The Negative Interest Rate?! Certainly feel not positive!

Some central banks in this world have set their interest rate with the negative value. Frankly speaking, as we save our money, we receive the minus interest paid so it means we are penalised for our saving. Then, we pay the minus interest rate for our borrowing so we gain bonus from borrowing money. Then, why not should we keep diligently save up our income and start spending a load of money? But, wait before taking out a loan for your dreaming extravagant life! This is certainly negative so that you should not feel positive about it!

First of all, banks will not rend you a lot of money. We must not forget that the interest rate fluctuates from time to time so that the rate may suddenly goes back to the positive rate. Therefore, unless this borrowing person or institute seems to be able to pay all the borrowed money back at the time when the rate becomes positive again, banks will not rend you money. In the real world, when majority of people are confident for the future enough to spend their load of money at once, central banks will not launch their negative interest rate.


Banks will not rend money for the simplest things that people will spend unlimited amount of money because this kind of things is often addictive behaviours easily related to violence and vice which will cause a severe catastrophe of civilisation. Therefore, the aggregate of cost of rending money substantially will exceed the aggregate gain from rending under the negative interest rate.

We cannot enjoy eating delicious foods, sleeping off, and having sex several times at once enough to avoid doing these things for other days or even years. We need to have adequate amount of foods, sleep, and sex day by day. This is why we save money which is an intermediary of exchange. We use money to earn and keep in exchange of our efforts and/or fortune in our life. Money is able to be saved for our daily needs and wants, and enables ourselves to prepare for eating, sleep, and sex whenever we need or want.


The central interest rate is set in order to offset the price inflation rate which is the relative devaluation of money. In order to maintain the money as the intermediary of exchange, the money saved should not be either appreciated and depreciated across times. So, the central interest rate is adjusted to the inflation rate, and the expected inflation rate is frequently referred.

The price inflation is high when the productivity level becomes higher relatively to the money value over the time. The high inflation can be either good or bad. Any way, the higher inflation implies that the market circulation is fast so it is active. So, the interest rate is set high in order to maintain the money as the intermediary of currency for people to secure their daily life and their pleasure.

By contrast, there is a negative price inflation which is the phenomenon that the productivity level is lowered so that the productivity rate becomes relatively lower than the appreciation rate of money. This implies that the market circulation is stagnated and the entire size of the market is shrinking. This usually happens in the developed countries where their productivity rate used to be high but declines recently.

The considerably low, zero, or even negative interest rate can be launched in order to offset the further decline of the productivity level. They may try to prop up investing money to the market to re-circulate again to increase the productivity. Nevertheless, when the confidence of improving the productivity level is low and it literally seams to be just a waste of money for doing so, these economic agents tend to be reluctant to invest.


In terms of the investment motive, the performance of the financial market must be negative. People usually participate in the financial market in order to increase their money in order to secure their life in the future and maximise their utility (maximising their pleasures meanwhile minimising pains). They usually split their saved income and even borrow money to invest in the financial market when the expected investment return seems to be high. By contrast, the expected return must be negative recently so they must think that they should simply save their money by investing less or none in spite of the considerably low or even negative interest rate of their money saving account.

This situation also is also reflected in the national bond market. The surprising aspect is that the interest rate of some national bonds is also negative although this is still less negative than the central interest rate for the money market. The interest rate of national bonds is always adjusted to the interest rate of money. This is because when the interest rate of a national bond is lower than or indifferent from the interest rate for money, rational individuals do not hold national bonds because they can just save their money in their basic saving account. When the interest rate of a national bond is significantly higher, then more rational people simply switch their money from their basic saving account to their national bond investment account so that the less money is injected to circulate the market.


The developing and the newly emerging countries often offer a high interest rate for purchasing their national bonds in order to attract investors for these national bonds. The high rate tends to be set in order to offset the risk of the significantly fluctuating unstable economic situation of these countries. As same as the situation that private banks and insurance companies set a high interest rate for risky borrowers and insured customers, the high interest rate of these national bonds tends to be required as an incentive for these investors.

Almost the opposite case scenario is occurring in some of the current developed countries. Their economic situation is stagnated but still stable and there does not seem to be any further dramatic decline. Therefore, these countries still do not substantially decrease these investors whom these countries owe even with a low, zero, or even negative interest rate. Although this does not mean that these countries keep gaining a financial gain, these investors are still happy to hold these national bonds because their interest rate is still less negative than the basic money saving account and safer and relatively more profitable than holding other shares.


In the financial market, there are two different gains from investing in shares: The income gains and the capital gains. The income gains are the interest rate payment and dividend as rewards for shareholders. The capital gain is the net profit from trading these shares e.g. buying with a cheaper price in advance and selling with a high price later. By means of money, the fiat money we use in our daily life, the central interest rate of borrowing and saving money is the income gain meanwhile the capital gain is the value of the currency.

The negative interest rate i.e. the negative income gain may indicate that the capital gain i.e. the value of saving money is still way high in the current market situation. The relative value of money to the other assets such as good&service in the real market and share-investment in the capital market must be high in this situation. So, people are quite rational to save their income even under the negative interest rate because the relative appreciation rate of the value of their money saved is faster than the negative interest.