# Negative Interest



## OneSeat (Apr 15, 2020)

Info:

The Bank of England has told lenders they must be ready to introduce negative rates within six months if the UK economy takes a further turn for the worse, in a potential blow to millions of hard-pressed families.

The controversial policy would heap more pain on savers who have endured rock bottom rates since the financial crisis, while financial experts have warned it could herald the end of free banking.


----------



## james4beach (Nov 15, 2012)

Yes. I posted about this a few months ago as well, since the UK was laying the groundwork and making people comfortable with the idea of negative interest rates.

So what if the same policy comes to Canada? Is it possible that these 1.20% 5 year GICs you see today might in fact the deal of a lifetime? And same goes for XBB which currently has a 1.30% average yield to maturity. That's really not bad at all, in fact XBB yields more than most high grade GICs out there.

People are always posting on this board with their forecast about interest rates. They say they savings accounts are better than bonds and GICs, only a fool would buy GICs or bonds at these levels around 1%.

If we get negative rates in Canada, the fools will be those who've been sitting in cash instead of buying bonds and GICs *back when they had positive yields.*


----------



## m3s (Apr 3, 2010)

james4beach said:


> Is it possible that these 1.20% 5 year GICs you see today might in fact the deal of a lifetime? And same goes for XBB which currently has a 1.30% average yield to maturity. That's really not bad at all, in fact XBB yields more than most high grade GICs out there.
> 
> If we get negative rates in Canada, the fools will be those who've been sitting in cash instead of buying bonds and GICs *back when they had positive yields.*


It's easy to get 5-15% yield in DeFi right now. A lot of the US exchanges are now offering 3-10% yields.

Kraken registered as a US bank now and there are rumors of a Kraken bank account. With Visa/PayPal/square launching crypto merchant payments this year

I agree only fools would be sitting in cash


----------



## nathan79 (Feb 21, 2011)

The next step will be phasing out cash and creating a central bank digital currency (CBDC). This will allow the central bank to have more control over inflation. If inflation is running below target, they can program a negative interest rate directly into the currency. For example, if the CPI is running at +1%, and the BOC inflation target is +2%, they can program a 1% negative interest rate into the currency. People will see the value of their money decreasing and they will be more likely to spend it, increasing inflation. The rate can be adjusted regularly in response to the CPI.


----------



## james4beach (Nov 15, 2012)

nathan79 said:


> The next step will be phasing out cash and creating a central bank digital currency (CBDC). This will allow the central bank to have more control over inflation. If inflation is running below target, they can program a negative interest rate directly into the currency. For example, if the CPI is running at +1%, and the BOC inflation target is +2%, they can program a 1% negative interest rate into the currency. People will see the value of their money decreasing and they will be more likely to spend it, increasing inflation. The rate can be adjusted regularly in response to the CPI.


The whole cash system is already electronic. The central banks manage the cash supply through overnight bank transfers and balances, which are all electronic payments.

We live in a world where cash is an electronic system, for the most part.


----------



## Ponderling (Mar 1, 2013)

Come on now, like flea markets and strip clubs will soon be run by every 'vendor' with a square reader on their phone, or doing interac e transfer with a security question?


----------



## OneSeat (Apr 15, 2020)

james4beach said:


> So what if the same policy comes to Canada? Is it possible that these 1.20% 5 year GICs you see today might in fact be the deal of a lifetime? And same goes for XBB which currently has a 1.30% average yield to maturity. That's really not bad at all, in fact XBB yields more than most high grade GICs out there.


Well we have knowledgeable people on this forum - and as I've mentioned before my doc says I have 10+ years life expectancy so what do you suggest between now and Feb 4th 2031 - 100% equities ????
OK - maybe not - so how do you rank
-1- GIC ladder vs
-2- short term bonds like XSB (might they disappear?)
-3- longer term (universal, aggregate) bonds like XBB and (US) AGG?
Anything else?

My thoughts are - keep my equities currently about 28% after adding some HiDiv stocks

split the rest approx 1/3 each between the above three FI ideas.
I guess that makes them about 25% each.


----------



## OneSeat (Apr 15, 2020)

Anything we can learn from history?








