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June 06, 2014, 01:24:46 PM |
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In the free market, you can not have zero or negative prices. (Look, I can sell you a bitcoin, just give me a bitcoin address, then, I will give you a 100 dollar note also...)
The interest is the price you pay to be able to spend other peoples money before you have earned, or conversely what receive after you have forgone your possibility to spend for a period of time. The interest rate is decided by the market, and if it is well oiled, it should be the same everywhere.
So what is going on?
When you lend to the bank, what you get back in addition to the principal is
a) the basic interest as above.
b) plus the risk leaving the money outside of your control
c) minus the cost for the bank of managing your money (assuming you believe they are good at it).
This is the composition of the rate casually referred to as "interest". So if the cost is larger than the basic interest, and the risk is very low, you have to pay. This is not far fetched, think of the cost and risk of storing the money or gold in your flat.
The other thing to note is that the product that Draghi talks about, deposits of excess reserves from banks to the European Central Bank, is far from a the free market. The banks are grossly over-regulated, with threats of exclusion, explicit and unspoken guarantees, random penalties, and suspect settlements.
The negative interest rate, whether it will have some volume or not, is mainly a marketing ploy. What is more interesting for us is Draghis plans to expand credit and therefore the effective euro money supply. He mentioned a number, but even after several years he is only talking (still, his words seem to have some effect on the markets).
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