3 ms·
They are not getting paid, because those are nominal interest rates, not real interest rates.
by SantalBlush 5y ago
They are not getting paid, because those are nominal interest rates, not real interest rates.
- landemva 5y agoThe original loan is fixed, other than the -1% interest which is basically a loan paydown gift. They pay back the nominal they borrowed. They are getting paid for risk-free paper shuffling.
- BearsAreCool 5y agoDoesn't this require conversion between currencies, inherently adding a ton of risk?
- sumedh 5y agoWhat is the difference?
- SantalBlush 5y agoThe nominal interest rate doesn't account for inflation. Suppose countries A and B have nominal rates of -1% and 2%, respectively. Now suppose their inflation rates are 2% and 6%. That makes their real interest rates -3% and -4%, so if you borrow from country A and park the money in country B, you are losing money despite B having a higher nominal rate. Moreover, what OP is describing (infinite money mechanism) is an arbitrage situation, so any risk-free profit opportunity would quickly vanish and parity would be reached.