Interest Rates... Why So Negative? : Planet Money All over the world, interest rates are very, very low. In some places, they're negative: you lend out money, and get less back. | Subscribe to our weekly newsletter here.

Interest Rates... Why So Negative?

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Can you just introduce yourself and say what you do?

JOSH BARRICKMAN: Sure. Josh Barrickman. I head the bond indexing group for the Americas for Vanguard, and we manage roughly $900 billion at the moment.

ROMER: Jacob, I called Josh because a few - a very few - of those $900 billion that Josh Barrickman manages are our dollars.


True. We both have dollars invested in those Vanguard bond funds that Josh manages.

ROMER: Quick refresher on what a bond is. Companies and governments want to borrow money, so they sell bonds.

GOLDSTEIN: And we buy those bonds. We lend money to the companies and governments, and then they promise to pay us back over time with interest.

ROMER: And then we retire, hopefully. So Vanguard funds own literally thousands of bonds. There's a bond from the government of Indonesia. We're getting 7.7% interest on that one.

GOLDSTEIN: A U.K. government bond - getting 1%. Apple, the company - there's an Apple bond. We're getting 0.1% on that one.

ROMER: Now look at 10-year German bonds.

GOLDSTEIN: The 10-year German bonds are paying negative 0.5%, which means we are giving the German government money now, and they are promising - they are promising that they're going to pay us back less money later - something like we give them a thousand euros now, and in 10 years or whatever, they give us back, say, 950.

ROMER: I asked Josh about this.

I noticed that we hold German Treasurys. And I feel like we're giving them money, and they're giving us back less money. What are we doing on that front?

BARRICKMAN: Well, that's a very popular topic these days.

GOLDSTEIN: Yeah, it's popular because negative interest rates are showing up on all kinds of bonds, not just in Germany. There are negative interest rates right now on government bonds from Japan, France, Sweden, Denmark, Switzerland. There are even negative interest rates on bonds from a few giant corporations like Siemens and Nestle.

ROMER: What's your best estimate of how much negative-yielding bonds are out there?

BARRICKMAN: So I think the most recent figure is 16 1/2 trillion.


ROMER: Sixteen and a half trillion dollars of bonds that pay you back less than you put in.


ROMER: Hello, and welcome to PLANET MONEY. I'm Keith Romer.

GOLDSTEIN: And I'm Jacob Goldstein. All over the world, interest rates are super low. Companies and governments are cashing in on it. The president of the United States is tweeting about it.

ROMER: Today on the show, why is this happening? What does it mean that interest rates have gotten so low that we don't even get all our money back when we lend it out? It's a question that goes to the heart not just of our retirement funds but, really, to the economy of the entire world - all of it.

ALAN BLINDER: OK, I think I'm with you now.

ROMER: OK, great. What I want to do is I want to sort of imagine us in the state of nature, whatever that means, for borrowing and lending. Do you want to be the lender or the borrower?

BLINDER: I'll be the lender.

ROMER: OK, that's perfect. Oh, and can you - can I get you just to introduce yourself?

BLINDER: OK. This is Alan Blinder, a professor of economics and public affairs at Princeton University.

ROMER: OK. So, Alan Blinder, professor at Princeton, you are sitting in, let's say, a meadow on a rock with your box of gold coins. And I need to borrow coins from you to open a blacksmith shop. What's that going to cost me?

BLINDER: Well, that would depend on the going interest rate of the state of nature. Let's suppose it was 3%. Then, if you needed a hundred, you have to pledge to pay me back 103 at the end of a year.

ROMER: Now I come back the following year, same meadow, same box of coins, except that now instead of just you, there are seven professors on seven different rocks, all with their boxes of coins. What's your play?

BLINDER: Well, now there's more competition in the market, so it's possible that you could get a better deal.

ROMER: I mean, Larry Summers just offered me 102 instead of 103.

BLINDER: Yeah, well, I'd have two choices, right? I could match the 102 or try to best it, or I could say, go ahead and borrow it from Summers.

