Tuesday, December 29, 2020

Interest Rates Are Negative & Free Money For Aussies

(Peter Martin’s article from the ABC NEWS Australia on 29 December 2020)

Interest rates are negative now in Australia: On December 10, it finally happened. Instead of demanding an interest payment from the Government in return for lending it money, a group of investors offered to pay the Government in order to lend it money.

Naturally enough, the offer was accepted. The Australian Government needed $1.5 billion, which it promised to repay on March 26. It sought tenders. What was the lowest return an investor would accept to lend it the money?

It wasn't short of offers. It fended off $8.2 billion of bids, and some of them were prepared to accept very low returns indeed. The lowest was -0.01 per cent. The minus sign indicates that, instead of the Government paying the lender a return for lending to it, the lender would pay the Government a return for the privilege of lending to it — a perfectly legal backhander if you like.

The lowest offer for the $1.5 billion loan was at a negative interest rate.(Australian Office Of Financial Management (AOFM)) The Government got a fair chunk of the $1.5 billion for less than nothing.

Some of the bidders demanded more, but nothing too far into positive territory. It happened because the sale of bonds benefits both parties: the Government gets to borrow money it needs and the investor gets a safe place to park their money.

In those circumstances, where benefits flow in both directions, there's no reason to suppose that the final payment will flow in only one direction. And sometimes the direction chosen is arbitrary. Economist Joshua Gans made the point on Twitter talking about the coronavirus vaccine.

He said: "Half of the economists out there think people should be paid to be vaccinated, the other half think they should pay to be vaccinated earlier. Can we at least work out whether the price is positive or negative?"