There was a proposal by some group that the G7 central bankers should raise their inflation targets from around 2% to around 4% to create more room for rate decreases for adjustments.
The proposal met with widespread condemnation.
Dave David Ingram, CERA, FRM, PRM Willis Re +1 212 915 8039
________________________________
From: Nick Albicelli <njalbice...@yahoo.com> To: Steven Craighead <steven.craigh...@towerswatson.com>; Jetha, Shiraz (OIC) <Shir...@OIC.WA.GOV>; in...@list.soa.org <in...@list.soa.org> Sent: Thu Jun 24 16:21:41 2010 Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows:
Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5 <http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/defaul...> Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
________________________________
From: Steven Craighead <steven.craigh...@towerswatson.com> To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org Sent: Thu, June 24, 2010 2:42:20 PM Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were still barely positive, but the inflation adjustment forced the real values to be negative.
What happens is that for negative discount rates, you are paying the US government to hold your money instead of being paid for them to hold it. In that situation, it would be better to either put the $ under your mattress instead of loaning it to the government, since the face amount would remain the same (assuming that inflation is zero). In the situation of negative discount and inflation, paper money will decline in value as inflation goes up.
Negative discount rates would force cautious investors to move to more risky investments. For instance, frequently cat bonds invest in treasuries, since they figure that the government isn't going to go bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA Towers Watson One Alliance Center 3500 Lenox Road, Suite 900 Atlanta, GA 30326-4238 Ph: 404-365-1287 Fax: 404-365-1663
To <in...@list.soa.org> "Jetha, Shiraz (OIC)" cc <Shir...@OIC.WA.GOV> Subject 06/24/2010 02:15 PM INARM Message - Negative Interest Rates
In the context of GFC, we hear in the media that the interest rate tool is maxed out i.e. feds cant go lower than zero percent in setting interest rates.
I have been wondering about this and I think I see why.
But as someone who grew up with math(s) and therefore has a preference for symmetry, I wondered what would happen if rates turned negative; e.g. if the fed announced that the discount rate was minus Ό (or ½) %.
It didnt seem to me that the world would change much practically (or maybe even theoretically?) for entering negative territory.
Is this what is meant by being maxed out that while fed can set negative rates, the market would just ignore it and mortgage rates (or investment grade to junk bond rates) would stay about the same? Or does something cataclysmic happen when discount rate is negative?
Shiraz Jetha 360-725-7057
NOTICE: This communication may contain confidential, proprietary or legally privileged information. It is intended only for the person(s) to whom it is addressed. If you are not an intended recipient, you may not use, read, retransmit, disseminate or take any action in reliance upon it. Please notify the sender that you have received it in error and immediately delete the entire communication, including any attachments. Towers Watson does not encrypt and cannot ensure the confidentiality or integrity of external e-mail communications and, therefore, cannot be responsible for any unauthorized access, disclosure, use or tampering that may occur during transmission. This communication is not intended to create or modify any obligation, contract or warranty of Towers Watson, unless the firm clearly expresses such an intent.
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Also, at the time of the financial crisis there were a lot of brainstorming-quality (i.e. not entirely serious) ideas about how to work a negative interest rate. One in particular that was memorable was a proposal to randomly draw serial numbers of paper currency and declare that those serial numbers were no longer legal tender. Every day, repeat, taking some amount of currency out of circulation, thereby increasing the (expected) carrying cost of currency to whatever amount was deemed necessary. Voila - negative interest rate on cash under the mattress.
________________________________ From: Stephen Britt <Stephen.Br...@iag.com.au> To: Nick Albicelli <njalbice...@yahoo.com>; Steven Craighead <steven.craigh...@towerswatson.com>; "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; "in...@list.soa.org" <in...@list.soa.org> Sent: Thu, June 24, 2010 8:05:05 PM Subject: [Spam] RE: INARM Message - Negative Interest Rates
Note: This e-mail is subject to the disclaimer contained at the bottom of this message.
________________________________
Negative nominal interest rates are (theoretically) almost impossible in a financial economics sense because of cash and carry arbitrage. As in:
· Borrow a very large amount of money and put it under your bed; and · Carry a big gun to ensure that you arent robbed.
The lower limit to the interest rate here is the cost of carry (ie the cost of the gun).
I believe that interest rates were negative in Japan briefly some time in the last twenty years or so.
STEPHEN BRITT SENIOR MANAGER INTERNAL CAPITAL MODELS INSURANCE AUSTRALIA GROUP (IAG)
T +61 (0)2 9292 2311 F +61 (0)2 9292 3159 M +61 (0)411 014 571 E stephen.br...@iag.com.au
PLEASE CONSIDER THE ENVIRONMENT BEFORE PRINTING THIS EMAIL.
From:Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Friday, 25 June 2010 7:22 AM To: Steven Craighead; Jetha, Shiraz (OIC); in...@list.soa.org Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows: Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5 Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
During WWII the T-Bill rates real rates were negative. The effective were still barely positive, but the inflation adjustment forced the real values to be negative.
What happens is that for negative discount rates, you are paying the US government to hold your money instead of being paid for them to hold it. In that situation, it would be better to either put the $ under your mattress instead of loaning it to the government, since the face amount would remain the same (assuming that inflation is zero). In the situation of negative discount and inflation, paper money will decline in value as inflation goes up.
Negative discount rates would force cautious investors to move to more risky investments. For instance, frequently cat bonds invest in treasuries, since they figure that the government isn't going to go bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA Towers Watson One Alliance Center 3500 Lenox Road, Suite 900 Atlanta, GA 30326-4238 Ph: 404-365-1287 Fax: 404-365-1663
In the context of GFC, we hear in the media that the interest rate tool is maxed out i.e. feds cant go lower than zero percent in setting interest rates.
I have been wondering about this and I think I see why.
But as someone who grew up with math(s) and therefore has a preference for symmetry, I wondered what would happen if rates turned negative; e.g. if the fed announced that the discount rate was minus Ό (or ½) %.
It didnt seem to me that the world would change much practically (or maybe even theoretically?) for entering negative territory.
Is this what is meant by being maxed out that while fed can set negative rates, the market would just ignore it and mortgage rates (or investment grade to junk bond rates) would stay about the same? Or does something cataclysmic happen when discount rate is negative?
Shiraz Jetha 360-725-7057
NOTICE: This communication may contain confidential, proprietary or legally privileged information. It is intended only for the person(s) to whom it is addressed. If you are not an intended recipient, you may not use, read, retransmit, disseminate or take any action in reliance upon it. Please notify the sender that you have received it in error and immediately delete the entire communication, including any attachments. Towers Watson does not encrypt and cannot ensure the confidentiality or integrity of external e-mail communications and, therefore, cannot be responsible for any unauthorized access, disclosure, use or tampering that may occur during transmission. This communication is not intended to create or modify any obligation, contract or warranty of Towers Watson, unless the firm clearly expresses such an intent.
________________________________ The information transmitted in this message and its attachments (if any) is intended only for the person or entity to which it is addressed. The message may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon this information, by persons or entities other than the intended recipient is prohibited. If you have received this in error, please contact the sender and delete this e-mail and associated material from any computer. The intended recipient of this e-mail may only use, reproduce, disclose or distribute the information contained in this e-mail and any attached files, with the permission of the sender. This message has been scanned for viruses. ________________________________
There have also been negative interest rates in T-Bills for very short periods post Lehman's collapse.
These rates can arise when you consider what can be done with a large amount of money, say $10bn, with high uncertainty about credit risk. You can't withdraw the money from the system in cash; you don't want to put it in a bank as it might crash; so you buy short dated treasury securities. If you have enough money that needs to be invested safely then you bid up the price of a Tbill above its face value. Corresponding banks, those with a reserve account with the countries Reserve Bank (Fed etc), can always leave their money in the reserve account, so they have no problems. The rest of us have problems. In instances like this the Reserve Bank needs to act as the borrower of last resort i.e. it borrows money (sells Tbills) to anybody who wants them, or it offers almost unlimited guarantees on banks deposits, which is the same thing. This takes a few hours to set up, so there can be isolated hours or days of panic when Tbills may have a negative interest rate.
Frank Ashe +61 (0) 425 291 833
________________________________
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Friday, 25 June 2010 10:28 AM To: in...@list.soa.org Subject: Re: [Spam] RE: INARM Message - Negative Interest Rates
Also, at the time of the financial crisis there were a lot of brainstorming-quality (i.e. not entirely serious) ideas about how to work a negative interest rate. One in particular that was memorable was a proposal to randomly draw serial numbers of paper currency and declare that those serial numbers were no longer legal tender. Every day, repeat, taking some amount of currency out of circulation, thereby increasing the (expected) carrying cost of currency to whatever amount was deemed necessary. Voila - negative interest rate on cash under the mattress.