The History of Interest Rates Over 670 Years


Interest rates sit near generational lows — is this the new normal, or has it been the trend all along? We show a history of interest rates in this graphic.




www.visualcapitalist.com


----------



## james4beach (Nov 15, 2012)

OneSeat said:


> -1- GIC ladder vs
> -2- short term bonds like XSB (might they disappear?)
> -3- longer term (universal, aggregate) bonds like XBB and (US) AGG?


If you're retired and tapping into this money, I think option 3 should be a minimal holding. Those kinds of bonds need longer time horizons and can be quite volatile within a 10 year time horizon.

About 30% in stocks also seems right to me. I think it's good to split your fixed income around between GIC ladder and short term bonds / XSB as you say. So maybe something like

30% stocks
30% in GIC ladder (usually the best yields)
20% XSB (you can also tap into this if needed)
20% XBB for CAD and AGG if you have USD (should be left alone)

My investments are very similar to this, except I also have some gold.


----------



## Ukrainiandude (Aug 25, 2020)

m3s said:


> It's easy to get 5-15% yield in DeFi right now. A lot of the US exchanges are now offering 3-10% yields.
> 
> Kraken registered as a US bank now and there are rumors of a Kraken bank account. With Visa/PayPal/square launching crypto merchant payments this year
> 
> I agree only fools would be sitting in cash


 That’s crypto , I wander how it can generate any interest, do they give loans with 5-15%


----------



## Ukrainiandude (Aug 25, 2020)

james4beach said:


> usually the best yields


 Better compared to current HISAs rates?


_
**Canadian Tire Financial Services (CTFS) - "High Interest Savings" -- Rate: 1.80%*
-- (Service Fees) // Online Banking)

**Bridgewater Bank (wholly owned subsidiary of the Alberta Motor Association) - "Bridgewater Savings" -- Rate: 1.55%*
-- ( Service Fees) // (There is No Online Banking)

**Motive Financial (division of Canadian Western Bank) - "Motive Savvy Savings" -- Rate: 1.55%* (on all balances)
-- (Service Fees) // (Online Banking) // (RFD Thread)

**Neo Financial - "Neo Savings Account" -- Rate: 1.55%* (on all balances)
-- Online Bank through APP on Phone only

**EQ Bank (a division of Equitable Bank) - "Savings Plus Account" -- Rate: 1.50%*
-- (Service Fees) // (Online Banking) // (RFD Thread)

**Wealth One Bank of Canada - "WealthONE High Interest Savings" -- Rate: 1.50%*
-- (Service Fees) // (Online Banking) // (RFD Thread)_


----------



## james4beach (Nov 15, 2012)

Ukrainiandude said:


> Better compared to current HISAs rates?


The thread title is 'negative interest'. What happens if the BoC brings rates below zero? The GICs and bonds will have much better returns because they lock in higher rates for many years.

There are other scenarios as well, but negative rates should not be ruled out.


----------



## m3s (Apr 3, 2010)

Ukrainiandude said:


> That’s crypto , I wander how it can generate any interest, do they give loans with 5-15%


Staking (rewards for validating transactions) providing liquidity (transaction fees for trading) lending (interest for collateral backed loans)

With DeFi you suddenly have lower financial fees and real rewards for savers. Rather than the banks profiting from your savings


----------



## fplan (Feb 20, 2014)

james4beach said:


> If we get negative rates in Canada, the fools will be those who've been sitting in cash instead of buying bonds and GICs *back when they had positive yields.*


Already many people are/were fooled by the mainstream media narrative that RE will crash for the last many years. people who waited lost big time.

Western economies are on life support (LOW Rates) since 2008, so rates will NEVER raise. Period. 

I pity those millennials, whose parents are poor, no matter how hard they study/work, those kids will never be able to have a decent life. Expensive RE, less stable jobs, etc.


----------



## Flugzeug (Aug 15, 2018)

james4beach said:


> If you're retired and tapping into this money, I think option 3 should be a minimal holding. Those kinds of bonds need longer time horizons and can be quite volatile within a 10 year time horizon.
> 
> About 30% in stocks also seems right to me. I think it's good to split your fixed income around between GIC ladder and short term bonds / XSB as you say. So maybe something like
> 
> ...


