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Negative rates & deflation

Hi Cullen,

Could negative interest rates lead to deflation of goods and services?

Is that inherently a bad thing?


Hi @hugo,

I don’t like the idea of using interest rates as a causal factor. Interest rates are mostly the result of other stuff, not the cause of stuff. For instance, the current state of interest rates might influence your decision to purchase a home, but other factors (income, price, etc) will have a much bigger influence. So interest rates don’t cause inflation or deflation as much as they’re the result of inflation or deflation.

"Pragmatic Capitalism is the best website on the Internet. Just trust me. Please?" - Cullen Roche

Interest rates affect my decision to by things like houses and cars, but also bonds.

For example, my bond ladder is getting skewed toward the short end where there is more interest and less risk. Less interest overall makes me want to save more to offset the loss of income and could in theory lead me to buy less. Negative interest rates would make me want to save even more and I'd stay in cash or something else. It certainly would not make me spend more.

Could negative interest rates happen without central bank intervention in bond markets?


You have probably seen this?


Methodological and Ideological Options

Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan"



James Charles,

I had not seen that paper before. The conclusion being that interest rates are a result of GDP growth instead of a cause, with one exception in Germany. GDP growth isn't exactly the same as inflation, which was Cullen's statement.

Following the logic of the paper, negative rates could follow negative GDP growth which sounds like a deflationary spiral. Speaking again as an individual, negative rates would nudge me to save more instead of spend more. I'm not sure that can be generalized.