________________________________
From: Stephen Britt <Stephen.Br...@iag.com.au> To: Nick Albicelli <njalbice...@yahoo.com>; Steven Craighead <steven.craigh...@towerswatson.com>; "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; "in...@list.soa.org" <in...@list.soa.org> Sent: Thu, June 24, 2010 8:05:05 PM Subject: [Spam] RE: INARM Message - Negative Interest Rates
Note: This e-mail is subject to the disclaimer contained at the bottom of this message.
________________________________
Negative nominal interest rates are (theoretically) almost impossible in a financial economics sense because of cash and carry arbitrage. As in:
· Borrow a very large amount of money and put it under your bed; and
· Carry a big gun to ensure that you aren't robbed.
The lower limit to the interest rate here is the cost of carry (ie the cost of the gun).
I believe that interest rates were negative in Japan briefly some time in the last twenty years or so.
--------------------------------------------- STEPHEN BRITT SENIOR MANAGER
INTERNAL CAPITAL MODELS INSURANCE AUSTRALIA GROUP (IAG)
T +61 (0)2 9292 2311
F +61 (0)2 9292 3159 M +61 (0)411 014 571 E stephen.br...@iag.com.au <mailto:stephen.br...@iag.com.au>
PLEASE CONSIDER THE ENVIRONMENT BEFORE PRINTING THIS EMAIL. ---------------------------------------------
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Friday, 25 June 2010 7:22 AM To: Steven Craighead; Jetha, Shiraz (OIC); in...@list.soa.org Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows:
Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5 <http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/defaul...> Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
________________________________
From: Steven Craighead <steven.craigh...@towerswatson.com> To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org Sent: Thu, June 24, 2010 2:42:20 PM Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were still barely positive, but the inflation adjustment forced the real values to be negative.
What happens is that for negative discount rates, you are paying the US government to hold your money instead of being paid for them to hold it. In that situation, it would be better to either put the $ under your mattress instead of loaning it to the government, since the face amount would remain the same (assuming that inflation is zero). In the situation of negative discount and inflation, paper money will decline in value as inflation goes up.
Negative discount rates would force cautious investors to move to more risky investments. For instance, frequently cat bonds invest in treasuries, since they figure that the government isn't going to go bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA Towers Watson One Alliance Center 3500 Lenox Road, Suite 900 Atlanta, GA 30326-4238 Ph: 404-365-1287 Fax: 404-365-1663
To <in...@list.soa.org> "Jetha, Shiraz (OIC)" cc <Shir...@OIC.WA.GOV> Subject 06/24/2010 02:15 PM INARM Message - Negative Interest Rates
In the context of GFC, we hear in the media that the "interest rate tool" is "maxed out" - i.e. feds can't go lower than zero percent in setting interest rates.
I have been wondering about this and I think I see why.
But as someone who grew up with math(s) and therefore has a preference for symmetry, I wondered what would happen if rates turned negative; e.g. if the fed announced that the discount rate was minus Ό (or ½) %.
It didn't seem to me that the world would change much - practically (or maybe even theoretically?) - for entering negative territory.
Is this what is meant by being "maxed out" - that while fed can set negative rates, the market would just ignore it and mortgage rates (or investment grade to junk bond rates) would stay about the same? Or does something cataclysmic happen when discount rate is negative?
Shiraz Jetha 360-725-7057
NOTICE: This communication may contain confidential, proprietary or legally privileged information. It is intended only for the person(s) to whom it is addressed. If you are not an intended recipient, you may not use, read, retransmit, disseminate or take any action in reliance upon it. Please notify the sender that you have received it in error and immediately delete the entire communication, including any attachments. Towers Watson does not encrypt and cannot ensure the confidentiality or integrity of external e-mail communications and, therefore, cannot be responsible for any unauthorized access, disclosure, use or tampering that may occur during transmission. This communication is not intended to create or modify any obligation, contract or warranty of Towers Watson, unless the firm clearly expresses such an intent.
________________________________
The information transmitted in this message and its attachments (if any) is intended only for the person or entity to which it is addressed.
The message may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon this information, by persons or entities other than the intended recipient is prohibited.
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I didn't see this good response from James before putting up my own. Sorry for duplication.
In the late 1990s the Japanese government printed tons of physical money, the equivalent a few thousand dollars per person, that seems to have all gone under the futon, and is still there. If the BoJ could credibly raise inflationary expectations then there will be an almighty stimulus hitting Japan as this cash hits the system, which is one of my reasons why I have an investment in Japan, just in case this comes to pass. (Why don't I wait till I see this happen? By the time I realise it's happened the share prices will have risen.)
Frank Ashe +61 (0) 425 291 833
________________________________
From: James Lynch [mailto:jimlynch9...@yahoo.com] Sent: Friday, 25 June 2010 8:31 AM To: in...@list.soa.org Subject: [Spam] Re: INARM Message - Negative Interest Rates
The speech calls a zero interest rate a 'practical minimum', and a negative interest rate is a mathematical possibility (T-bills were briefly negative during the financial meltdown.) But if you think of currency (it is a Federal Reserve Note, after all) as a Treasury bill with no term and 0% interest rate, the impracticality of a negative Fed funds rate becomes pretty clear pretty quickly. To keep the math simple, imagine a one-year T-note paying -1%. Today you give the government $100 and in a year you get back $99. Now that $100 you are holding while thinking about buying the T-note - what form does it take? If it's a $100 check, you would only buy the T-note if you think the bank issuing the check has a significant probability of default. Since the federal government sells a lot of T-notes, its offer of negative interest rate would be essentially saying the banking system is on the verge of collapse. Don't think that's the message the Fed would like to send. Now imagine that $100 is cash. Well, why wouldn't you just stuff that cash in a mattress? It'll still be worth $100 in a year and in a deflationary environment, it'll be able to buy more stuff. You wouldn't buy the note. You'd just hold the cash. At least, that's what I'd do. In fact, that's what everybody would do. We'd all go out and liquidate all of our checking accounts, CDs, money markets, bonds, etc., and exchange them for cash. There'd be a shortage of currency in the country. And no one would spend that cash, as its the best investment out there. We'd keep it at home and thus accelerate the deflationary cycle. The only way we would stop hoarding cash would be if rioting broke out. Then the expected loss from looting might exceed $1. So the T-note would start looking better. You're paying the federal government to use its police powers to protect your wealth from imminent threat, and they are, essentially, charging you a 1% handling fee. Don't think the Fed wants to go there, either. So a negative interest rate implies that collapses of the financial system and of all civil order are imminent. Hence the 0% lower bound.
From: Nick Albicelli <njalbice...@yahoo.com> To: Steven Craighead <steven.craigh...@towerswatson.com>; "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org Sent: Thu, June 24, 2010 5:21:41 PM Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows:
Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5 <http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/defaul...> Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
________________________________
From: Steven Craighead <steven.craigh...@towerswatson.com> To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org Sent: Thu, June 24, 2010 2:42:20 PM Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were still barely positive, but the inflation adjustment forced the real values to be negative.
What happens is that for negative discount rates, you are paying the US government to hold your money instead of being paid for them to hold it. In that situation, it would be better to either put the $ under your mattress instead of loaning it to the government, since the face amount would remain the same (assuming that inflation is zero). In the situation of negative discount and inflation, paper money will decline in value as inflation goes up.
Negative discount rates would force cautious investors to move to more risky investments. For instance, frequently cat bonds invest in treasuries, since they figure that the government isn't going to go bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA Towers Watson One Alliance Center 3500 Lenox Road, Suite 900 Atlanta, GA 30326-4238 Ph: 404-365-1287 Fax: 404-365-1663
To <in...@list.soa.org> "Jetha, Shiraz (OIC)" cc <Shir...@OIC.WA.GOV> Subject 06/24/2010 02:15 PM INARM Message - Negative Interest Rates
In the context of GFC, we hear in the media that the "interest rate tool" is "maxed out" - i.e. feds can't go lower than zero percent in setting interest rates.
I have been wondering about this and I think I see why.
But as someone who grew up with math(s) and therefore has a preference for symmetry, I wondered what would happen if rates turned negative; e.g. if the fed announced that the discount rate was minus Ό (or ½) %.
It didn't seem to me that the world would change much - practically (or maybe even theoretically?) - for entering negative territory.