This is how I approach my fixed income portion as well. Split between GIC ladder, and bond ETFs. I am not retired but I’m happy with this approach.


----------



## Flugzeug (Aug 15, 2018)

fplan said:


> Already many people are/were fooled by the mainstream media narrative that RE will crash for the last many years. people who waited lost big time.
> 
> Western economies are on life support (LOW Rates) since 2008, so rates will NEVER raise. Period.
> 
> I pity those millennials, whose parents are poor, no matter how hard they study/work, those kids will never be able to have a decent life. Expensive RE, less stable jobs, etc.


M

I agree we are in for a long period of low rates. There are many people who would not be able to afford their mortgages if rates increase much. This happened decades ago, midnight moves or jungle mail as they called it. People just walked away from their homes they could no longer afford and were worth considerably less than they owed.

What is next? 75 year mortgages like parts of Europe? Your kids inherit your mortgage.


----------



## MrMatt (Dec 21, 2011)

fplan said:


> Already many people are/were fooled by the mainstream media narrative that RE will crash for the last many years. people who waited lost big time.
> 
> Western economies are on life support (LOW Rates) since 2008, so rates will NEVER raise. Period.
> 
> I pity those millennials, whose parents are poor, no matter how hard they study/work, those kids will never be able to have a decent life. Expensive RE, less stable jobs, etc.


Okay, we have the highest standard of living and quality of live ever in human history.
"those kids will never be able to have a decent life. "

As technology, automation and women entered the workforce over the last century, quality of life has skyrocketed at an unbelievable rate.
It might slow down, but it isn't going down.

The only thing I agree with you is that RE prices are going up, but that is a supply issue.
1. People across the country are fighting development.

They aren't making more land.
If there are 100units of properly and 100 people there's enough, once you get 101 people, there is a bidding war and the price will go until person 101 can't afford to buy in.
there is literally no other solution when you have a limited resource.


----------



## james4beach (Nov 15, 2012)

A friend of mine just bought a house (the most popular pastime in Canada) and said that HSBC has mortgages for 0.99%

The next most popular pastime in Canada is endless home renovations. We're like the US in 2006. Our whole economy is driven by low interest rates!


----------



## Ukrainiandude (Aug 25, 2020)

MrMatt said:


> They aren't making more land.


Canada almost 10 million square km size even 1/10 that’s 1000,000
with population of 37 m
vs Germany 
350,000 km size
and 83 m people 
negative interest rates, no bidding wars, no RE bubbles, 
enough land for new development 
something isn’t right someone artificially created RE deficit to inflate prices in Canada


----------



## MrMatt (Dec 21, 2011)

Ukrainiandude said:


> Canada almost 10 million square km size even 1/10 that’s 1000,000
> with population of 37 m
> vs Germany
> 350,000 km size
> ...


People don't want to live in that land, they want to live in Toronto or Vancouver, which are full/exploding.

Around Toronto, people are commuting 1-2 hours.
I think the remote work will help.


----------



## Tostig (Nov 18, 2020)

MrMatt said:


> People don't want to live in that land, they want to live in Toronto or Vancouver, which are full/exploding.
> 
> Around Toronto, people are commuting 1-2 hours.
> I think the remote work will help.


Many years ago, my commute was1.5hrs. 45 minutes down the DVP and across the Gardiner and 45 minutes along the QEW to Burlington. I used to show people my commute on a map of Canada.

Then I took a job 4.5km from home. I drove, took the bus, walked and bicycled to work. Bicycling was the best, even in the snow storm.


----------



## Ukrainiandude (Aug 25, 2020)

Tostig said:


> Many years ago, my commute was1.5hrs.


Perhaps Canadian government should hire Chinese engineers to build high speed railway in those populated areas to cut off transit time.


----------



## james4beach (Nov 15, 2012)

Tostig said:


> Many years ago, my commute was1.5hrs. 45 minutes down the DVP and across the Gardiner and 45 minutes along the QEW to Burlington. I used to show people my commute on a map of Canada.
> 
> Then I took a job 4.5km from home. I drove, took the bus, walked and bicycled to work. Bicycling was the best, even in the snow storm.


