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Of course there needs to be a premium to lend money. Why would I lend someone money to get the same amount back (in real terms)? You'd need at least some prem
by refurb 4y ago
Of course there needs to be a premium to lend money.
Why would I lend someone money to get the same amount back (in real terms)? You'd need at least some premium to account for risk of non-payment, changes in inflation, etc.
There doesn't need to be a consistent premium to borrowing money. So if I borrow $1M for 30 years right now the interest rate doesn't have to be 10% because most people assume inflation will come down, so the average inflation over 3 years might be 3-4%, so an interest rate of 5-6% is probably enough of a premium.
- roflyear 4y agoTo safely park cash. Think government securities.
- refurb 4y agoOk, fair point on that one. Eliminate the default risk and you're willing to take 0% or even a negative real interest rate.
- roflyear 4y agoYeah. But without getting value through some mechanism like that (or, imagine if you're convinced that equities will be flat or return negative over the next few years) you're correct - you should make money from lending money.
- blagie 4y agoThis is correct. If you have $100B, what are your options? 1) Risky return-yielding instruments, like stocks and bonds 2) Non-liquid assets, like land 3) A Scrooge McDuck giant vault full of cash 4) ... and so on. In many cases, a negative interest account works better than any of the above. Sweden was the first to employ them in 2009, with an interest rate of -0.25%. The world didn't implode, as people predicted. If I deposit $100B overnight at -0.25%, I've lost just north of half a million dollars for that night. That's enough to push me to look for other places to stash my money (stimulating the economy), but not enough to break me (assuming I have $100B, which unfortunately, I don't). Critically, if the economy is collapsing, and you expect stocks to go down, removing other places to stash money can prop them up.
- prottog 4y ago> That's enough to push me to look for other places to stash my money Yep, you take your $100B and invest it in the US capital markets. Does nothing for Sweden's economy other than make it comparatively less competitive.
- blagie 4y agoIf you're willing to handle forex risks.... If I borrow $1M in USD to buy a 11M SEK property in Sweden, and the dollar goes up, I'm drowning underwater. If the dollar goes down, I'm sitting pretty.
- roflyear 4y agoPeople also forget that banks are only FDIC insured up to a certain amount, generally. So if you have like $1b, though unlikely, there are many reasons to not keep it in cash.
- blagie 4y agoPeople also forget that the negative interest rates are with central banks. They're not FDIC-insured because if they go under, that means the FDIC (together with the rest of the country) is gone.