Is this what is meant by being "maxed out" - that while fed can set negative rates, the market would just ignore it and mortgage rates (or investment grade to junk bond rates) would stay about the same? Or does something cataclysmic happen when discount rate is negative?
Shiraz Jetha 360-725-7057
NOTICE: This communication may contain confidential, proprietary or legally privileged information. It is intended only for the person(s) to whom it is addressed. If you are not an intended recipient, you may not use, read, retransmit, disseminate or take any action in reliance upon it. Please notify the sender that you have received it in error and immediately delete the entire communication, including any attachments. Towers Watson does not encrypt and cannot ensure the confidentiality or integrity of external e-mail communications and, therefore, cannot be responsible for any unauthorized access, disclosure, use or tampering that may occur during transmission. This communication is not intended to create or modify any obligation, contract or warranty of Towers Watson, unless the firm clearly expresses such an intent.
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Seemingly stranger things have happened. When the US went off the gold standard, it became illigal for US citizens to hold gold in any form but jewlery.
So the process to accomplish this would be to make paper money illegal and then to continually adjust the electronic balances to reflect the negative interest rates.
Seems very strange, but I imagine that a few years before the gold standard ended the actions that actually happened would have been almost universally thought to be outrageous and impossible.
As risk managers, we are constantly reminded that things that many thought were impossible do in fact happen.
An agreement on likelihood by all of the best and brightest does not seem to be an indication of whether something will happen or not.
________________________________
From: jim bridgeman [mailto:bridgem...@gmail.com] Sent: Friday, June 25, 2010 10:29 AM To: 'Jetha, Shiraz (OIC)'; in...@list.soa.org Subject: RE: INARM Message - Negative Interest Rates
2. the problem was (and is), as earlier comments indicated, it can only be implemented on a broad scale for a few hours to a few days, unless you are willing use force to confiscate cash into negative rate deposits.
From: Jetha, Shiraz (OIC) [mailto:Shir...@OIC.WA.GOV] Sent: Friday, June 25, 2010 10:10 AM To: in...@list.soa.org Subject: FW: INARM Message - Negative Interest Rates
Couple of questions:
1. What was driving the discussion on the negative interest rates during GFC? Was it a belief that this tool of lowering rates further into negative territory could help stimulate lending, for example, if it could work?
2. And why wasn't it pursued? Lack of good ideas on how to deal with the paper currency? Too much trouble to successfully implement? Too traumatic for investors? Others?
Shiraz
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Thursday, June 24, 2010 5:28 PM To: in...@list.soa.org Subject: Re: [Spam] RE: INARM Message - Negative Interest Rates
Also, at the time of the financial crisis there were a lot of brainstorming-quality (i.e. not entirely serious) ideas about how to work a negative interest rate. One in particular that was memorable was a proposal to randomly draw serial numbers of paper currency and declare that those serial numbers were no longer legal tender. Every day, repeat, taking some amount of currency out of circulation, thereby increasing the (expected) carrying cost of currency to whatever amount was deemed necessary. Voila - negative interest rate on cash under the mattress.
________________________________
From: Stephen Britt <Stephen.Br...@iag.com.au> To: Nick Albicelli <njalbice...@yahoo.com>; Steven Craighead <steven.craigh...@towerswatson.com>; "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; "in...@list.soa.org" <in...@list.soa.org> Sent: Thu, June 24, 2010 8:05:05 PM Subject: [Spam] RE: INARM Message - Negative Interest Rates
Note: This e-mail is subject to the disclaimer contained at the bottom of this message.
________________________________
Negative nominal interest rates are (theoretically) almost impossible in a financial economics sense because of cash and carry arbitrage. As in:
· Borrow a very large amount of money and put it under your bed; and
· Carry a big gun to ensure that you aren't robbed.
The lower limit to the interest rate here is the cost of carry (ie the cost of the gun).
I believe that interest rates were negative in Japan briefly some time in the last twenty years or so.
--------------------------------------------- STEPHEN BRITT SENIOR MANAGER
INTERNAL CAPITAL MODELS INSURANCE AUSTRALIA GROUP (IAG)
T +61 (0)2 9292 2311
F +61 (0)2 9292 3159 M +61 (0)411 014 571 E stephen.br...@iag.com.au <mailto:stephen.br...@iag.com.au>
PLEASE CONSIDER THE ENVIRONMENT BEFORE PRINTING THIS EMAIL. ---------------------------------------------
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Friday, 25 June 2010 7:22 AM To: Steven Craighead; Jetha, Shiraz (OIC); in...@list.soa.org Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows:
Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5 <http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/defaul...> Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
________________________________
From: Steven Craighead <steven.craigh...@towerswatson.com> To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org Sent: Thu, June 24, 2010 2:42:20 PM Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were still barely positive, but the inflation adjustment forced the real values to be negative.
What happens is that for negative discount rates, you are paying the US government to hold your money instead of being paid for them to hold it. In that situation, it would be better to either put the $ under your mattress instead of loaning it to the government, since the face amount would remain the same (assuming that inflation is zero). In the situation of negative discount and inflation, paper money will decline in value as inflation goes up.
Negative discount rates would force cautious investors to move to more risky investments. For instance, frequently cat bonds invest in treasuries, since they figure that the government isn't going to go bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA Towers Watson One Alliance Center 3500 Lenox Road, Suite 900 Atlanta, GA 30326-4238 Ph: 404-365-1287 Fax: 404-365-1663
To <in...@list.soa.org> "Jetha, Shiraz (OIC)" cc <Shir...@OIC.WA.GOV> Subject 06/24/2010 02:15 PM INARM Message - Negative Interest Rates
In the context of GFC, we hear in the media that the "interest rate tool" is "maxed out" - i.e. feds can't go lower than zero percent in setting interest rates.
I have been wondering about this and I think I see why.
But as someone who grew up with math(s) and therefore has a preference for symmetry, I wondered what would happen if rates turned negative; e.g. if the fed announced that the discount rate was minus Ό (or ½) %.
It didn't seem to me that the world would change much - practically (or maybe even theoretically?) - for entering negative territory.
Is this what is meant by being "maxed out" - that while fed can set negative rates, the market would just ignore it and mortgage rates (or investment grade to junk bond rates) would stay about the same? Or does something cataclysmic happen when discount rate is negative?
Shiraz Jetha 360-725-7057
NOTICE: This communication may contain confidential, proprietary or legally privileged information. It is intended only for the person(s) to whom it is addressed. If you are not an intended recipient, you may not use, read, retransmit, disseminate or take any action in reliance upon it. Please notify the sender that you have received it in error and immediately delete the entire communication, including any attachments. Towers Watson does not encrypt and cannot ensure the confidentiality or integrity of external e-mail communications and, therefore, cannot be responsible for any unauthorized access, disclosure, use or tampering that may occur during transmission. This communication is not intended to create or modify any obligation, contract or warranty of Towers Watson, unless the firm clearly expresses such an intent.
________________________________
The information transmitted in this message and its attachments (if
...
I think that the few cases of negative nominal interest rates that have occurred (at least those experienced in the U.S. and Japan relatively recently) were due to the specific circumstances involved, e.g., the overnight-bank rates charged by the Fed in the U.S. It points out that there is more to the components of 'risk-free' interest rates in certain circumstances than the time value of money -- eg specific monetary policy, willingness to pay for safety.
Sam
From:
"Hopewell, David" <dhopew...@Aegonusa.com>
To:
jim bridgeman <bridgem...@gmail.com>, "'Jetha, Shiraz (OIC)'" <Shir...@OIC.WA.GOV>, "in...@list.soa.org" <in...@list.soa.org>
Date:
06/25/2010 09:50 AM
Subject:
RE: INARM Message - Negative Interest Rates
Jim, I disagree but only in theory. I think Bernankes comments in the link below suggest that the ability to purchase securities regardless of price is prima facie the capacity to create negative interest rates by running the printing press for the purpose of purchasing government securities. He clearly doesnt think that would be necessary, but it does seem possible and doesnt require compulsion.
Intervening in the foreign exchange markets (selling dollars for other currencies) can do the same thing to those whose currency numeraire is not in dollars much more easily than for the home currency. It would however take a lot of money much more than is he would expect to be necessary to prevent deflation. Hence unthinkable but not impossible.
In practice negative rates should be limited to the securities the government would buy and relies on their limited supply. So perhaps limiting the creation of alternative borrowing vehicles would also ensue.
Also, I understand some think of inflation (or less deflation) as government confiscation of wealth so maybe those techniques really are taking by force?
An interesting subject for thought experiments; it goes right to the core of the governments role of defining and protecting property rights, of which the value of money is one of the most basic.
