and lending it out five times is okay. But systemically speaking, it’s a misleading model. The truth is the bank created $5 in loans, and through that $5 in deposits. About $4 of those deposits were then spent and ended up in other banks or bank accounts as deposits.
The loan always comes first. The BoE has a good primers on this .
But for that the bank needs to hold $1 (or whatever) in reserves, so either they had excess reserves already (because “someone gave them $1, the bank can now lend $5”) or they a) get new deposits, b) get them from another bank (i.e. the money comes from previous deposits elsewhere) or c) new money is created by the central bank.
Because a dollar dealt results in a deposited, this system is self-reinforcing.
It is. It’s the difference between picturing a rocket propelled by expanding gases versus a vessel thrust forth by Newtonian dynamics.
It is correlation versus causality. Loans cause deposits. Deposits correlate with loans. This discrepancy is the source of money supply estimation error.
$1 deposited doesn’t create $5 in loans. $5 in loans prompts about $1 in reserves. The difference in these models explains the interbank market, per se and in terms of rates; reserves as a stochastic versus deterministic phenomenon; bank runs and much more.
Loans create deposits. Not the other way. Modern banking makes sense once you internalise this difference.
Banks are not forced to loan out as much as they could, they have a choice. And because the system is not working at “full capacity” the central bank cannot control the money supply adjusting the minimal reserve requirements. They use other mechanism like short term rates (including through the interest the Fed pays on reserves since 2008).
“Loans create deposits” is of course true in the standard description as well. If banks create money (by lending out, if they want, excess reserves) that necesarily means that the total amount of deposits increases. Because the total amount of deposits (plus the relatively less important amount of physical money in circulation) is what we call money!
Banks compete for deposits and compete to lend. The spread between those rates must pay the bank’s costs, cover its risks and turn a profit. When central banks reduce the return on safe assets banks hold, their income from lending to the government goes down. The banks thus seek to replace that income with other lending. Unfortunately, everyone in the system is doing the same thing. This competition forces lending rates down.
Savers are competing for investments next to the banks. There are lots of them crowding into bank deposits; this lets those banks lower the rate they pay. (Nobody forces savers to deposit Euros only in German banks.)
This is a system of feedback loops. Nobody is charging a tax, though banks may charge a fee for a service it costs them to provide. Depositors are free to take their business elsewhere. And entrepreneurs who think they can do better are free to launch competing financial services.
If that £100 is spent into the economy but is not returned, did the total volume of available £100 not increase, reducing the buying power of any £ stores? Perhaps it is not a tax because it isn't used directly by the government, but it is a burden that such a lender can enforce upon currency holders with the authority that is given to it by the organization controlling the currency.
>entrepreneurs who think they can do better are free to launch competing financial services.
Entrepreneurs cannot lend out money they never had. How difficult is it for a new company to obtain a piece of the volume of money that the currency regulator deems available for creation within a timeframe?
Loans create deposits. The only way the deposit isn’t returned is if capital is destroyed.
> Entrepreneurs cannot lend out money they never had
With a banking license, yes. They can.
Once you have a banking charter, you can lend to your heart’s content. At the end of the day, you borrow to make your reserve requirement. (If you’re deficient, you die.)
Lending creates deposits. Not the reverse.
There is almost a zero-cost to storing the money and as the account size grows the cost to transact on this account per dollar of storage also approaches zero.
Meanwhile the lending power of the bank multiples by large whole numbers.
They aren't storing your bills or gold coins.
Bitcoin is zero-cost^ to store for any dollar amount. So are gold bars.
Insuring them against theft and loss is not zero-cost.
A shovel for burying gold in your yard is cheap (high capex, low opex), but if a sinkhole opens up and eats your gold, you’re probably out of luck. A hard drive for your Bitcoin is cheap (high capes, low opex), but if a lightning bolt burns your house down and you aren’t paying for offsite backups, you might be out of luck.
What degree of loss do you wish to insure against (accident, damage, theft, loss) — and what percentage of your money are you willing to spend on that?
^ “I bury coins on my land” seems zero-cost, but it just means that you’re paying property tax to insure against treasure hunters uncovering your hoard with a metal detector. External costs need to be accounted for.
I never said anything about storing bills or coins.
Broader interest rates are low, too. The revenue potential for banks is limited. Particularly European ones.
