Everyday Erinyes #179

Experts in autocracies have pointed out that it is, unfortunately, easy to slip into normalizing the tyrant, hence it is important to hang on to outrage. These incidents which seem to call for the efforts of the Greek Furies (Erinyes) to come and deal with them will, I hope, help with that. As a reminder, though no one really knows how many there were supposed to be, the three names we have are Alecto, Megaera, and Tisiphone. These roughly translate as “unceasing,” “grudging,” and “vengeful destruction.”

I am not an expert on the global economy. But, fortunately, I know people who are. So when I received this email from one of them, I sat up and took notice. I did not myself live through the Great Depression, and it’s not a time in history I have studied extensively, but I am aware that it was not confined to the United States, but, rather, was worldwide. I also realize that the conditions it created were largely responsible for World War II. That involves far more complexity than I want to go into, but I will just mention that hate and fear also played a role (and were certainly not alleviated by the Depression), and I don’t need to tell anyone here that we have those, both here and around the world, right now.

So here’s the basic fact that is so startling that we all need to look at it and learn about what it means:

A Danish bank is offering mortgages with negative interest rates

Excuse me? Negative interest rates? What does that even mean?

As reported by the Guardian and others, Jyske Bank – Denmark’s third-largest bank – said this week that customers would now be able to take out a 10-year fixed-rate mortgage with an interest rate of -0.5%, meaning customers can actually pay back less than the amount they borrowed.

To put the -0.5% rate in simple terms: If you bought a house for $1 million and paid off your mortgage in full in 10 years, you would pay the bank back only $995,000. 

More specifically,

That doesn’t exactly sound like a stellar business plan, does it? However …

If the alternative is that the bank doesn’t gain market share, or their lending book dwindles, possibly through a generalised lack of consumer confidence, then it might be that the bank is better off locking in a small loss now, rather than a bigger loss later. Plus there’ll probably be some fees associated with the lending, so they can cover themselves to a degree.

Financial markets are in a volatile, uncertain spot right now. Factors include the US-China trade war, Brexit, problems in Hong Kong, and a whole heap more including a generalised economic slowdown across the world – and particularly in Europe. Some – not all – investors fear a substantial crash in the near future.

So some banks are willing to lend money at negative rates, accepting a small loss rather than risking a bigger loss by failing to lend money at higher rates later on that customers cannot meet. Essentially, lock in your customers now and help them ride out any coming storm. 

“Any coming storm.” What kind of storm would that be, that would induce a hard-headed financial institution to accept a cut amounting to a loss of income stream, and commit to it for ten years?

 According to [Mikkel] Høegh, institutions in Denmark are worried that the dollar’s strength won’t last. In a slide, the bond’s value falls in local currency and could end up posting a greater loss than the 0.5% that backing a mortgage costs. (emphasis mine) 

Gee – what could have cause bankers concern about the future strength of the US dollar? Hmmm. I have no doubt anyone here could supply an answer to that.

But mortgage interest rates affect people who are getting new fixed rate mortgages, or people who have adjustable rate mortgages. That doesn’t describe me. What effect would it have on me personally, if this trend comes to where I live?

It would become harder – or, at least, expensive – to save money. Banks would be charging negative rates on deposits, meaning that consumers would be paying the bank for opportunity to squirrel away money.

Bank customers could turn to more risky methods of stashing money, [Danielle] Hale said, such as holding on to actual cash or putting it into riskier investments. This could also have ripple effects across people’s financial lives. 

Stashing money in mattresses? Where have I heard that before?

I don’t want to panic, and I don’t want anyone here to panic, just to take this seriously. Negative interest rates are not coming to the United States tomorrow, or even next week. This development in Denmark did not come out of thin air. It took seven years from the time that Denmark’s central bank lowered its interest rates to zero to get to this point, although certificate of deposits began carrying negative yields soon after. Current rates for fixed thirty-year mortgages in the United States are running around 3.6%. We’re not there yet.

However, we don’t need to go all the way to negative interest rates to see ill effects for ordinary people, people who cannot afford to lose much if anything.

As for people living on their savings? Good luck. You’re going to need it. 

Alecto, Megaera, and Tisiphone, I honestly don’t know enough to tell you what to do about this, or even if there is anything you can do. I am pretty confident that, if there is to be any kind of turnaround, it will not come from any government or governments run by Republicans. So maybe the best thing you can do is to get out the vote, world wide, to get progressives elected to as many offices as possible in as many nations as possible. Vote blue, no matter who!

The Furies and I will be back.