David Hopewell, FSA CFA
Chief Financial Officer
Transamerica Capital Management
dhopew...@aegonusa.com
319.355.4135
From: jim bridgeman [mailto:bridgem...@gmail.com] Sent: Friday, June 25, 2010 9:29 AM
To: 'Jetha, Shiraz (OIC)'; in...@list.soa.org
Subject: RE: INARM Message - Negative Interest Rates
2. the problem was (and is), as earlier comments indicated, it can only be implemented on a broad scale for a few hours to a few days, unless you are willing use force to confiscate cash into negative rate deposits.
From: Jetha, Shiraz (OIC) [mailto:Shir...@OIC.WA.GOV] Sent: Friday, June 25, 2010 10:10 AM
To: in...@list.soa.org
Subject: FW: INARM Message - Negative Interest Rates
Couple of questions:
1. What was driving the discussion on the negative interest rates during GFC? Was it a belief that this tool of lowering rates further into negative territory could help stimulate lending, for example, if it could work?
2. And why wasnt it pursued? Lack of good ideas on how to deal with the paper currency? Too much trouble to successfully implement? Too traumatic for investors? Others?
Shiraz
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Thursday, June 24, 2010 5:28 PM
To: in...@list.soa.org
Subject: Re: [Spam] RE: INARM Message - Negative Interest Rates
Also, at the time of the financial crisis there were a lot of brainstorming-quality (i.e. not entirely serious) ideas about how to work a negative interest rate. One in particular that was memorable was a proposal to randomly draw serial numbers of paper currency and declare that those serial numbers were no longer legal tender. Every day, repeat, taking some amount of currency out of circulation, thereby increasing the (expected) carrying cost of currency to whatever amount was deemed necessary. Voila - negative interest rate on cash under the mattress.
From: Stephen Britt <Stephen.Br...@iag.com.au>
To: Nick Albicelli <njalbice...@yahoo.com>; Steven Craighead <steven.craigh...@towerswatson.com>; "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; "in...@list.soa.org" <in...@list.soa.org>
Sent: Thu, June 24, 2010 8:05:05 PM
Subject: [Spam] RE: INARM Message - Negative Interest Rates
Note: This e-mail is subject to the disclaimer contained at the bottom of this message.
Negative nominal interest rates are (theoretically) almost impossible in a financial economics sense because of cash and carry arbitrage. As in:
· Borrow a very large amount of money and put it under your bed; and
· Carry a big gun to ensure that you arent robbed.
The lower limit to the interest rate here is the cost of carry (ie the cost of the gun).
I believe that interest rates were negative in Japan briefly some time in the last twenty years or so.
STEPHEN BRITT
SENIOR MANAGER
INTERNAL CAPITAL MODELS
INSURANCE AUSTRALIA GROUP (IAG)
T +61 (0)2 9292 2311
F +61 (0)2 9292 3159
M +61 (0)411 014 571
E stephen.br...@iag.com.au
PLEASE CONSIDER THE ENVIRONMENT
BEFORE PRINTING THIS EMAIL.
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Friday, 25 June 2010 7:22 AM
To: Steven Craighead; Jetha, Shiraz (OIC); in...@list.soa.org
Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows:
Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5 Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
From: Steven Craighead <steven.craigh...@towerswatson.com>
To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org
Sent: Thu, June 24, 2010 2:42:20 PM
Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were
still barely positive, but the inflation adjustment forced the real values
to be negative.
What happens is that for negative discount rates, you are paying the US
government to hold your money instead of being paid for them to hold it.
In that situation, it would be better to either put the $ under your
mattress instead of loaning it to the government, since the face amount
would remain the same (assuming that inflation is zero). In the situation
of negative discount and inflation, paper money will decline in value as
inflation goes up.
Negative discount rates would force cautious investors to move to more
risky investments. For instance, frequently cat bonds invest in
treasuries, since they figure that the government isn't going to go
bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA
Towers Watson
One Alliance Center
3500 Lenox Road, Suite 900
Atlanta, GA 30326-4238
Ph: 404-365-1287
Fax: 404-365-1663
In the context of GFC, we hear in the media that the interest rate tool
is maxed out i.e. feds cant go lower than zero percent in setting
interest rates.
I have been wondering about this and I think I see why.
But as someone who grew up with math(s) and therefore has a preference for
symmetry, I wondered what would happen if rates turned negative; e.g. if
the fed announced that the discount rate was minus Ό (or ½) %.
It didnt seem to me that the world would change much practically (or
maybe even theoretically?) for entering negative territory.
Is this what is meant by being maxed out that while fed can set
negative rates, the market would just ignore it and mortgage rates (or
investment grade to junk bond rates) would stay about the same? Or does
something cataclysmic happen when discount rate is negative?
I agree almost completely. My comment was only to the point of literally setting a posted interested rate below zero. Also, we now know that Bernankes comment turned out to be not only necessary but also workable. The quantitative easing to which weve been witness is precisely the helicopter dropping of printed cash that his old speech referred to as a hypothetical.
My almost above refers to a scruple that quantitative easing and/or some of the other items you mention do not automatically have all of the same effects as would a negative interest. Each of them has some of the effects of a negative interest rate some of the time. None are completely identical to it.
Jim
From: Hopewell, David [mailto:dhopew...@Aegonusa.com] Sent: Friday, June 25, 2010 10:51 AM To: jim bridgeman; 'Jetha, Shiraz (OIC)'; in...@list.soa.org Subject: RE: INARM Message - Negative Interest Rates
Jim, I disagree but only in theory. I think Bernankes comments in the link below suggest that the ability to purchase securities regardless of price is prima facie the capacity to create negative interest rates by running the printing press for the purpose of purchasing government securities. He clearly doesnt think that would be necessary, but it does seem possible and doesnt require compulsion.
Intervening in the foreign exchange markets (selling dollars for other currencies) can do the same thing to those whose currency numeraire is not in dollars much more easily than for the home currency. It would however take a lot of money much more than is he would expect to be necessary to prevent deflation. Hence unthinkable but not impossible.
In practice negative rates should be limited to the securities the government would buy and relies on their limited supply. So perhaps limiting the creation of alternative borrowing vehicles would also ensue.
Also, I understand some think of inflation (or less deflation) as government confiscation of wealth so maybe those techniques really are taking by force?
An interesting subject for thought experiments; it goes right to the core of the governments role of defining and protecting property rights, of which the value of money is one of the most basic.
From: jim bridgeman [mailto:bridgem...@gmail.com] Sent: Friday, June 25, 2010 9:29 AM To: 'Jetha, Shiraz (OIC)'; in...@list.soa.org Subject: RE: INARM Message - Negative Interest Rates
2. the problem was (and is), as earlier comments indicated, it can only be implemented on a broad scale for a few hours to a few days, unless you are willing use force to confiscate cash into negative rate deposits.
From: Jetha, Shiraz (OIC) [mailto:Shir...@OIC.WA.GOV] Sent: Friday, June 25, 2010 10:10 AM To: in...@list.soa.org Subject: FW: INARM Message - Negative Interest Rates
Couple of questions:
1. What was driving the discussion on the negative interest rates during GFC? Was it a belief that this tool of lowering rates further into negative territory could help stimulate lending, for example, if it could work?
2. And why wasnt it pursued? Lack of good ideas on how to deal with the paper currency? Too much trouble to successfully implement? Too traumatic for investors? Others?
Shiraz
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Thursday, June 24, 2010 5:28 PM To: in...@list.soa.org Subject: Re: [Spam] RE: INARM Message - Negative Interest Rates
Also, at the time of the financial crisis there were a lot of brainstorming-quality (i.e. not entirely serious) ideas about how to work a negative interest rate. One in particular that was memorable was a proposal to randomly draw serial numbers of paper currency and declare that those serial numbers were no longer legal tender. Every day, repeat, taking some amount of currency out of circulation, thereby increasing the (expected) carrying cost of currency to whatever amount was deemed necessary. Voila - negative interest rate on cash under the mattress.
_____
From: Stephen Britt <Stephen.Br...@iag.com.au> To: Nick Albicelli <njalbice...@yahoo.com>; Steven Craighead <steven.craigh...@towerswatson.com>; "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; "in...@list.soa.org" <in...@list.soa.org> Sent: Thu, June 24, 2010 8:05:05 PM Subject: [Spam] RE: INARM Message - Negative Interest Rates
Note: This e-mail is subject to the disclaimer contained at the bottom of this message.