I had an apartment in downtown Toronto, 2 km from my office. Just a 25 minute walk in any kind of weather. So my "commute" became 50 to 60 minutes of walking a day. It doubled as exercise and was usually pretty fun and interesting. Sometimes I'd grab a bite on my walk back home. Sometimes I'd stop at the park for a while and take in the scenery.

I don't understand the Canadian obsession with large suburban homes. IMO this is really an American concept and traps you into an expensive lifestyle where your life revolves around a car. It's not true that you need a huge house to raise kids. People in Europe live in city centres, have kids, raise families, and live excellent lifestyles.

One thing I discovered living in Toronto is that once all the suburban commuters leave, the city actually is pretty nice and quiet. _It's not as crowded_ as people think downtown is. Countless people are commuting back and forth from their suburban homes in a 90 km radius around Toronto.

Big houses are also awfully expensive. I see many friends of mine falling into this trap. People get into these "hobbies" of endless renovations and upgrades. How many tens of thousands of $ do people blow away on these unnecessary luxuries? On top of that, you're heating a giant home, insuring it, using massive amounts of water, plus thousands of dollars every couple years on endless maintenance. Not to mention the massive mortgage on a massive home.

Some of my friends criticize me for living "downtown" and think I live like a poor person. And the same people complain that they never seem to have enough money, don't have savings, can't invest for retirement.

I hear them talking about ~ $10,000 renovations and upgrades all the time. Sometimes I think they are bragging about it; it's fashionable in Canada.

Well yeah. If I had a 800k home with a huge loan on it, and which becomes a sinkhole of money / maintenance / renovations... I don't think I would have much money either!


----------



## sags (May 15, 2010)

Problem is that in Toronto a dinky condo can cost $800,000 and come with a hefty monthly condo fee plus taxes and assessments.

For the same money, someone can live 2 hours away in a two storey 3000 square foot home with a double garage, front porch and backyard.

All it takes is a 2 hour drive down the busiest 6-8 lane highway in Canada surrounded by semi-trucks....each way in all weather, or find another job.


----------



## nathan79 (Feb 21, 2011)

Everyone is different. I would assume they have their reasons... lifestyle, hobbies, space, etc. I guess for some people it can be an image thing, but hopefully those people are the exception.

I grew up in a house, but I've also owned a condo, rented a condo with a roommate, and rented a basement suite in a house. Out of those experiences, I'd much rather own a house, though I did enjoy being close to everything when I had my condo. I really like having a yard and a garage or shop to do my hobbies.

I don't need 3000 square feet or luxuries like granite countertops, though. I'm also not a fan of constantly renovating or spending massive amounts of money to keep up with the Jones's. The place I'm currently living in hasn't changed much since the 1980's... lol. Anyway, you can do a lot with coat of paint and other decorative touches that won't break the bank.

Contary to what your friends think, I assume anyone who can afford to rent a condo downtown must have more money than I do.


----------



## sags (May 15, 2010)

What we actually need......but I don't know how we get there, is to get businesses to stop all locating in the same cities.

Spread out across Canada for goodness sakes. We got land............land and more land.

Build the work places and people will come to work there.

I used to drive through the tiny village of Alliston, Ontario on the way to cottage country almost every weekend.

Honda built a huge auto manufacturing plant there and the village exploded in size. Affordable homes sprang up, businesses came.......it is thriving today.


----------



## AltaRed (Jun 8, 2009)

North Americans are indeed obsessed with 'bigness' in homes and land and visible trappings of perceived success. It is totally unnecessary.for individuals and families alike. It would be so much more efficient to have more row housing which provide enough space to raise a family and to have a bit of a private back yard for relaxation, gardening, etc. Much of what I perceive the UK to have (or did). 

That said, I don't believe apartments and high rise condos are the place to raise kids where they have no open space to play and get exercise. Fortunately, more and more medium density row housing and narrow lot SFH is being built both in the suburbs and as infill. It is something we encourage locally in our land planning policy.


----------



## sags (May 15, 2010)

Negative interest rates are returning the banks to the way they were in the wild west days, when people stored their money at the bank to keep it from bandits.

