Tuesday, July 20, 2010

Negative numbers for Finance


Negative numbers for Finance

Negative numbers have been around for hundreds of years. It’s about time the world of finance got with this new development.

We are told that interest rates can’t go below zero in nominal terms. Why not? We’ve often had negative real interest rates, and that seems more significant. In periods of deflation, negative nominal interest rates might be positive in real terms anyway.

Consider the stock market. Currently people who expect inflation are buying stocks of companies with debt, expecting inflation to get rid of the debt. People who expect economic weakness and deflation are buying bonds at near 0 interest. Having this split market seems bad. It would be better if the people buying stocks also shorted bonds and people buying bonds were also shorting stocks. One way to do this would be to allow people to hold a negative amount of bonds. This would allow other people to hold more of positive amounts. Of course if you own a negative amount of a bond then every time there is a dividend then you have to pay that. This money then goes as normal dividend to the extra people with positive amounts of the bond. Negative holdings of stocks would be tricky because of the additional problems with voting and stock splits.