_____
Negative nominal interest rates are (theoretically) almost impossible in a financial economics sense because of cash and carry arbitrage. As in:
· Borrow a very large amount of money and put it under your bed; and
· Carry a big gun to ensure that you arent robbed.
The lower limit to the interest rate here is the cost of carry (ie the cost of the gun).
I believe that interest rates were negative in Japan briefly some time in the last twenty years or so.
STEPHEN BRITT SENIOR MANAGER
INTERNAL CAPITAL MODELS INSURANCE AUSTRALIA GROUP (IAG)
T +61 (0)2 9292 2311
F +61 (0)2 9292 3159 M +61 (0)411 014 571 E <mailto:stephen.br...@iag.com.au> stephen.br...@iag.com.au
PLEASE CONSIDER THE ENVIRONMENT BEFORE PRINTING THIS EMAIL.
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Friday, 25 June 2010 7:22 AM To: Steven Craighead; Jetha, Shiraz (OIC); in...@list.soa.org Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows:
Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target. <http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/defaul...> 5 Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
_____
From: Steven Craighead <steven.craigh...@towerswatson.com> To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org Sent: Thu, June 24, 2010 2:42:20 PM Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were still barely positive, but the inflation adjustment forced the real values to be negative.
What happens is that for negative discount rates, you are paying the US government to hold your money instead of being paid for them to hold it. In that situation, it would be better to either put the $ under your mattress instead of loaning it to the government, since the face amount would remain the same (assuming that inflation is zero). In the situation of negative discount and inflation, paper money will decline in value as inflation goes up.
Negative discount rates would force cautious investors to move to more risky investments. For instance, frequently cat bonds invest in treasuries, since they figure that the government isn't going to go bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA Towers Watson One Alliance Center 3500 Lenox Road, Suite 900 Atlanta, GA 30326-4238 Ph: 404-365-1287 Fax: 404-365-1663
To <in...@list.soa.org> "Jetha, Shiraz (OIC)" cc <Shir...@OIC.WA.GOV> Subject 06/24/2010 02:15 PM INARM Message - Negative Interest Rates
In the context of GFC, we hear in the media that the interest rate tool is maxed out
...
2. the problem was (and is), as earlier comments indicated, it can only be implemented on a broad scale for a few hours to a few days, unless you are willing use force to confiscate cash into negative rate deposits.
From: Jetha, Shiraz (OIC) [mailto:Shir...@OIC.WA.GOV] Sent: Friday, June 25, 2010 10:10 AM To: in...@list.soa.org Subject: FW: INARM Message - Negative Interest Rates
Couple of questions:
1. What was driving the discussion on the negative interest rates during GFC? Was it a belief that this tool of lowering rates further into negative territory could help stimulate lending, for example, if it could work?
2. And why wasnt it pursued? Lack of good ideas on how to deal with the paper currency? Too much trouble to successfully implement? Too traumatic for investors? Others?
Shiraz
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Thursday, June 24, 2010 5:28 PM To: in...@list.soa.org Subject: Re: [Spam] RE: INARM Message - Negative Interest Rates
Also, at the time of the financial crisis there were a lot of brainstorming-quality (i.e. not entirely serious) ideas about how to work a negative interest rate. One in particular that was memorable was a proposal to randomly draw serial numbers of paper currency and declare that those serial numbers were no longer legal tender. Every day, repeat, taking some amount of currency out of circulation, thereby increasing the (expected) carrying cost of currency to whatever amount was deemed necessary. Voila - negative interest rate on cash under the mattress.
_____
From: Stephen Britt <Stephen.Br...@iag.com.au> To: Nick Albicelli <njalbice...@yahoo.com>; Steven Craighead <steven.craigh...@towerswatson.com>; "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; "in...@list.soa.org" <in...@list.soa.org> Sent: Thu, June 24, 2010 8:05:05 PM Subject: [Spam] RE: INARM Message - Negative Interest Rates
Note: This e-mail is subject to the disclaimer contained at the bottom of this message.
_____
Negative nominal interest rates are (theoretically) almost impossible in a financial economics sense because of cash and carry arbitrage. As in:
· Borrow a very large amount of money and put it under your bed; and
· Carry a big gun to ensure that you arent robbed.
The lower limit to the interest rate here is the cost of carry (ie the cost of the gun).
I believe that interest rates were negative in Japan briefly some time in the last twenty years or so.
STEPHEN BRITT SENIOR MANAGER
INTERNAL CAPITAL MODELS INSURANCE AUSTRALIA GROUP (IAG)
T +61 (0)2 9292 2311
F +61 (0)2 9292 3159 M +61 (0)411 014 571 E <mailto:stephen.br...@iag.com.au> stephen.br...@iag.com.au
PLEASE CONSIDER THE ENVIRONMENT BEFORE PRINTING THIS EMAIL.
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Friday, 25 June 2010 7:22 AM To: Steven Craighead; Jetha, Shiraz (OIC); in...@list.soa.org Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows:
Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target. <http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/defaul...> 5 Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
_____
From: Steven Craighead <steven.craigh...@towerswatson.com> To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org Sent: Thu, June 24, 2010 2:42:20 PM Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were still barely positive, but the inflation adjustment forced the real values to be negative.
What happens is that for negative discount rates, you are paying the US government to hold your money instead of being paid for them to hold it. In that situation, it would be better to either put the $ under your mattress instead of loaning it to the government, since the face amount would remain the same (assuming that inflation is zero). In the situation of negative discount and inflation, paper money will decline in value as inflation goes up.
Negative discount rates would force cautious investors to move to more risky investments. For instance, frequently cat bonds invest in treasuries, since they figure that the government isn't going to go bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA Towers Watson One Alliance Center 3500 Lenox Road, Suite 900 Atlanta, GA 30326-4238 Ph: 404-365-1287 Fax: 404-365-1663
To <in...@list.soa.org> "Jetha, Shiraz (OIC)" cc <Shir...@OIC.WA.GOV> Subject 06/24/2010 02:15 PM INARM Message - Negative Interest Rates
In the context of GFC, we hear in the media that the interest rate tool is maxed out i.e. feds cant go lower than zero percent in setting interest rates.
I have been wondering about this and I think I see why.
But as someone who grew up with math(s) and therefore has a preference for symmetry, I wondered what would happen if rates turned negative; e.g. if the fed announced that the discount rate was minus Ό (or ½) %.
It didnt seem to me that the world would change much practically (or maybe even theoretically?) for entering negative territory.
Is this what is meant by being maxed out that while fed can set negative rates, the market would just ignore it and mortgage rates (or investment grade to junk bond rates) would stay about the same? Or does something cataclysmic happen when discount rate is negative?
Shiraz Jetha 360-725-7057
NOTICE: This communication may contain confidential, proprietary or legally privileged information. It is intended only for the person(s) to whom it is addressed. If you are not an intended recipient, you may not use, read, retransmit, disseminate or take any action in reliance upon it. Please notify the sender that you have received it in error and immediately delete the entire communication, including any attachments. Towers Watson does not encrypt and cannot ensure the confidentiality or integrity of external e-mail communications and, therefore, cannot be responsible for any unauthorized access, disclosure, use or tampering that may occur during transmission. This communication is not intended to create or modify any obligation, contract or warranty of Towers Watson, unless the firm clearly expresses such an intent.
_____
The information transmitted in this message and its attachments (if any) is intended only for the person or entity to which it is addressed.
The message may contain confidential and/or privileged material. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon this information, by persons or entities other than the intended recipient is prohibited.
If you have received this in error, please contact the sender and delete this e-mail and associated material from any computer.
The intended recipient of this e-mail may only use, reproduce, disclose or distribute the information contained in this e-mail and any attached files, with the permission of the sender.
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows:
Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5 Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
________________________________ From: Steven Craighead <steven.craigh...@towerswatson.com> To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org Sent: Thu, June 24, 2010 2:42:20 PM Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were still barely positive, but the inflation adjustment forced the real values to be negative.
What happens is that for negative discount rates, you are paying the US government to hold your money instead of being paid for them to hold it. In that situation, it would be better to either put the $ under your mattress instead of loaning it to the government, since the face amount would remain the same (assuming that inflation is zero). In the situation of negative discount and inflation, paper money will decline in value as inflation goes up.
Negative discount rates would force cautious investors to move to more risky investments. For instance, frequently cat bonds invest in treasuries, since they figure that the government isn't going to go bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA Towers Watson One Alliance Center 3500 Lenox Road, Suite 900 Atlanta, GA 30326-4238 Ph: 404-365-1287 Fax: 404-365-1663
To <in...@list.soa.org> "Jetha, Shiraz (OIC)" cc <Shir...@OIC.WA.GOV> Subject 06/24/2010 02:15 PM INARM Message - Negative Interest Rates
In the context of GFC, we hear in the media that the interest rate tool is maxed out i.e. feds cant go lower than zero percent in setting interest rates.