ROMER: OK, OK, OK. So now a van rolls up - anachronistic but, you know, a van rolls up. There's more blacksmiths. Ten more blacksmiths get out.

BLINDER: Right now, the market dynamics have shifted in favor of the lenders. You got a lot of people wanting to borrow money. So, if anything, you would expect the cost of borrowing - that is to say the interest rate - to go up. You may have to pledge to pay back 104, 105 or something like that. It's the basic lesson of supply and demand. If there's a surge in demand, that tends to push the price up. If there's a surge in supply, that tends to push the price down. And in this case, the relevant price is the interest rate.

GOLDSTEIN: Alan Blinder is very good at this. He really went down that road with you.

ROMER: He's a pro.

GOLDSTEIN: So this idea that you and Blinder were talking about - the idea that interest rates are a price that is determined by supply and demand - this idea is central to the way economists think about the world. You know, like, at any given moment, the economists say, there is some magical interest rate that balances how much lenders want to lend and how much borrowers want to borrow and that keeps the economy just rolling along smoothly. Economists call this magical rate the neutral interest rate. Also, confusingly, sometimes they call it the natural interest rate.

ROMER: First of all, do you have a preference between the two, neutral or natural?

OLIVIER BLANCHARD: No, I have no preference. I can live with it.

ROMER: That's Olivier Blanchard. He's at MIT and the Peterson Institute now, used to be the chief economist at the International Monetary Fund. Blanchard says the natural rate of interest in the real world, the rate set by how much people want to lend and how much people want to borrow - that rate has been falling for decades, and it is now very, very low. The technical definition, by the way - the natural rate is the rate at which inflation is steady and the economy is at full employment.

GOLDSTEIN: So, OK, the natural rate is low. Obvious question - why?

ROMER: OK. So Blanchard says there are a bunch of reasons for this, both on the supply side and the demand side of the equation. On the supply side, over the last few decades, there's just been a lot more saving in the world. In our meadow, that would mean a lot more professors with a lot more gold coins to lend.

BLANCHARD: The first explanation is what has been called the savings glut by Ben Bernanke in particular and others. And the notion is that, basically, people are saving more, countries are saving more.

GOLDSTEIN: This part reminds me of this conversation I had a few months ago - it was actually on the show earlier this year - a conversation with a guy who runs this sort of a tech real estate company. And he told me a while back, he got this call from somebody who said, I want to invest in your company. And the CEO was like, oh, we're OK. We don't really need to go through that right now. No, thank you. And then the investor was like, no, I have a problem. I have all this money from a rich oil state in the Persian Gulf, and my job is to invest this money, and I got to give it to you. I need you to take this money.

Like, that is the savings glut. You know, you have these whole nations with just piles of money in China and Singapore and Norway, and then you have these giant institutions, pension funds and big endowments. And they all have all this money that needs somewhere to go.

ROMER: And it's not just the countries and the pension funds. Blanchard says the savings glut is also about just people - regular folks.

BLANCHARD: So on saving, I think the main issue is demographics - right? - the fact that we are aging societies and aging societies tend to save more.

ROMER: All around the world, people are living longer than they used to. And if you're planning for 30 years of retirement instead of 10, you're just going to save more.

GOLDSTEIN: You're going to put more gold coins in the box, right? That is the supply side - more people with more money to lend out, all competing with each other like, please, take our money.

ROMER: Blanchard says it's important to think about the demand side as well, the demand for money - people, and especially companies, looking to borrow. There are a bunch of reasons people, and especially businesses, want to borrow less than they used to.

GOLDSTEIN: Yeah. Blanchard basically said, like, there are three big ones, right? Like, one is the stuff that companies buy to make more stuff - you know, big machines and robots - that stuff has gotten cheaper, so companies don't need to borrow as much money to buy the stuff they need.

ROMER: No. 2 - think about the kinds of companies that are dominating the economy today, the big tech companies - Facebook, Google, things like that. They are not in the business of making stuff at all.

