Patrick Barron: Negative Interest Rates Demystified

We've all heard about negative interest rates, but we may not really understand how and why they arises in recent years. Here to explain is our returning guest Dr. Patrick Barron, a longtime professor in the graduate school of banking at the University of Wisconsin. How and why would interest rates ever be negative, when everyone prefers current consumption to future consumption? Can the "natural" or market rate of interest ever be negative? What going on in Europe that would make negative-rate government and corporate bonds attractive to investors? Will the ECB be forced to raise rates back into positive territory if Janet Yellen continues to raise the Fed Funds Rate here in the US? And will Congress resist steady rate hikes that could radically spike its annual budget outlay for debt service?

Comments

1. The Gold Solution is a Lie https://www.youtube.com/watch?v=WVlqwJ00LMU
2. USA has already defaulted on bonds issued through Puerto Rico. That's the biggest news in a decade. Trump won't salvage or protect ur investment. Don't invest in the USA. Put ur money on Dubai sukuk. USA is already in huge debt and quantitive easing is not enough to save it. be careful with ur money.
3. Very interesting thoughts. But you should not make a video like this without mentioning Bitcoin which is a way of circumventing the negative interest rate by switching to another currency.
4. What about this money the are repatriating: where is it coming from? Euromarkets? If so, doesn't that put upward pressure on interest rates in Japanese in the EU?
5. Since 2009 the fed can arbitrarily set the overnight interest rate (or price of money) on reserves (prior to this they could not pay interest on reserves)... nirp should be understood to only apply too hard money in the reserve system... not to the wider soft money in the bank run monetary system.
   
   NIRP is designed to drive the rates down in the monetary system so that banks can issue loans at even lower rates... the banking system will not be expected to lend money at negative rates...
   
   Not that I agree with effective demand, but the difference between the reserve system hard money and the bank system soft money is an important distinction when discussing NIRP.
   
   (edit: although zero hedge discusses the scenario of the fed driving the IORR into NIRP, I figured this would only apply to excess reserves... interesting stuff...
   http://www.zerohedge.com/news/2016-02-06/mechanics-nirp-how-fed-will-bring-negative-rates-us)
6. As prices rise will we see the blame game as we did back in the 1970s?   Will they again blame rising prices on farmers, meat packers, unions, doctors, hospitals, Amazon, WalMart, oil companies and etc.  None of which have a "printing press".  If they do will American citizens fall for it once again?
7. So are Negative Interest rates possible to exist in a non fractional reserve banking system?
   
   If one's own savings could be required at any time, wouldn't the bank charge a fee for the storing of money, this fee in turn being considered a negative interest rate?