I have been wondering about this and I think I see why.
But as someone who grew up with math(s) and therefore has a preference for symmetry, I wondered what would happen if rates turned negative; e.g. if the fed announced that the discount rate was minus Ό (or ½) %.
It didnt seem to me that the world would change much practically (or maybe even theoretically?) for entering negative territory.
Is this what is meant by being maxed out that while fed can set negative rates, the market would just ignore it and mortgage rates (or investment grade to junk bond rates) would stay about the same? Or does something cataclysmic happen when discount rate is negative?
Shiraz Jetha 360-725-7057
NOTICE: This communication may contain confidential, proprietary or legally privileged information. It is intended only for the person(s) to whom it is addressed. If you are not an intended recipient, you may not use, read, retransmit, disseminate or take any action in reliance upon it. Please notify the sender that you have received it in error and immediately delete the entire communication, including any attachments. Towers Watson does not encrypt and cannot ensure the confidentiality or integrity of external e-mail communications and, therefore, cannot be responsible for any unauthorized access, disclosure, use or tampering that may occur during transmission. This communication is not intended to create or modify any obligation, contract or warranty of Towers Watson, unless the firm clearly expresses such an intent.
Note: This e-mail is subject to the disclaimer contained at the bottom of this message.
___________________________________________________________________________ ____________
Negative nominal interest rates are (theoretically) almost impossible in a financial economics sense because of cash and carry arbitrage. As in:
· Borrow a very large amount of money and put it under your bed; and
· Carry a big gun to ensure that you arent robbed.
The lower limit to the interest rate here is the cost of carry (ie the cost of the gun).
I believe that interest rates were negative in Japan briefly some time in the last twenty years or so.
STEPHEN BRITT
SENIOR MANAGER
INTERNAL CAPITAL MODELS
INSURANCE AUSTRALIA GROUP (IAG)
T +61 (0)2 9292 2311
F +61 (0)2 9292 3159
M +61 (0)411 014 571
E stephen.br...@iag.com.au<mailto:stephen.br...@iag.com.au>
PLEASE CONSIDER THE ENVIRONMENT
BEFORE PRINTING THIS EMAIL.
From: Nick Albicelli [mailto:njalbice...@yahoo.com]
Sent: Friday, 25 June 2010 7:22 AM
To: Steven Craighead; Jetha, Shiraz (OIC); in...@list.soa.org
Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows:
Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5<http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/defaul...> Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
________________________________
From: Steven Craighead <steven.craigh...@towerswatson.com>
To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org
Sent: Thu, June 24, 2010 2:42:20 PM
Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were
still barely positive, but the inflation adjustment forced the real values
to be negative.
What happens is that for negative discount rates, you are paying the US
government to hold your money instead of being paid for them to hold it.
In that situation, it would be better to either put the $ under your
mattress instead of loaning it to the government, since the face amount
would remain the same (assuming that inflation is zero). In the situation
of negative discount and inflation, paper money will decline in value as
inflation goes up.
Negative discount rates would force cautious investors to move to more
risky investments. For instance, frequently cat bonds invest in
treasuries, since they figure that the government isn't going to go
bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA
Towers Watson
One Alliance Center
3500 Lenox Road, Suite 900
Atlanta, GA 30326-4238
Ph: 404-365-1287
Fax: 404-365-1663
To
<in...@list.soa.org<mailto:in...@list.soa.org>>
"Jetha, Shiraz (OIC)" cc
<Shir...@OIC.WA.GOV<mailto:Shir...@OIC.WA.GOV>>
Subject
06/24/2010 02:15 PM INARM Message - Negative Interest
Rates
In the context of GFC, we hear in the media that the interest rate tool
is maxed out i.e. feds cant go lower than zero percent in setting
interest rates.
I have been wondering about this and I think I see why.
But as someone who grew up with math(s) and therefore has a preference for
symmetry, I wondered what would happen if rates turned negative; e.g. if
the fed announced that the discount rate was minus Ό (or ½) %.
It didnt seem to me that the world would change much practically (or
maybe even theoretically?) for entering negative territory.
Is this what is meant by being maxed out that while fed can set
negative rates, the market would just ignore it and mortgage rates (or
investment grade to junk bond rates) would stay about the same? Or does
something cataclysmic happen when discount rate is negative?
Shiraz Jetha
360-725-7057
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This thread is on the verge of conflating two different things: the existence of negative interest rates and the Fed targeting a negative interest rate policy. They are very different: the first is an event that occurs due to the forces of supply and demand in the market (simple mathematics; when the bid clears above the undiscounted value of future cash flows), but the second is a central bank policy (in particular, a policy that, in general, can not be attained by using their favorite tool, open market operations). Obviously there is some interaction between the two ideas; namely, for the Fed to have a negative interest rate policy there would have to be negative interest rates, but the existence of negative interest rates from time to time has not been a result of any negative interest rate Fed policy.
Having said that, Dave I.'s point is the best in the thread. 5 years ago, not only would nobody have predicted half of the Fed's balance sheet would be in Agency debt, it would have been thought to be pretty radical. Confiscation of gold? Sure. Stop issuing 30-yr Treasury? Yep. Negative interest rate policy? Maybe not so strange...
________________________________ From: "sam.gutter...@us.pwc.com" <sam.gutter...@us.pwc.com> To: "in...@list.soa.org" <in...@list.soa.org> Sent: Fri, June 25, 2010 11:02:18 AM Subject: RE: INARM Message - Negative Interest Rates
I think that the few cases of negative nominal interest rates that have occurred (at least those experienced in the U.S. and Japan relatively recently) were due to the specific circumstances involved, e.g., the overnight-bank rates charged by the Fed in the U.S. It points out that there is more to the components of 'risk-free' interest rates in certain circumstances than the time value of money -- eg specific monetary policy, willingness to pay for safety.
Sam
From: "Hopewell, David" <dhopew...@Aegonusa.com> To: jim bridgeman <bridgem...@gmail.com>, "'Jetha, Shiraz (OIC)'" <Shir...@OIC.WA.GOV>, "in...@list.soa.org" <in...@list.soa.org> Date: 06/25/2010 09:50 AM Subject: RE: INARM Message - Negative Interest Rates ________________________________
Jim, I disagree but only in theory. I think Bernankes comments in the link below suggest that the ability to purchase securities regardless of price is prima facie the capacity to create negative interest rates by running the printing press for the purpose of purchasing government securities. He clearly doesnt think that would be necessary, but it does seem possible and doesnt require compulsion.
Intervening in the foreign exchange markets (selling dollars for other currencies) can do the same thing to those whose currency numeraire is not in dollars much more easily than for the home currency. It would however take a lot of money much more than is he would expect to be necessary to prevent deflation. Hence unthinkable but not impossible.
In practice negative rates should be limited to the securities the government would buy and relies on their limited supply. So perhaps limiting the creation of alternative borrowing vehicles would also ensue.
Also, I understand some think of inflation (or less deflation) as government confiscation of wealth so maybe those techniques really are taking by force?
An interesting subject for thought experiments; it goes right to the core of the governments role of defining and protecting property rights, of which the value of money is one of the most basic.
David Hopewell, FSA CFA Chief Financial Officer Transamerica Capital Management dhopew...@aegonusa.com 319.355.4135 From: jim bridgeman [mailto:bridgem...@gmail.com] Sent: Friday, June 25, 2010 9:29 AM To: 'Jetha, Shiraz (OIC)'; in...@list.soa.org Subject: RE: INARM Message - Negative Interest Rates
2. the problem was (and is), as earlier comments indicated, it can only be implemented on a broad scale for a few hours to a few days, unless you are willing use force to confiscate cash into negative rate deposits.
From: Jetha, Shiraz (OIC) [mailto:Shir...@OIC.WA.GOV] Sent: Friday, June 25, 2010 10:10 AM To: in...@list.soa.org Subject: FW: INARM Message - Negative Interest Rates
Couple of questions: 1. What was driving the discussion on the negative interest rates during GFC? Was it a belief that this tool of lowering rates further into negative territory could help stimulate lending, for example, if it could work? 2. And why wasnt it pursued? Lack of good ideas on how to deal with the paper currency? Too much trouble to successfully implement? Too traumatic for investors? Others?
