NEGATIVE OR POSITIVE INETERST RATES

Nilay Chaturvedi
Nov 1 · 4 min read

Interest Rates around developed world are sliding down everyday but what this means for the Global Financial sector?

Recently the president of the United States Donald Trump made a statement at his “chopper talk conference” that the federal bank of the United States pressed the panic button and it’s measure of increasing the interest rate was not a good move, he further argued that US like certain European economies should actually go the route of negative interest rate. That led me to think as to what is negative interest rate because I lived in a world where a person invests money in a bank for a definite period of time and his money increases but if money doesn’t increase then WHY WOULD I LEND IT?

Interest rate is the cost of borrowing or lending money charged or given.

THE MATH IS TO BE UNDERSTOOD BEFORE PROSCEEDING FURTHER AND IT’S VERY SIMPLE

Suppose A invests 10,000 bucks in the bank at 6% per annum bond, what this means essentially is that each financial year Mr. A’s money will grow at 6% rate now the bank will take this money and lend it to somebody else Mr. b who will pay more than 6% to borrow , the divisible is banks income

Now healthy interest rates incentivize people to lend money to the bank aka invest money which is good for the economy because it keeps the money rolling plus interest rates are raised to counter an economy that is in overdrive or is it??

Now back to Donald Trump, he praised Germany for having zero percent interest rate, which essentially means that an investor in Germany has to pay the bank to keep his/her money.

The history of negative interest rates in the recent past isn’t that long as they first appeared in Sweden 2009 when interest rates there were cut -0.25 aka you pay bank 0.25% more to keep your money.

They can’t be serious about this!!

But back to negative interest rates, basically are done to incentivize lending since holding on is bad for banks as they in turn have to pay the central bank like R.B.I in India or Federal Reserve in USA.

So what happened to Sweden? — actually good things — Sweden’s population did not horde their cash rather they spent it or just left it there BUT, following Sweden’s path following countries cut their interest rates — Denmark, Germany, Switzerland, Japan even European central bank.

But always blindly following somebody else has never worked for anybody and it wasn’t’ going to here either

Because Germany fell into a ditch — German economy is on the verge of recession so the interest rate was lowered to -0.31% but in order to meet the demand of government expenditure German government decided or at least tried to sell 2 billion Euros worth of 30 yr bonds which had 2 problems.

1 — THE BONDS WERE TO MATURE IN 2050 AND 2 — THEY HAD NEGATIVE YIELD

What happened was investors only bought 869 million Euros worth with -0.11 yield aka investor will pay 0.11% on his investment to hold money and anybody who keeps this bond for life will sure shot lose money, but this has augured well for America as negative rates and economic uncertainty has driven investors to American markets, so America is trying to do what European banks did and failed at 2 question marks??

Negative interest rate further could jeopardize the global financial market and disincentives people to borrow + it could jeopardize pension plans for millions of people and lead to a reduction in asset buying

The thing is financial systems around the world are built on 1 simple principle that if I invest money in a bank I will get more money at the end of a particular period, you take that away it jeopardizes marginal reserves for institutions less investment and a impending recession that could stick the global financial system in a 2008 like limbo and push this world into an overdrive recession.

By the way I am too looking to invest money, any suggestions??

Nilay Chaturvedi

Written by

Science & history fluxer, news afficianado, nerd by design

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