Negative Interest Rates

The idea of negative interest rates might appear absurd at first but in is a common concept in my opinion. The absurdity stems from the way the idea (negative interest rate) is framed in our minds (especially at first instance).

The statement negative interest rates (NIR Hereinafter) when applied to mmo means that you actually pay the central bank money when you lend it money (normally they pay you money for such a situation). At first instance one might ask oneself why an institution might accept such a situation (the thinking in our minds is that such a situation is bad). Whether NIR are good or bad depends on the economic situation at hand. Before I describe when NIR are good or bad, I am going to reveal common situations in which we experience NIR.

Interest (I Hereinafter) is a cost paid for the use of capital. Normally the owner of the capital is paid the interest when another party uses his capital. We must not restrict ourselves to the above scenarios. First, lets agree interest is a cost! At times another scenario emerges, where the owner of the capital pays costs to another party for a service offered in relation to their use of the owner's capital. For example if you release money to someone for safekeeping purposes, you pay a cost to the other party. Well such a cost is also interest but the interest is just being paid out in the opposite direction (from owner to the other party). Hence, if interest is paid by the other party to the owner of the capital, the reverse situation (interest paid by the owner of the capital to the other party) means that the other party is paying out negative interest (NI Hereinafter) to the owner of the capital.