European banks have failed to compete for investment opportunities. Negative rates push that onus back onto savers.
Banks are definitely storing money. They’re just not storing physical currency. They mostly store money in various financial instruments such as loans, which provides them with some revenue. If that revenue is sufficiently high, they can make all their money this way and set a negative price for their money storage services. But there’s no natural law that says the revenue potential must be that high.
It would be nice to blame the latter but there seems to be evidence toward the former.
Also with inflation the real rate of sub-percent interest is already negative, so a below-zero rate is more psychological than anything. The difference between inflation and inflation+1 isn't transformative.
Generally you already pay for a fee for your account/credit card.
I think this cost actually goes up more than just proportionally, too. Criminals will preferentially target higher value accounts, and they’ll make off with more when they do, so the risk increases more than linearly.
In any case, not all costs are fixed.
I think 'the Germans' were never a big supporter of keeping the economy running at all costs. Like the way the ECB operated in the last few years.
Sooner or later there will be a crash. But somehow everyone thinks that will never ever happen.
I don't doubt a crash/recession will come eventually, it doesn't seem obvious to me that that will take it back to how it was before.
Negative interest rates could cause even more aggressive saving as people need to hold on to every last little penny they own. When you know that you're bank account will have less and less in it in the future, saving even more in the present day becomes even more important. If I was a retiree in germany right now, I'd cut as much of my spending to almost nothing and wait for this ridiculousness (negative interest rates) to stop.
The generations in Western Europe who are 45-50+ have considerable wealth and thus have been able to save. For the generations below it's not really possible, on a macro level, to save money. They need all their money for housing and what's left to try to keep up the pretense that they're as successful as their elders.
I'm not trying to deliberately pinch pennies. (Well, maybe a little.) I just happen to live in a way that avoids big spending. I don't have kids, so I don't need to spend money on that. Because I don't have kids, I don't need a large house. Therefore I live in an apartment in the city center, which (besides being convenient) means I don't need a car. And so on.
> the majority burn their salary month per month
I obviously don't know your sample, but out of the people that I know, those who live paycheck-to-paycheck usually do so because they work in low-wage jobs that simply don't pay enough to save any money. There surely are outliers that just don't know how money works, but the majority fail to save because of low-wage jobs.
That financial responsibility has saved me too, during an unemployed stint I was living off the extra money I'd put against my apartment. Had I not put the money away or gone into more debt to buy a bigger apartment I would have lost it entirely and been back to renting.
The idea of living on credit is insane to me.
Self employed with Gewerbesteuer?
Germany: 27.4 % GDP
As a comparison:
USA 16.9 % GDP
UK 15.8 % GDP
It should be no surprise that Aldi and Lidl are German companies.
While back home most people would resort to black market or bazaar.
It's usually perilous to extrapolate anecdotes to the population.
Is their any regulatory reason against doing this (lets ignore the cost of securing such cash against physical risks).
Banks can also place money with other banks, but that is lending to other banks. Besides, this only shifts the problem to another bank, who now has cash on hand that'll be stored in the ECB if they don't do something else with it.
Besides that, banks can invest cash. But in a low-yield market where all stable investments give very low, or even negative, interest, that becomes less attractive.
Modern money is basically tree of connected electronic ledger. In the top of the tree is the central bank, lower there are the saving banks, lower all the firms and households.
If a bank has continual deposits at the ECB, and is paying money for the privilege, they might just decide to hold those euros in a vault. Once the vault becomes cheaper than the ECB, it should become a matter of time.
now, remember when everybody was wondering why they axed the 500€ bill?
The saving grace in the US is the somewhat recent trend of online banks offering around 2%. I don’t know if other developed countries in the Eurozone have similar offerings.
Go all into stocks, bonds? Buy real estate, lock up in long term CDs before it hits zero? I have thought about foreign savings, but without FDIC insurance, it doesn't even seem to be worth the risk.
What are your plans?
German savings rate is about 10%, let’s assume it’s 20% for a high earner.
If she decides to stop saving, she can reduce her workload to 80%. This is generally easier than it might look like.
Because of progressive taxes, she will still earn about 85% of her income, so she can still save 5%, but rather outside of Europe with its faltering economy. Especially when more high earners decide to work less and live more.
Luckily few people act rationally.
