Economics question
I've googled it but not sure I get it, usually when a country is deeply in debt the cost to borrow rises. However Japan is deeper in debt than any country by GDP and yet Sweden, Switzerland, and Denmark are not they all have negative rates.
In theory negative rates are used to prevent deflation spirals and encourage people to invest in more risky assets.
But also in theory "free" money would cause people to run out and buy up stuff creating inflation.
How is it that money is essentially free in these countries and yet they can't stoke inflation?
It is hard to imagine borrowing money and getting paid to do it LOL, where is the USA on this? From all I have read companies are deeply in debt but heck if the money is cheap why not? Where does it go from here?
In theory negative rates are used to prevent deflation spirals and encourage people to invest in more risky assets.
But also in theory "free" money would cause people to run out and buy up stuff creating inflation.
How is it that money is essentially free in these countries and yet they can't stoke inflation?
It is hard to imagine borrowing money and getting paid to do it LOL, where is the USA on this? From all I have read companies are deeply in debt but heck if the money is cheap why not? Where does it go from here?
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The only thing I have learned about economics is, The bigger the numbers, the more BS involved.
You can not run the numbers and percentages like a math equation. It doesn't work.
A country can be 800 trillion in debt, and yet spend more and more monies.
There is an old saying..."when a company owes a bank $1 million, the bank owns the company==
and when a company owes a bank 100 million, the company owns the bank."0 -
babun wrote:There is an old saying..."when a company owns a bank $1 million, the bank owns the company==
and when a company owns a bank 100 million, the company owns the bank."
As to the OP I don't get lots of things, LOL but who knows today? Perhaps someday it will be AI driven and make mroe sense internationally
That is funny, my FIL used to own a golf course or should I say he "owned" the bank that owned the golf course LOL, I used to ask him how he could get away with paying them late and still being able to borrow more money.
He said they couldn't afford to let him go bankrupt! LOL0 -
our govt keeps spending way more than we can afford and pay in and borrow ... and nothing is done about that....MY bank would never allow that chit to go on when i was farming...paid every note before or on time since a crop failure in 1971...worked extra jobs in the winter and lived cheap till i got out of debt and do not OWE... nobody....nothing.....for years now..... 0 -
According to Joe Biden all you need to do when you get deep in debt is to spend your way out. He was vice president at the time so who else would know better? :roll: 0 -
I can answer your question as of the why with one word and explain in one sentence:
GOVERNMENT. GOVERNMENT via tax code and regulation punishes and discourages savings and rewards and encourages debt and spending.0 -
GilWilson1 wrote:
But also in theory "free" money would cause people to run out and buy up stuff creating inflation.
...
where is the USA on this? From all I have read companies are deeply in debt but heck if the money is cheap why not? Where does it go from here?
We're already there with the "free money" and its effect... With all this debt forgiveness, borrowing money you don't have to repay is "free money."0 -
?The reason that the rich were so rich, Vimes reasoned, was because they managed to spend less money.
Take boots, for example. He earned thirty-eight dollars a month plus allowances. A really good pair of leather boots cost fifty dollars. But an affordable pair of boots, which were sort of OK for a season or two and then leaked like hell when the cardboard gave out, cost about ten dollars. Those were the kind of boots Vimes always bought, and wore until the soles were so thin that he could tell where he was in Ankh-Morpork on a foggy night by the feel of the cobbles.
But the thing was that good boots lasted for years and years. A man who could afford fifty dollars had a pair of boots that'd still be keeping his feet dry in ten years' time, while the poor man who could only afford cheap boots would have spent a hundred dollars on boots in the same time and would still have wet feet.
This was the Captain Samuel Vimes 'Boots' theory of socioeconomic unfairness.?
? Terry Pratchett, Men at Arms0 -
Negative interest rates have some of their roots in the economic reality that quite often what is individually correct is collectively wrong. Much of economic activity, and particularly investing, is based upon the expectation of future benefit. Similar to a diet, people are often willing to endure present pain in order to achieve a desired goal in the future.
When an economy is experiencing inflation, people rush to buy now in order to avoid a future price increase, but when deflation is the norm, people postpone purchases in order to take advantage of lower prices in the future. Both practices make perfect sense for the individual, and both tend to feed the current situation and make it worse. A rush to buy will add to inflationary pressure, and societal postponement of purchases will force sellers to further lower prices in order to produce sales, thus increasing deflation.
Central banks will raise interest rates to combat inflation by increasing the cost of borrowing, and they will decrease interest rates during recessions and/or deflation in order to encourage borrowing/spending and discourage saving. Deflation appears to be good for the consumer, but it is a disaster for existing loans, the ability to collect revenue to pay contractual salaries and wages, replace inventory, and the value of things like houses and cars, etc.
Deflation can be just as dangerous for an economy as inflation.
Central banks will try to combat deflation by continuing to lower interest rates in order to stimulate buying and investing, but if deflation continues, as it has in Japan for years, they may try a rather radical, and somewhat unproven tactic of negative interest rates. It has had mixed results at best, and has mostly been undetermined as to the final results.
It usually tends to only be practiced at the Central Bank level where they charge member banks a fee to store surplus funds rather than pay interest for them. This will discourage the member banks from parking money there, and result in an indirect encouraging of them to lower interest rates to their customers in order to get them to borrow more money to spend or invest in order to get rid of surplus funds. In the extreme application of the idea, it will result in some select borrowers getting negative rates, but that does not seem to be too common, and doesn?t work as well as you would think since investors would still rather wait to borrow money to invest or spend until prices and interest decline even more.
It can also be used in an effort to reduce money flow (think store) into a country in order to prevent inflation or to devalue the currency in order to increase export sales.
I realize this simplistic explanation can be picked apart by those who are cognizant in the fields of both micro and macro economics, but it will do for those who want an explanation of how negative rates work in their simplest form.0
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