Bitcoin Forum
March 28, 2017, 08:28:37 AM *
News: Latest stable version of Bitcoin Core: 0.14.0  [Torrent]. (New!)
 
   Home   Help Search Donate Login Register  
Pages: [1]
  Print  
Author Topic: Bank interest rates  (Read 445 times)
SMOKEU
Member
**
Offline Offline

Activity: 110


View Profile
August 07, 2011, 09:46:35 AM
 #1

Quick question: For example, if a bank advertises a 5% interest rate on a particular savings account, and the inflation rate for that country is 4%, does that mean the overall interest gain over 1 year is (5% interest - 4% inflation) = 1%?

Or is the interest rate advertised calculated after inflation has been taken into account?
1490689717
Hero Member
*
Offline Offline

Posts: 1490689717

View Profile Personal Message (Offline)

Ignore
1490689717
Reply with quote  #2

1490689717
Report to moderator
There are several different types of Bitcoin clients. The most secure are full nodes like Bitcoin-Qt, but full nodes are more resource-heavy, and they must do a lengthy initial syncing process. As a result, lightweight clients with somewhat less security are commonly used.
Advertised sites are not endorsed by the Bitcoin Forum. They may be unsafe, untrustworthy, or illegal in your jurisdiction. Advertise here.
1490689717
Hero Member
*
Offline Offline

Posts: 1490689717

View Profile Personal Message (Offline)

Ignore
1490689717
Reply with quote  #2

1490689717
Report to moderator
JoelKatz
Legendary
*
Offline Offline

Activity: 1470


Democracy is vulnerable to a 51% attack.


View Profile WWW
August 07, 2011, 09:55:46 AM
 #2

The interest rate is in terms of the underlying currency in which the deal is made. So if the deal is made in dollars, a 4% interest rate means that each $100 borrowed accumulates $4 interest per year (not including interest on interest). It makes no sense to add inflation to interest because the inflation is already priced into the original currency.

If I borrow $100 and the inflation rate is 5%, if that were added to interest, I'd be paying it twice. Since part of the loan deal was that I took custody of the $100, I am the one whose $100 reduced in value by 5%. If not for the loan, the lender would lose 5% due to inflation anyway.

Just to be sure it's clear: If I borrow $100 from you for a year, and inflation decreases the value of that $100 by 5%, there is no reason I should owe you that 5%. It's is your $100 that dropped in value. We could argue equally well that you should pay me the $5 to restore the loan amount to the $100 it was supposed to be. (Of course, both arguments are silly. Loans are currency-neutral.)

Let me give you an analogy:

Say you're going away for a month and I want to rent your car for a month. This will cause wear and tear on your car and the additional mileage will reduce its value. Say we decide $250 is a fair rental fee. Now, suppose if I don't rent the car, you'd have to pay a $50 storage fee to keep your car while you're gone. Well, now if I say "I'm only willing to pay $205 for the car", you still might accept the deal. If you don't accept the deal, you are out the $50 storage fee, a net loss of $50. If you take the deal, I pay you $205 and you suffer $250 in costs to your car, a net less of only $45.

Inflation is like a storage fee on money -- since the lender would have to pay it he can't make a loan, it enables the borrower to cut a better deal, since he makes it possible for the lender to avoid the fee.

I am an employee of Ripple.
1Joe1Katzci1rFcsr9HH7SLuHVnDy2aihZ BM-NBM3FRExVJSJJamV9ccgyWvQfratUHgN
Pages: [1]
  Print  
 
Jump to:  

Sponsored by , a Bitcoin-accepting VPN.
Powered by MySQL Powered by PHP Powered by SMF 1.1.19 | SMF © 2006-2009, Simple Machines Valid XHTML 1.0! Valid CSS!