Find cheaper hobbies. Video games, library books, walks in parks (city, regional, national), exercising or playing cheap team sports like soccer or basketball, local volunteering, playing music - all have a very low cost per hour. Other hobbies such as woodworking/carpentry, painting or other arts and crafts, have higher costs but also the possibility of making some money.
If you have more vacation time, you can also choose cheaper but slower modes of transport or book tickets and accommodation at non-peak times. E.g. you're not forced to travel around long weekends or Christmas holidays to get a decent-sized break.
In fact the EU fiscal crisis came from people basically doing what you said: putting their euros in Greek and Spanish banks that paid higher interest than German banks were. They assumed they’d have no exchange rate risk (they didn’t, except at a macro level) but also assumed they’d have the same bank regulation and guarantees they had at home. Oops!
Our entire housing market is fucked thanks to the ECB, pension funds are cutting pensions because bonds literally don't give you a return anymore. All assets worldwide have been pumped into record heights.
All this so governments in southern Europe don't drown in their own debt.
If only the countries joining the Euro had agreed to keep deficits and debts below a certain level....
Is this a good thing or a bad thing. Hard to say, but certainly when your populus is more exposed on credit and less backed up with saving and secured assets, any blips in the market can and will explode into financial meltdown with more dominos in the stack to fall down in a greater knock-on effect.
What we also need to know is that in the past when things got bad, governments would raise interest rates, that would have a negative knock-on effect. So the approach switched towards lowering those interest rates, more competition in financial markets and with that growth, we saw the rise in marketing and credit accessibility and the market competed with itself for your not only the money you have today, but more so towards the money you will have tomorrow.
There is only so far you can cut interest rates, and had you asked anybody a few decades ago about the possibility of negative interest rates, they would of laughed so much that your ears would bleed. Today, such things are a reality.
What I wonder is that Quantitative Easing ( fancy way of devaluing your currency and in effect currency manipulation that is accepted...these days) is the elephant in the room. If we never had such things, would we of ever seen negative interest rates?
What's more, we are now even seeing Government bonds with negative interest rates. How far will they go and with all that.
Will we see the bartering system becoming more fashionable?
Finally, is saving now classed as an obsession! Really, are we seriously at that stage in in fiscal devolution that we all seem flummoxed in a few decades time when nobody bothered to have a pension plan? Finance is about balance, sure have fun, have credit, but equally, have some savings. This drive to now demonise savings, just seems irrisponsible.
But do remember, savings can be in many forms, assets can be a form of savings, gold, art, shares in companies even. Some have larger risk, some more stable and with any financial blip/crisis - the same old things do better like gold. Which is also an indicator of financial crisis's, and it has been trending up recently, in a way indicative of a financial crash. Now with that in mind, and finance does have some smart people who not only see that and more, I wonder - are negative interest rates the new trick to staive of a financial market heading for a crash? Maybe, but it gets down to enough people buying into it. Now with government bonds, that may well happen as many pension pots have rules that force them to have a certain percentage of such bonds. As they have always been classed as stable. Times change, rules change and if those pension pots change there safe long term bets into another approach, things could become very interesting indeed.
I do hope that this new trick in interest rates pans out, but it is hard not to be blown away by the complexities at play the further and deeper you look into it.
Germany has benefited most of all from the unfinished project of the EU. Without becoming a federal union like the US, but having a common currency, Germany's exports have been artificially cheaper and thus more competitive for over 20 years.
This is the natural outcome from the obsession with running fiscal surpluses. Now Germany is on the brink of recession and they're finally starting to make some noises about fiscal spending, but the politics will likely limit it to modest deficits than anything transformational. Enjoy the negative rates.
Germany has absorbed a large number of refugees at huge social cost precisely because they believed they could afford it. It seems disingenuous to ignore Germany's role in overall European stability and suggest that the good German burghers hoard money in order to rape the rest of the continent with cheap Volkswagens.
To take the most extreme example, Greece, and some problems evident when they hit the buffers a few years ago.
Hairdressing and playing the trombone are/were considered dangerous professions by the government, because that allowed people to retire at 50. The pensions in question are vast and the state cannot afford it.
Public sector wages rose 50 percent between 1999 and 2007.
Tax evasion was rampant.
Salaries were very high, industry near none existent. Its books were fraudulent - the country was only able to join the euro at all because it misrepresented the state of the economy.