GOLDSTEIN: Right. So they don't need to go out and borrow to buy tons of machinery the way old industrial companies did.

ROMER: And the third issue, and this is the big one - the fundamental issue with demand is what companies see when they look out at the world. Economic growth is really, really low. Like, go back to my blacksmith. If Blinder was going to lend me money at 3%, I'm not sure I can make enough money smithing to pay him back, so I don't borrow the money.

GOLDSTEIN: So there are all these reasons that there is both more supply of money to lend out - all these people have all this savings that they want to lend - but, at the same time, less demand to borrow that money. And that combination is what is driving interest rates down.

ROMER: And this isn't just a problem, like, for 2019. Blanchard says this might just be how things are now.

BLANCHARD: Demographics are not going to change overnight. Investment is not going to suddenly explode overnight. So the best guess is that these interest rates are going to be very low for a long time.

ROMER: Are we talking 10 years, 20 years, 50 years, 100 years?

BLANCHARD: We're talking about all this. The rates that people are willing to borrow or lend at at five years, 10 years, 30 years, 50 years are very close to zero. So it's clear that investors, on average, believe that that's going to be happening for a long time.

GOLDSTEIN: So this is the interest rate world that we're living in, that, I guess, maybe we're going to live in for the rest of our lives. There are these two words that we have...

ROMER: Central bank.

GOLDSTEIN: After the break, what about central banks?

So, OK, central banks - these big institutions. They're supposed to be independent from lawmakers, politicians, presidents. In Europe, it's the European Central Bank. In the U.S., it's the Federal Reserve. Central banks are what we talk about when we talk about interest rates.

ROMER: For example, the president of the United States on Twitter, and I quote, "the Federal Reserve should get our interest rates down to zero or less." And then later in the same thread, he writes, the USA should always be paying the lowest rates - no inflation. It is only the naivete of Jay Powell and the Federal Reserve that doesn't allow us to do what other countries are already doing, a once-in-a-lifetime opportunity that we are missing because of boneheads.

GOLDSTEIN: Now, if you are Jay Powell, the chairman of the Federal Reserve, and you read this tweet, you got a couple of possible responses. No. 1 - quit it. Hey. Oh, man.

ROMER: Another more nuanced response would be, look; there is only so much a central bank can do. Yes, we can lower interest rates a little bit to stimulate the economy if it's sluggish or raise interest rates a little bit to cool it down if it's overheating. But ultimately, we, the central bank, are beholden to that natural rate.

GOLDSTEIN: Right. Remember the natural rate from the meadow, the rate that gets determined by the supply and demand where the professors are lending the gold coins to the blacksmiths and the economy just runs along smoothly. So say in the meadow, the professors are lending gold coins to blacksmiths at 3% interest, and everything's great. People are borrowing. People are lending. The economy is just humming along. Three percent is the natural rate of interest in the meadow.

Now imagine, somehow, the Fed appears - whatever - magically in this meadow and says, actually, we think that 3% interest rate is too high. And we're not just going to tweak it; we're going to lower it a lot. Now the official interest rate is zero.

ROMER: Now, if you're a blacksmith, you're thinking at first, great, I'm going to borrow all of this money. I'm going to go crazy borrowing. I'm going to go crazy spending. But all that spending is going to drive up prices. And eventually, inflation's going to explode. That would obviously be very bad.

GOLDSTEIN: Now imagine, on the other hand, same meadow, professors lending gold coins at 3%. This time, the Fed walks in and says, now all the professors have to lend at 10% interest.

ROMER: So for me and the other blacksmiths, that's terrible, right? Now none of us can afford to borrow anymore. We're going to have to start closing up our smithies. The economy freezes up - no more cauldrons.

GOLDSTEIN: So central banks are really kind of tied to this natural rate. If they try and set interest rates way below the natural rate, there's, like, this frenzy of borrowing and spending, and that creates this massive inflation. On the other hand, if they set interest rates way above the natural rate, they choke off borrowing. People start getting laid off. There's a recession. And in the real world, in the U.S. right now, the natural rate is somewhere around 2%. And the Federal Reserve has set its key interest rate right around 2%.