Who knows......maybe people will have to pay the bank to store money for them. A lot of people already pay businesses to store their old junk in storage lockers.


----------



## m3s (Apr 3, 2010)

This is really making DeFi a no brainer for anyone comfortable with some tech

Pay a bank fees while they benefit from the liquidity you provide.. or earn +5% on a deflationary asset


----------



## AltaRed (Jun 8, 2009)

That plus, in my opinion, the tooth fairy despite Why Those in Crypto are talking about DeFi


----------



## m3s (Apr 3, 2010)

Well besides that article being from mid 2019.. when most DeFi became a reality in 2020

When he said Bitcoin is the original DeFi application... and that Dai is a "newer app"... I guess anyone can be a FinTech journalist nowadays

Seems written to a narrative an older audience want to hear. Not that surprising for legacy magazine sold out to China I suppose


----------



## AltaRed (Jun 8, 2009)

DeFi may have some application outside developed countries for some 2? blllion folks without access to traditional banking or fintech, but I can't imagine how it is going to replace fintech in established economies. Here is a better article on the subject, one that even a crusty old senior like me can understand.


----------



## m3s (Apr 3, 2010)

Yes there are some big announcements coming for DeFi in Africa very soon

In the same way Africa skipped the wired tech straight to wireless - they are a perfect candidate to skip legacy banks for DeFi

That doesn't mean we don't like wireless tech ourselves. We just don't like change


----------



## MrMatt (Dec 21, 2011)

AltaRed said:


> DeFi may have some application outside developed countries for some 2? blllion folks without access to traditional banking or fintech, but I can't imagine how it is going to replace fintech in established economies. Here is a better article on the subject, one that even a crusty old senior like me can understand.


I don't think it will because the governments will block it, or restrict it heavily.

DeFi and conventional first world finance is better than poorly developed financial systems.

Now countries without fully developed financial systems, will move to one of these two options.
Here, we have a massively powerful financial system, that the government is tightly intertwined with. I don't imagine they're going to let go of that power, even if DeFi is "better".

Myself I'd like a hybrid collaberative system, but the establishment doesn't like it.


----------



## james4beach (Nov 15, 2012)

Negative interest rates makes a stronger case for keeping cash in your home, in a good quality safe.

Might as well keep some gold coins there as well. The argument that gold is a bad store of money since it doesn't pay interest ... well that argument is history.

In a negative interest rate world, *gold yields more* than cash.


----------



## wayward__son (Nov 20, 2017)

james4beach said:


> Negative interest rates makes a stronger case for keeping cash in your home, in a good quality safe.
> 
> Might as well keep some gold coins there as well. The argument that gold is a bad store of money since it doesn't pay interest ... well that argument is history.
> 
> In a negative interest rate world, *gold yields more* than cash.


yup, large institutions have been too smart for gold for many years but may start coming around to it with rates pinned near zero or negative given gold's inverse correlation to real yields and the reduction of opportunity cost in holding it as a hedge for risk assets.

in a negative interest rate world, taking cash out of the bank into paper notes is exactly what i would do, which is why this central bank digital currency stuff really gets my tin foil hat going:



nathan79 said:


> The next step will be phasing out cash and creating a central bank digital currency (CBDC). This will allow the central bank to have more control over inflation. If inflation is running below target, they can program a negative interest rate directly into the currency. For example, if the CPI is running at +1%, and the BOC inflation target is +2%, they can program a 1% negative interest rate into the currency. People will see the value of their money decreasing and they will be more likely to spend it, increasing inflation. The rate can be adjusted regularly in response to the CPI.


Look at this job ad on the Bank of Canada website. "The Bank of Canada is embarking on a program of major social significance to design a contingent system for a central bank digital currency (CBDC), which can be thought of as a banknote, but in digital form." It goes on to talk about CBDCs being operable without the need for intermediation through the banking system (presumably through some type of centrally monitored digital wallet assigned to individuals). What does saving look like when the central bank can impose austerity on savers by programming negative yields, use-it-or-lose-it conditions and similar things right into the currency (which in all likelihood wont be withdrawable into paper notes). For investors, this doesnt seem great for the business of commercial banking vs fintech platforms (less of a role for monetary policy through the interest rate and credit channels, more of a role for direct fiscal). As a citizen, this type of govt oversight and control over how people transact and save seems more than a little dystopian.