Attempts to fix these problems triggered riots and political chaos, much of which had explicitly anti German rhetoric. The Germans, you see, were being totally evil by not shovelling all their savings into this money furnace disguised as a developed country.
What about Spain?
Home of the famous airport to nowhere: https://psmag.com/economics/airport-to-nowhere-spains-costly...
And a giant housing bubble: https://en.wikipedia.org/wiki/Spanish_property_bubble
Has a large (>2% GDP) government deficit but raised the minimum wage by 22% last year.
Germany isn't inflicting misery on southern countries, they inflict it on themselves, and it should by all rights be dramatically worse - and if it weren't for Germans sending them such huge wealth tranfers it would be much worse.
Individual Germans would actually end up benefiting the most from a change in national religion about saving if their government opened up the purse strings.
Why though? The article is specifically about private savings.
The great thing is that negative rates are self-correcting. While the story mentions the German finance ministry is considering making it impossible for banks from passing on the negative rates to depositors, so clearly they're going to try literally everything to keep the delusion going, eventually after putting their banks at risk and realizing the negative rates aren't going away they'll figure out they need to actually spend on a national level.
I cannot believe that we are this far through this discussion, with 80+ points and 120+ comments and not one person has mentioned the underlying cause that is deeper than the "german culture of savings".
None of them had any kids.
Their birthrate is well below replacement. You can't produce an inflationary environment when households aren't being established and the major, overriding driver of consumption has been removed from the lives of so many Germans.
There is a reason they have all this money to save ...
 https://en.wikipedia.org/wiki/Demographics_of_Germany "The total fertility rate was rated at 1.57 in 2017." (vs. a replacement rate of 2.1 ...)
As we speak there are millions of people wanting (hell, willing to pay hundreds of euros to smugglers) to be European consumers, younger than the Euro average (I don't have hard numbers on this, but I would be real money), but they are driven away and left for dead in dinghyes.
There's more than one way to grow the population.
Ideally there'd be enough political will to finish the EU project, but that's even more of a long shot than Germany seeing the light on fiscal spending. Then there'd be actual transfer payments between rich and poor EU members, but barring that, Germany and the other rich EU members need to spend.
All the single Germans should probably start taking more vacations in Greece and Spain and the rich ones should buy some Ferraris.
USDA figures  put the costs of having a child at 12% to 24% of household income (for richer and poorer families respectively) while some UK estimates  have put it as high as 38%
Of course a childless couple can build savings like crazy, if they've got as much income as their peers who are parents, but their outgoings are that much lower!
Germany could give every German with a child a stipend to subsidize families (and if they're already doing that, increase the amount they get per child). I don't actually think that would make more Germans have children, but the ones that have families would be able to spend more.
1. "Elterngeld" (parental leave money): After a child is born, parents can take up to 14 months off and the state pays a portion of their last salary (70% afaik). Employers are required by law to accommodate parents who wish to take parental leave.
2. A few years ago, a "right to child daycare" is introduced. If you're working and want to give your child into daycare, the municipality has to offer you a place in their daycare facilities or, if they don't have enough, compensate you for lost income.
(This isn't to say that you don't have to pay for that daycare, but "free child daycare" is now a popular slogan among many political parties and some states have already implemented it afaik.)
3. Not a policy, but there is ongoing pressure from society on employers to improve the work-life balance of parents. Things like making it easier to both men and women to work part-time after a child is born etc. It's still a problem that women are low-key discriminated against, as in "We cannot promote her into an important role. What if she has a child?", and the gender pay gap is still significant, and fathers doing parental work are still looked at funny sometimes, but it's all getting better. (Frustratingly slowly.)
That requires some proof. The German public loves to save, the German state doesn't. The German public hates bailouts with tax money, the German state loves them. Germany isn't a good example for "individual interests form policy".
> Even the leftist parties in Germany don't drift far from this orthodoxy.
Why would they, leftist parties love generous state spending and high debt. The somewhat surprising part in Germany is that the conservatives love spending and hate saving, too.
People are willing to pay money for the privilege of lending money to the German government. Yet the German government, including the supposedly left-wing SPD, is still holding to the schwarze Null ("black zero," meaning a balanced budget). A rational policy in this environment would be to take advantage of negative interest rates to finance stimulus. Instead, they're dogmatically holding to the zero-deficit policy.