ROMER: In Europe, the natural rate is even lower. It's below zero. So the European Central Bank has set its key interest rate at negative 0.5% So this is the world - the negative interest rate world - where people are lending out money and getting back less. And, yes, it is weird. Alan Blinder says until recently, people didn't even think this was possible.

BLINDER: If you hold dollar bills, cash in the mattress, you're getting zero. And so the thinking, which turned out to be wrong, is why would anybody ever take anything less than zero? Well, it turns out it's pretty inconvenient, not to mention dangerous, to keep thousands and thousands or, if you're a financial institution, billions of dollars in paper money.

ROMER: From a practical perspective, it's not a great idea to literally put $50,000 in your mattress.

GOLDSTEIN: Yes, or a billion dollars in your mattress, in the case of a big institution, right? But if you want a safer alternative and you want to hold actual cash, there is a cost, right? You know, you've got to pay for the vault, got to hire guards.

ROMER: Lasers that you have to crawl under when you're busting into the vault - not cheap.

GOLDSTEIN: And, you know, lending money to the German government - buying a German government bond - is basically as safe as putting money in a vault. So the new thinking is interest rates on those bonds can be a little bit negative.

BLINDER: So we now understand that you can go negative, but there's a limit. If the central banks tried to force very, very negative interest rates, then I think you would see people hoarding cash.

GOLDSTEIN: So he's saying, yeah, sure, the European Central Bank can set its interest rate at negative 0.5% - barely negative. But if it tried to lower its rate much more, then people would start hoarding cash in vaults.

ROMER: And here's the problem. The European Central Bank does need to lower rates more.

GOLDSTEIN: Yeah. The natural rate of interest in Europe is probably around negative 2%, and Germany is now on the cusp of a recession. And the way central banks fight recessions, the way they stimulate the economy is by lowering interest rates. But what Blinder is saying is if the ECB does lower its interest rates a bunch more, it won't work. People with money to lend will say, no, I'm not going to lend out my money and get paid back that much less. I am going to just put it in the vault.

ROMER: And Blanchard says this puts the European Central Bank in a really tough spot.

BLANCHARD: They have to say that they can do something while in their heart of hearts they know they can't do much.

ROMER: In our lifetime, the world has worked like this. There's a recession. People get laid off. And the central bank steps in, lowers rates and pulls the economy out of the recession.


ROMER: That world may not exist anymore, and that's scary.

GOLDSTEIN: So when the next recession comes - and in Germany, the next recession may be right now - Blanchard says we shouldn't look to central banks. We should look to the people we elected. That's the Parliament in Germany and Congress and the president in the United States.

ROMER: He says they could fight the recession by borrowing and spending huge amounts of money. It could be for whatever they want - infrastructure, tax cuts, fighting climate change. If the problem is that people and businesses won't borrow and spend enough, the government has to be the one to do it.


GOLDSTEIN: Is there some abstract economic idea that we should explain with a painfully extended metaphor?

ROMER: More blacksmiths. Email us at

GOLDSTEIN: Or you can find us on Facebook or Twitter or Instagram.

ROMER: Instagram.

GOLDSTEIN: Today's show was produced by Nick Fountain. It was edited by Jessica Weisberg (ph) and Bryant Urstadt. Our supervising producer is Alex Goldmark. PLANET MONEY has a newsletter. It's great. It comes once a week. You can sign up for it at Again,

ROMER: I'm Keith Romer.

GOLDSTEIN: I'm Jacob Goldstein. This is NPR. Thanks for listening.

After the break, central banks.

ROMER: Hey, hey, hey, hey, folks out there in drive time land. Central banks coming up after the break. Stay tuned. Back in two and 20.

GOLDSTEIN: Two and 20 is what hedge funds charge.

ROMER: That's right. A little insider joke.

GOLDSTEIN: Hedge fund radio.

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