----------



## Eclectic12 (Oct 20, 2010)

james4beach said:


> ... I don't understand the Canadian obsession with large suburban homes. IMO this is really an American concept and traps you into an expensive lifestyle where your life revolves around a car.


Is this any different than people buying high and selling low?

YMMV as moving downtown would have cost me triple. 
Buying nearer work - with a cheap townhouse (four flights of stairs with a postage stamp front/back lawn) was double with the condos being more. 

A quick scan of the realty listings says it's pretty much the same now.




james4beach said:


> ... It's not true that you need a huge house to raise kids. People in Europe live in city centres, have kids, raise families, and live excellent lifestyles ...


Sure ... but sharing a bedroom until pretty much leaving for university - a larger room with a larger closet cut down on the fights and discontent.




james4beach said:


> ... Big houses are also awfully expensive. I see many friends of mine falling into this trap. People get into these "hobbies" of endless renovations and upgrades. How many tens of thousands of $ do people blow away on these unnecessary luxuries?


And that's any different then people buying a vehicle on a seven year loan?

I'm not arguing people should overbuy ... but I suspect the same people, if they were to be in a downtown apartment are going to find other silly things to spend on. As an example, the guy in the downtown apartment felt a good idea of the first round that was on him was twenty four drinks for four people. Seeing that made his comment of needing a high paying job to keep up with his entertainment bill far more understandable - though IMO no less silly.




james4beach said:


> ... On top of that, you're heating a giant home, insuring it, using massive amounts of water, plus thousands of dollars every couple years on endless maintenance.


If it's really too big a house, I can understand the heating part but don't follow how the water can be massive - unless there is a leak.
Plus it wouldn't surprise me if the endless maintenance had a large component that was redoing areas that didn't need it.


Cheers


----------



## sags (May 15, 2010)

My sister and husband roam around a huge expensive home. The kids are long gone and have homes of their own.

Their reasoning for staying is they are making a pile of free money on the house ever year.

It was paid off 30 years ago and every year it goes up another $30K or more.

So far......they are content to wait until prices start falling to sell.


----------



## james4beach (Nov 15, 2012)

Eclectic12 said:


> And that's any different then people buying a vehicle on a seven year loan?
> 
> I'm not arguing people should overbuy ... but I suspect the same people, if they were to be in a downtown apartment are going to find other silly things to spend on


That's a very good point. It might come down to the habits of people and maybe they can spend too much money no matter what situation they live in.


----------



## peterk (May 16, 2010)

Most other consumer spending items, nearly all of them, are a bigger waste of money than having slightly too much house, IMO.

Perhaps you might use that space at some time in the distant future, and it is nice to just be able to roam around a bit, indoors, without being confined to tight quarters and rooms that "must" be used efficiently. It seems that the market continues to recognize this as a fact.


----------



## AltaRed (Jun 8, 2009)

Excess space (and FMV) is a luxury that costs extra money every month. One simply needs to be aware that none of this comes at low cost (taxes, insurance, heating, decorating, repair). Much better placed in capital markets with an ongoing 0-20 bp MER.


----------



## james4beach (Nov 15, 2012)

Rather than buying big ... I'd still argue that it's better to live in the amount of space you need.

One can always rent an apartment. Nobody holds a gun to your head and says you have to buy a condo. I would never buy a condo, myself. Just rent what you need.

If you then need more place, easy enough to change and rent a larger place, or buy a house in the suburbs at that point.


----------



## Benting (Dec 21, 2016)

The rate has been so low last 20(?) years that I have no GIC for quite some time. Just will not buy any if the rate is less than half of what I will get from a blue chip dividend stock. All my investments are in equities, even in my RIF and LIF. Each year I just sell some stock around last quarter of the year to cover the withdrawal. Last time I check, my RIF that set to withdraw min each year since 2013, has actually gained about 15%.

I am sure some people will turn to stock instead of GIC because of the rate ?


----------

