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Ze, 'Ow you say, Deflation Watch. Eurozone edition
Comments
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Not really because the BTL LL expects to make a profit overall. In this scenario you will make a small capital loss even if the bond pays out.
This is more to do with it being increasingly hard to find assets to protect your capital. Contrary to popular belief, most people are most interested in capital preservation rather than wealth gains, especially the rich.
My assumption was that the potential capital gain would come via a currency gain from holding SFR, your other options being Swiss Govt bonds paying an even more negative interest rate or cash which obviously has physical costs of holding?I think....0 -
My assumption was that the potential capital gain would come via a currency gain from holding SFR, your other options being Swiss Govt bonds paying an even more negative interest rate or cash which obviously has physical costs of holding?
Oh, I see what you mean. Yes, quite possibly.0 -
what is deflation ?
buying something tomorrow as it would be cheaper?“Life isn't about finding yourself. Life is about creating yourself.”
― George Bernard Shaw0 -
A reduction in the general level of prices in an economy.
That is the fear.
TBH a general fall in the level of prices due to improvements in productivity or the terms of trade (like cheaper oil) is not a problem if wages are maintained.
The danger is that incomes (of individuals and firms) fall leaving them unable to service their debts which are generally fixed in nominal terms because interest rates can not become negative (I know!).
Given the risk of falling income and fixed nominal debt business will not borrow to invest nor consumers to spend leading to a sharp slow down in economic activity and a spiral of defaults and asset price write-downs as happened in the 30s.I think....0 -
Deflation = Fear
Inflation = Fear
Economics is a social science.
When people are frightened they do act irrationally.'In nature, there are neither rewards nor punishments - there are Consequences.'0 -
TBH a general fall in the level of prices due to improvements in productivity or the terms of trade (like cheaper oil) is not a problem if wages are maintained....
There is indeed a distinction made between good inflation and bad deflation. And of course, just because one specific price change has sufficient impact on price indices to push it into minus territory it does not mean that you have deflation.....Given the risk of falling income and fixed nominal debt business will not borrow to invest nor consumers to spend leading to a sharp slow down in economic activity and a spiral of defaults and asset price right-downs as happened in the 30s.
We had deflation in the first half of the 1930s. But oddly enough it didn't stop the UK economy from bouncing back from the depression. GDP growth was 6.2% in 1934 for example.0 -
We live in interesting times. An unexpected side effect of all this is that it seems that interest rates can fall below zero.
You now have to pay money to lend money to Nestle. Their bonds cost more to buy than you will get back in interest and principal payments!The danger is that incomes (of individuals and firms) fall leaving them unable to service their debts which are generally fixed in nominal terms because interest rates can not become negative (I know!).
'Government debt is low in Denmark, less than half of GDP, and there's no real issue in terms of financing given where rates are. But Denmark has high levels of privately-held debt, particularly in the housing market, which always raises concerns.
However, a positive side effect for borrowers of the negative interest rate is that for the first time, a Danish lender, Nordea Kredit, is reportedly paying mortgage holders to borrow money by charging a negative interest rate. But others are not following suit as it's unclear how to handle a negative interest rate.
Indeed, there are calls now in Europe to fashion IT systems and discuss how to manage negative interest rates. There's an estimated $4 trillion of sovereign debt, including even 10-year Swiss bonds, which have negative yields.'
http://www.bbc.co.uk/news/business-311091240
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