As for the SPD being left-wing: traditional political categories quickly break down when applied to Germany, the continuum is "far left, nothing, nothing, the super majority in the center, nothing, nothing, far right". There's very little actual difference between the "conservative" CDU, "social democrat" SPD, the socially progressive Green party and the "free markets will take care of that, whatever it is" FDP when it comes down to policies, which is also why Germany's policies don't change a lot when the government changes (the conservatives removed the military draft, the social democrats cut back the social system, and the pacifist Greens & social democrats went to war in Kosovo).
> A rational policy in this environment would be to take advantage of negative interest rates to finance stimulus.
In a time of growth, record tax income, strong-ish inflation (thank god for cellphones and smart tvs or it would shoot up like crazy)?
Taxes on income, yes. Taxes on spending, yes. Taxes on capital gains, not really. And taxes on property are virtually nonexistent. And where's that financial transaction tax people were talking about 10 years ago?
The share of tax revenue they provide isn't that large, it's about as much as car tax. Even if they doubled it, it wouldn't really matter. Property taxes do exist, but they aren't a federal issue, they (together with a tax on company earnings) fund the local communities, the federal level is funded by income tax and sales tax, mostly.
> And where's that financial transaction tax people were talking about 10 years ago?
It was mostly activists talking about it in a "if we all got together and did this world wide, it would be so nice" kind of way. I don't see that happening any time soon.
Germany is on the verge of recession. Growth was negative last quarter. Inflation is around 1%, which is rather low.
Unless the state is expecting bond rates to remain negative indefinitely.
Government budgets might not be the same as household budgets but you can’t borrow endlessly.
The countries in the Eurozone don't own the Euro: for all effects is a foreign currency. Their finances work like a household.
States or nations that are not doing has well economically deserve respect and help or we should stop calling ourselves a Union.
It's much more difficult when you then ask Germany what to do about a country like Greece, where years of spending and a recession left the government with more debt than it could bear. "just save money" probably wasn't the best response, but it's not like "just take on massive debt to fix your economy" was an option either (it would have been an option if Greece had taken on less debt in better years).
The "stupid" and "lazy" southern countries (PIIGS) will have to spend again (buy German cars) with German credit (German savings) to keep the German economy going.
Germany is at no 29. It's not like the median German has profited. If anybody has profited then it could be the average German, i.e. the top 1% that has made some money.
That said, why do you think government spending will lead to prosperity? They can get some people off the streets, but sooner or later, resources will be misaligned to the point that the economy is not competitive anymore. Germany had a state-run economy in one part, guess which one almost vanished.
I'm not saying Germany has to nationalize industries, they just need to run large fiscal deficits over a sustained period of time. One thing they could do right away that doesn't cause "resources to be misaligned", is to cut taxes and increase the benefits for the poorest German workers.
Germany is at the brink of recession due to prolonged weakness in Chinese economy and inability of German automotive industry transitioning into XXI century. Both engines of growth failed simultaneously and lets hope German economy can avoid crash landing. Otherwise it will drag entire Europe down into abyss.
If that was true we should be all in excellent condition because the Germany commercial balance surplus of the last years have been ridiculously high.
But you don't need to share a currency to have artificially cheap exports, do you? Selling things at a discount is usually very easy to accomplish.
It's not just the currency though. The "German model" has been to keep wages depressed. That's also how their exports are "cheaper". Make no mistake the result has been to enrich German capital at the expense of labor (even German labor).
it's simply a cultural preference. Germans have accepted lower wages for general full-employment and job security even in times of recession. It is exceedingly rare for qualified German workers to ever have to switch jobs during economic downturns because the somewhat lower levels of negotiated pay give companies breathing room to act socially equitable.
the hire and fire and short-term consumption mentality that dominates american labour contracts has never been perceived as desirable in Germany.
They haven't really, they ended up giving up more and more job-security, with stagnating wages, to keep the sham of "full employment" going. Something that's been especially affecting West Germany since reunification, where previously wages were extremely high.
But contrary to popular belief, even in Germany the labor markets were quite "liberalized" over these last couple of decades .
Nowadays plenty of low/middle-class Germans having to work two part-time jobs and still receiving government assistance, or unemployed people getting "loaned out" by the Arbeitsagentur to private companies as cheap 1€ labor force .