Shiraz From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Thursday, June 24, 2010 5:28 PM To: in...@list.soa.org Subject: Re: [Spam] RE: INARM Message - Negative Interest Rates
Also, at the time of the financial crisis there were a lot of brainstorming-quality (i.e. not entirely serious) ideas about how to work a negative interest rate. One in particular that was memorable was a proposal to randomly draw serial numbers of paper currency and declare that those serial numbers were no longer legal tender. Every day, repeat, taking some amount of currency out of circulation, thereby increasing the (expected) carrying cost of currency to whatever amount was deemed necessary. Voila - negative interest rate on cash under the mattress.
________________________________
From: Stephen Britt <Stephen.Br...@iag.com.au> To: Nick Albicelli <njalbice...@yahoo.com>; Steven Craighead <steven.craigh...@towerswatson.com>; "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; "in...@list.soa.org" <in...@list.soa.org> Sent: Thu, June 24, 2010 8:05:05 PM Subject: [Spam] RE: INARM Message - Negative Interest Rates
Note: This e-mail is subject to the disclaimer contained at the bottom of this message.
________________________________
Negative nominal interest rates are (theoretically) almost impossible in a financial economics sense because of cash and carry arbitrage. As in:
· Borrow a very large amount of money and put it under your bed; and · Carry a big gun to ensure that you arent robbed.
The lower limit to the interest rate here is the cost of carry (ie the cost of the gun).
I believe that interest rates were negative in Japan briefly some time in the last twenty years or so.
STEPHEN BRITT SENIOR MANAGER INTERNAL CAPITAL MODELS INSURANCE AUSTRALIA GROUP (IAG)
T +61 (0)2 9292 2311 F +61 (0)2 9292 3159 M +61 (0)411 014 571 E stephen.br...@iag.com.au
PLEASE CONSIDER THE ENVIRONMENT BEFORE PRINTING THIS EMAIL.
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Friday, 25 June 2010 7:22 AM To: Steven Craighead; Jetha, Shiraz (OIC); in...@list.soa.org Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows: Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
________________________________
From: Steven Craighead <steven.craigh...@towerswatson.com> To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org Sent: Thu, June 24, 2010 2:42:20 PM Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were still barely positive, but the inflation adjustment forced the real values to be negative.
What happens is that for negative discount rates, you are paying the US government to hold your money instead of being paid for them to hold it. In that situation, it would be better to either put the $ under your mattress instead of loaning it to the government, since the face amount would remain the same (assuming that inflation is zero). In the situation of negative discount and inflation, paper money will decline in value as inflation goes up.
Negative discount rates would force cautious investors to move to more risky investments. For instance, frequently cat bonds invest in treasuries, since they figure that the government isn't going to go bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA Towers Watson One Alliance Center 3500 Lenox Road, Suite 900 Atlanta, GA 30326-4238 Ph: 404-365-1287 Fax: 404-365-1663
...
From a risk management point of view your thoughts below prompted my paper, which I've attached. If I was a risk manager for a bank then I'd be very worried that there is a lack of consensus on monetary and fiscal policy (the two can't be separated) in a world where North Atlantic economies (sorry, most of you, it's not a world crisis any more) are still struggling with very high unemployment and government processes that are moribund or in thrall to the same neo-classical economic theories that gave us the crisis in the first place - calling for austere budgets now comes from the same intellectual tradition as the call for deregulation: get the government out of the way!
Cheers,
Frank Ashe +61 (0) 425 291 833
________________________________
From: Ingram, Dave [mailto:Dave.Ing...@willis.com] Sent: Saturday, 26 June 2010 12:41 AM To: in...@list.soa.org Subject: RE: INARM Message - Negative Interest Rates
Seemingly stranger things have happened. When the US went off the gold standard, it became illigal for US citizens to hold gold in any form but jewlery.
So the process to accomplish this would be to make paper money illegal and then to continually adjust the electronic balances to reflect the negative interest rates.
Seems very strange, but I imagine that a few years before the gold standard ended the actions that actually happened would have been almost universally thought to be outrageous and impossible.
As risk managers, we are constantly reminded that things that many thought were impossible do in fact happen.
An agreement on likelihood by all of the best and brightest does not seem to be an indication of whether something will happen or not.
________________________________
From: jim bridgeman [mailto:bridgem...@gmail.com] Sent: Friday, June 25, 2010 10:29 AM To: 'Jetha, Shiraz (OIC)'; in...@list.soa.org Subject: RE: INARM Message - Negative Interest Rates
2. the problem was (and is), as earlier comments indicated, it can only be implemented on a broad scale for a few hours to a few days, unless you are willing use force to confiscate cash into negative rate deposits.
From: Jetha, Shiraz (OIC) [mailto:Shir...@OIC.WA.GOV] Sent: Friday, June 25, 2010 10:10 AM To: in...@list.soa.org Subject: FW: INARM Message - Negative Interest Rates
Couple of questions:
1. What was driving the discussion on the negative interest rates during GFC? Was it a belief that this tool of lowering rates further into negative territory could help stimulate lending, for example, if it could work?
2. And why wasn't it pursued? Lack of good ideas on how to deal with the paper currency? Too much trouble to successfully implement? Too traumatic for investors? Others?
Shiraz
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Thursday, June 24, 2010 5:28 PM To: in...@list.soa.org Subject: Re: [Spam] RE: INARM Message - Negative Interest Rates
Also, at the time of the financial crisis there were a lot of brainstorming-quality (i.e. not entirely serious) ideas about how to work a negative interest rate. One in particular that was memorable was a proposal to randomly draw serial numbers of paper currency and declare that those serial numbers were no longer legal tender. Every day, repeat, taking some amount of currency out of circulation, thereby increasing the (expected) carrying cost of currency to whatever amount was deemed necessary. Voila - negative interest rate on cash under the mattress.
________________________________
From: Stephen Britt <Stephen.Br...@iag.com.au> To: Nick Albicelli <njalbice...@yahoo.com>; Steven Craighead <steven.craigh...@towerswatson.com>; "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; "in...@list.soa.org" <in...@list.soa.org> Sent: Thu, June 24, 2010 8:05:05 PM Subject: [Spam] RE: INARM Message - Negative Interest Rates
Note: This e-mail is subject to the disclaimer contained at the bottom of this message.
________________________________
Negative nominal interest rates are (theoretically) almost impossible in a financial economics sense because of cash and carry arbitrage. As in:
· Borrow a very large amount of money and put it under your bed; and
· Carry a big gun to ensure that you aren't robbed.
The lower limit to the interest rate here is the cost of carry (ie the cost of the gun).
I believe that interest rates were negative in Japan briefly some time in the last twenty years or so.
--------------------------------------------- STEPHEN BRITT SENIOR MANAGER
INTERNAL CAPITAL MODELS INSURANCE AUSTRALIA GROUP (IAG)
T +61 (0)2 9292 2311
F +61 (0)2 9292 3159 M +61 (0)411 014 571 E stephen.br...@iag.com.au <mailto:stephen.br...@iag.com.au>
PLEASE CONSIDER THE ENVIRONMENT BEFORE PRINTING THIS EMAIL. ---------------------------------------------
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Friday, 25 June 2010 7:22 AM To: Steven Craighead; Jetha, Shiraz (OIC); in...@list.soa.org Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows:
Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5 <http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/defaul...> Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
Read the speech to see how he responds...
________________________________
From: Steven Craighead <steven.craigh...@towerswatson.com> To: "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; in...@list.soa.org Sent: Thu, June 24, 2010 2:42:20 PM Subject: Re: INARM Message - Negative Interest Rates
During WWII the T-Bill rates real rates were negative. The effective were still barely positive, but the inflation adjustment forced the real values to be negative.
What happens is that for negative discount rates, you are paying the US government to hold your money instead of being paid for them to hold it. In that situation, it would be better to either put the $ under your mattress instead of loaning it to the government, since the face amount would remain the same (assuming that inflation is zero). In the situation of negative discount and inflation, paper money will decline in value as inflation goes up.
Negative discount rates would force cautious investors to move to more risky investments. For instance, frequently cat bonds invest in treasuries, since they figure that the government isn't going to go bankrupt even in a disaster.
Questions? Comments?
Steven Craighead, CERA ASA MAAA Towers Watson One Alliance Center 3500 Lenox Road, Suite 900 Atlanta, GA 30326-4238 Ph: 404-365-1287 Fax: 404-365-1663
To <in...@list.soa.org> "Jetha, Shiraz (OIC)" cc <Shir...@OIC.WA.GOV> Subject 06/24/2010 02:15 PM INARM Message - Negative Interest Rates
In the context of GFC, we hear in the media that the "interest rate tool" is "maxed out" - i.e. feds can't go lower than zero percent in setting interest rates.
