Tuesday, March 8, 2016

Negative Rates May Be Ineffective and Dangerous

Negative Rates May Be Ineffective and Dangerous: ... according to the Bank for International Settlements (BIS) — the so-called central banks' central bank.

Here is my commentary on the concept of Negative Interest Rates:

The notion of a Negative Rate of interest, is risible at most. According to the pure definition of interest, the interest rate is defined as the price ratio between the following: Present goods vs Future Goods.  To wit: This helps define the inter-temporal time preference of the actors in the market place. This is the definition, as per the work of Marginalist thinkers of Economics.

If one were to consider the Classical economic model of interest, it is defined as the equilibrium price between the supply of money(currency) in circulation, against the demand of that money. In this model, the interest rate acts as a "price".

In either model, the question remains: How is it possible to have a negative interest rate? If one considers the former model, how is it possible to have a negative interest rate? Does one prefer items prior to their creation? Does one go backwards in time to prefer and obtain items? Or, if one reviews this notion of negative interest rate using the classical economic model, how does one determine a negative "price" of money?

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