With programs like those, it's not very difficult to make your employment statistics look amazing: On paper barely anybody is actually unemployed because in reality most of them are "hidden away" in pointless training programs or straight up subsidizing the labor costs of private companies.
Germany's middle-class relatively speaking to many other countries is still fairly intact which is reflected in the low priority that class issues or employment has in German politics. Not many people in Germany fall into the 1$ job market, and it should be pointed out that (IIRC) as time went on the majority of part-time jobs has converted into full-time employment.
Employment is pretty much one of the main topics of German politics. High employment needs to be presented even if those employed can't even live from that income. While the low-income issue has been ignored with "Be glad you got at least some work!". As German culture is very quick and harsh to shame people for not working a job. Which has been one of the factors the AfD played on:
Many low and mid-income Germans feel like they've been missing out, the German right has pitted that feeling against the arriving refugees in a "We don't have money for German pensioners , but we do for Syrian economic migrants?!" way.
As such I never declared the German model as dead, I was merely pointing out that it ain't as perfect as many people from the outside often perceive it to be. There's a whole lot of shining up the numbers going on, not just in terms of "who counts as unemployed", but even with "who counts as poor/low income". 
I don't see how that stops them from selling things at the same price as ever, denominated in a neutral currency.
> It's not just the currency though. The "German model" has been to keep wages depressed. That's also how their exports are "cheaper".
Paying your workers less does make things cheaper, so I'm not sure why you used scare quotes.
Germany's personal savings rate is about 10.x%. The US - infamously tilted toward consumer spending - is actually not far behind at 8.x% (up from a low of 2.2% in 2005).
Wonder how much of that is healthcare and education which is wayyy expensive in US.
However fiscal transfers between the two states (I.e. taxes -> welfare payments, labor standards etc) mean that the cheaper goods are more likely to be up to standards and that Alabamans can buy California almonds and Roku boxes. (This is one way cutting welfare hurts capitalism). The EU has no such fiscal mechanism thus the process drifts out of a crisis.
Germany’s Länderausgleich is actually more extensive than the US’s, which has made its economy so strong for so long, yet the country is loath to extend its benefits (much of which would flow back to Germany!) to the rest of the EU.
I assume the downvoting comes from economics being a popular topic on which people like to opine whether or not they understand it (insert joke here about economists being subject to this rule as well)
After all, the US is a single country, with common news reporting, a common language, common political systems and parties, common tax enforcement and so on.
I mean, if an Alabamian thinks that Californians are all surf bums he can find employment statistics for both states gathered under identical standards, read press coverage in his language, and even move there if he feels like it, as he already knows the language.
It seems unlikely the EU will ever achieve that level of integration.
> It seems unlikely the EU will ever achieve that level of integration.
I disagree but it's unlikely to happen in my lifetime.
Hopefully this threat of recession will light a fire under the correct asses.
These exist EU wide you know.
Additionally money is allocated to poorer regions to develop industries, not welfare payments but still wealth redistribution.
Edit: oh I see that poor editing on my part implied that labour standards were part of fiscal transfers, a nonsensical connection. My apologies)
As a former EU resident of two different countries I have benefitted from EU labor laws.
Regional development funds are practically below the noise floor as a part of the Zone’s GDP (and are in fact EU-wide, not just eurozone-wide). Most of the money is squandered (not necessarily through corruption, just lack of macro efficacy) as it’s such a small amount it gets little attention.
People are already complaining about too many construction sites on the Autobahn. The main issue there is that we don't have enough workforce in the construction industry, mostly as a result of demographics and everyone wanting to go to university instead of learning a trade.
Infrastructure, knowledge, education, and a better life in general is a real thing.
Who do you think managed to maintain the Euro as a going concern?
And don't forget Germany suffered quite a lot after the introduction of the Euro, and it didn't really have anyone else to bail it out.
Edit: In the first paragraph in referring to the aftermath of the financial crisis, when PIIGS was an acronym, and France wasn't looking too great either.
And in the second paragraph in referring to immediately after the introduction of the Euro. The Euro appreciated, German exports lost competitiveness whilst it lost the power to devalue its currency. It managed to increase its productivity per worker though and has reaped the benefits since. It too has seen the downsides of not having control of its own currency.
The ECB stopped production of the 500 Euro note in April to make the stuffing of cash more costly.