I have been wondering about this and I think I see why.
But as someone who grew up with math(s) and therefore has a preference for symmetry, I wondered what would happen if rates turned negative; e.g. if the fed announced that the discount rate was minus Ό (or ½) %.
It didn't seem to me that the world would change much - practically (or maybe even theoretically?) - for entering negative territory.
Is this what is meant by being "maxed out" - that while fed can set negative rates, the market would just ignore it and mortgage rates (or investment grade to junk bond rates) would stay about the same? Or does something cataclysmic happen when discount rate is negative?
One implicit assumption in this thread is that there is some independence between fiscal and monetary policy. They are really two sides of the one coin. Bernanke's paper brings this out when he discusses what could happen when interest rates hit zero; we have to move to fiscal policy if we want to have an effect on the economy. There is no need to move to negative rates. Of course, we could have had the fiscal measures before we got to zero rates, but politically it's most probably easier to move more radically on fiscal policy after hitting ZIRP. Also note that because of the automatic stabilisers we usually have fiscal policy kicking in strongly in the face of a severe recession before we get ZIRP imposed - this is not a radical policy. Radical fiscal policy is dropping money from helicopters, or, as Keynes suggested, burying bank notes in disused mine shafts if you couldn't do something more useful with them such as build infrastructure.
Frank Ashe +61 (0) 425 291 833
________________________________
From: Nick Albicelli [mailto:njalbice...@yahoo.com] Sent: Saturday, 26 June 2010 1:38 AM To: in...@list.soa.org Subject: Re: INARM Message - Negative Interest Rates
This thread is on the verge of conflating two different things: the existence of negative interest rates and the Fed targeting a negative interest rate policy. They are very different: the first is an event that occurs due to the forces of supply and demand in the market (simple mathematics; when the bid clears above the undiscounted value of future cash flows), but the second is a central bank policy (in particular, a policy that, in general, can not be attained by using their favorite tool, open market operations). Obviously there is some interaction between the two ideas; namely, for the Fed to have a negative interest rate policy there would have to be negative interest rates, but the existence of negative interest rates from time to time has not been a result of any negative interest rate Fed policy.
Having said that, Dave I.'s point is the best in the thread. 5 years ago, not only would nobody have predicted half of the Fed's balance sheet would be in Agency debt, it would have been thought to be pretty radical. Confiscation of gold? Sure. Stop issuing 30-yr Treasury? Yep. Negative interest rate policy? Maybe not so strange...
________________________________
From: "sam.gutter...@us.pwc.com" <sam.gutter...@us.pwc.com> To: "in...@list.soa.org" <in...@list.soa.org> Sent: Fri, June 25, 2010 11:02:18 AM Subject: RE: INARM Message - Negative Interest Rates
I think that the few cases of negative nominal interest rates that have occurred (at least those experienced in the U.S. and Japan relatively recently) were due to the specific circumstances involved, e.g., the overnight-bank rates charged by the Fed in the U.S. It points out that there is more to the components of 'risk-free' interest rates in certain circumstances than the time value of money -- eg specific monetary policy, willingness to pay for safety.
Sam
From: "Hopewell, David" <dhopew...@Aegonusa.com> To: jim bridgeman <bridgem...@gmail.com>, "'Jetha, Shiraz (OIC)'" <Shir...@OIC.WA.GOV>, "in...@list.soa.org" <in...@list.soa.org> Date: 06/25/2010 09:50 AM Subject: RE: INARM Message - Negative Interest Rates
________________________________
Jim, I disagree but only in theory. I think Bernanke's comments in the link below suggest that the ability to purchase securities regardless of price is prima facie the capacity to create negative interest rates by running the printing press for the purpose of purchasing government securities. He clearly doesn't think that would be necessary, but it does seem possible and doesn't require compulsion.
Intervening in the foreign exchange markets (selling dollars for other currencies) can do the same thing to those whose currency numeraire is not in dollars much more easily than for the home currency. It would however take a lot of money - much more than is he would expect to be necessary to prevent deflation. Hence unthinkable but not impossible.
In practice negative rates should be limited to the securities the government would buy and relies on their limited supply. So perhaps limiting the creation of alternative borrowing vehicles would also ensue.
Also, I understand some think of inflation (or less deflation) as government confiscation of wealth so maybe those techniques really are taking by force?
An interesting subject for thought experiments; it goes right to the core of the government's role of defining and protecting property rights, of which the value of money is one of the most basic.
David Hopewell, FSA CFA Chief Financial Officer Transamerica Capital Management dhopew...@aegonusa.com 319.355.4135 From: jim bridgeman [mailto:bridgem...@gmail.com <mailto:bridgem...@gmail.com> ] Sent: Friday, June 25, 2010 9:29 AM To: 'Jetha, Shiraz (OIC)'; in...@list.soa.org Subject: RE: INARM Message - Negative Interest Rates
2. the problem was (and is), as earlier comments indicated, it can only be implemented on a broad scale for a few hours to a few days, unless you are willing use force to confiscate cash into negative rate deposits.
From: Jetha, Shiraz (OIC) [mailto:Shir...@OIC.WA.GOV <mailto:Shir...@OIC.WA.GOV> ] Sent: Friday, June 25, 2010 10:10 AM To: in...@list.soa.org Subject: FW: INARM Message - Negative Interest Rates
Couple of questions: 1. What was driving the discussion on the negative interest rates during GFC? Was it a belief that this tool of lowering rates further into negative territory could help stimulate lending, for example, if it could work? 2. And why wasn't it pursued? Lack of good ideas on how to deal with the paper currency? Too much trouble to successfully implement? Too traumatic for investors? Others?
Shiraz From: Nick Albicelli [mailto:njalbice...@yahoo.com <mailto:njalbice...@yahoo.com> ] Sent: Thursday, June 24, 2010 5:28 PM To: in...@list.soa.org Subject: Re: [Spam] RE: INARM Message - Negative Interest Rates
Also, at the time of the financial crisis there were a lot of brainstorming-quality (i.e. not entirely serious) ideas about how to work a negative interest rate. One in particular that was memorable was a proposal to randomly draw serial numbers of paper currency and declare that those serial numbers were no longer legal tender. Every day, repeat, taking some amount of currency out of circulation, thereby increasing the (expected) carrying cost of currency to whatever amount was deemed necessary. Voila - negative interest rate on cash under the mattress.
________________________________
From: Stephen Britt <Stephen.Br...@iag.com.au> To: Nick Albicelli <njalbice...@yahoo.com>; Steven Craighead <steven.craigh...@towerswatson.com>; "Jetha, Shiraz (OIC)" <Shir...@OIC.WA.GOV>; "in...@list.soa.org" <in...@list.soa.org> Sent: Thu, June 24, 2010 8:05:05 PM Subject: [Spam] RE: INARM Message - Negative Interest Rates
Note: This e-mail is subject to the disclaimer contained at the bottom of this message.
________________________________
Negative nominal interest rates are (theoretically) almost impossible in a financial economics sense because of cash and carry arbitrage. As in:
* Borrow a very large amount of money and put it under your bed; and * Carry a big gun to ensure that you aren't robbed.
The lower limit to the interest rate here is the cost of carry (ie the cost of the gun).
I believe that interest rates were negative in Japan briefly some time in the last twenty years or so.
--------------------------------------------- STEPHEN BRITT SENIOR MANAGER INTERNAL CAPITAL MODELS INSURANCE AUSTRALIA GROUP (IAG)
T +61 (0)2 9292 2311 F +61 (0)2 9292 3159 M +61 (0)411 014 571 E stephen.br...@iag.com.au <mailto:stephen.br...@iag.com.au>
PLEASE CONSIDER THE ENVIRONMENT BEFORE PRINTING THIS EMAIL. ---------------------------------------------
From: Nick Albicelli [mailto:njalbice...@yahoo.com <mailto:njalbice...@yahoo.com> ] Sent: Friday, 25 June 2010 7:22 AM To: Steven Craighead; Jetha, Shiraz (OIC); in...@list.soa.org Subject: Re: INARM Message - Negative Interest Rates
There are real concerns (pun intended!) when short term rates hit the zero bound. Fortunately, current Fed chair Bernanke is a scholar who had thought about those problems long before the current financial crisis. If you want to understand the various issues involved and possible solutions (many of which were actually put into practice during the current crisis), they are summarized very well in the speech that gave him the (somewhat unfair) nickname of "helicopter Ben."
but the heart of it addresses the original question, which Bernanke states as follows: Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5 <http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/defaul...> Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity.
