How to make sense of negative interest rates.
(a short thread)
(a short thread)
1/ In many developed nations such as Switzerland, interest rates have been negative for many years now.
This means you pay the bank to hold cash. How does that make sense?
cnn.com/2020/01/23/inv…
This means you pay the bank to hold cash. How does that make sense?
cnn.com/2020/01/23/inv…
2/ The key is that this is happening in most developed nations.
In these nations, investable opportunities are going down because practically their economies - roads, industries and so on - are built out.
Imagine you have money but nowhere profitable to invest. What happens?
In these nations, investable opportunities are going down because practically their economies - roads, industries and so on - are built out.
Imagine you have money but nowhere profitable to invest. What happens?
3/ As investment opportunities become scarce, expected return from investments keep going down and for speculative projects it can actually be highly negative.
4/ Imagine your economy has mature mouse trap companies and a startup proposes to build yet another mouse trap, you should expect to lose a lot of money on that investment.
In comparison, holding cash looks more profitable.
In comparison, holding cash looks more profitable.
5/ But then if you’re holding cash, why would interest rates become negative?
Because when people hold a currency, it appreciates as comparison to other currencies.
If Swiss francs are being held in banks and not getting spent/invested, the currency appreciates.
Because when people hold a currency, it appreciates as comparison to other currencies.
If Swiss francs are being held in banks and not getting spent/invested, the currency appreciates.
6/ What’s the harm with currency appreciation?
If your currency buys more stuff, importing becomes cheaper and by virtue of it domestic industry and exports decay.
In short, your country’s competitiveness suffers globally.
If your currency buys more stuff, importing becomes cheaper and by virtue of it domestic industry and exports decay.
In short, your country’s competitiveness suffers globally.
7/ So central banks want to disincentivize holding of their currency.
A negative interest is a push to make people spend or invest currency.
Because cash held - and not spent/invested - is bad news for domestic economy.
A negative interest is a push to make people spend or invest currency.
Because cash held - and not spent/invested - is bad news for domestic economy.
8/ To understand this better, refresh your memory with how money works and then everything will make more sense.
https://twitter.com/paraschopra/status/1346688696599252993
9/ In summary: negative interests are a consequence of wealthy folks having more cash than investable opportunities.
You can think of negative interest like a wealth tax, because it really is a country’s way to redistribute wealth from those who have it to those who need it.
You can think of negative interest like a wealth tax, because it really is a country’s way to redistribute wealth from those who have it to those who need it.
• • •
Missing some Tweet in this thread? You can try to
force a refresh
