Discounting hyperbole on negative yields

As is well known, many German savers object to the European Central Bank’s monetary policies on the grounds that lower interest rates drive down the yields on their savings.Last year, Germany ran a current account surplus – a good proxy for total savings – of EUR215 billion, equal to 7.4 percent of its gross domestic product, an all-time record for the country, and 20% larger in size than the surplus mustered by China, the other great mercantilist regime that has opted out of deepening its own domestic bond market in favor of hitching a ride on a foreign currency.

Euro coins. Reuters

With yields below zero on German bunds of maturities up to seven years, German savers are no doubt feeling the kosh.
But it is less noticed that the country’s savers have long been a particular breed. In a recent study, Germans came led the world in preferring more money tomorrow than what they have today.
Almost 90% of those polled said they would prefer to have $3800 in a month’s time rather than $3400 today, according to a recent interesting and methodologically sophisticated research paper
Neighboring linguistic brethren in Austria and Switzerland boasted similar high scores. Curiously, more than half of the Italians, Spaniards and Greeks indicated they’d prefer to have the $3400 today rather than enjoy a return that would if annualized lead to tripling one’s money each year.
The discrepancy is curious, as is the tone of the paper, written by finance scholars based in Germany and Switzerland on the back of a survey conducted on 5,912 economics and business-school students in 45 countries.
The authors said that restricting the survey to business students made the data more internationally comparable and suggest the respondents’ chosen field of study reflects higher cognitive abilities. In a coy footnote, they relish pointing out that the average German or Swiss is more likely to notice and grab the 13% monthly interest on offer than the average student at Princeton University in the U.S. Ivy League.
Arguably, European Union data showing that Germany’s economy is, like Italy’s, among the worst at absorbing high-skilled graduates might raise caution about the sample.
The authors – writing before EU officials and the IMF organized the bailout of German banks exposed to Greece – also note that students of finance often take jobs that make them decision makers at key institutions. That makes some sense, but as such students may also be relatively affluent it jars with using average national GDP per capita measures as a proxy for wealth. After all, Germany’s economy, like Italy’s, is among the least effective in the EU in terms of absorbing high-skilled graduates.
The authors suggests that the desire to take money now rather than even more next month is particularly high in some countries because of a Latin orientation towards the circularity of time rather than a more linear vision in northern climes. They suggest that cultures with “more punctuality and higher working speed” tend to opt for the “patient” approach – meaning preferring the 280% annualized yield on offer for not taking the money immediately.
More realistically, they also hint that distrust of the counterparty’s future solvency, rather than impatience, may drive the “impatient” choice. For example, Georgians’ implied demand for one-year yields of 14,900% might have reflected concerns about the war with Russia that was looming when the survey was done.
What is not even mentioned is the possibility that some might take the money now because they have a plan to use it. Economics is the most popular major at Princeton, after all, and perhaps students there are keen to fund a start-up and see the money in hand as potential equity rather than the more credit-based notions that drive the kind of discount-rate logic the authors find superior. The same might be true in southern euro-zone countries, where obtaining a bank loan is usually impossible without pledging hefty patrimonial collateral.
One of the striking findings from a more subtle question in the survey is that people in all countries except for Australia use a much higher discount rate for one year than for 10 years, meaning that the annual dividend they demand to postpone taking possession of the money for a decade is lower than what they insist on for a shorter period.
The authors put forward an intriguing behavioural interpretation of that so-called hyperbolic discounting. When faced with uncertainty, “people try to avoid delayed positive consequences and prefer delayed negative consequences,” they say.
Bond traders would call that an inverted yield curve, which is generally seen as a harbinger of economic contraction. Perhaps the credit view of money, a kind of gold standard view distinct from an equity view less geared to money as a store of value, can be correlated to the notion of a perpetual recession.
If so, its advocates can hardly complain about low and even negative yields on their savings.


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