True. There will always be uncertainty of the future thus a positive risk premium on the pure rate of interest. But it might happen that positive risk premium is not enough to carry the rate to a positive teritorry. At least for some very creditworthy institutions.
Also what you imply is a zero-sum game. And you may be right on nominal monetary zero-sum game. But wealth increase is not dependent on the monetary situtaion. Thus even if the monetary total is fixed and a zero-sum game, the wealth would increase anyways.
In gold standard “insuficient risk premium” will be quickly killed by keeping gold in safe deposit box and reducing money supply. In current system “insuffcient risk premium” is possible because your choices are tougher - loose slowly via inlfation in safe deposit box or US Treasuries or buy hard assets and get all that volatility. Those who can’t bear (seems most can’t) high volatility of hard assets accept negative yield and nominal stability.
Nominal interest rates are comprimised of 3 things.
Natural rate of interest + Risk premium.+ Price Inflation premium
Natural rate can never be zero (or a negative number) because it is the price of time and time is always scarce. At least in this universe.
Risk premium can never be zero (or a negative number) because future is always uncertain.
But the price inflation premium maybe zero or a negative number, in which case it would be a price deflation premium.
And this negative number may force the nominal interest rate to zero or even a negative number if it is higher than the sum of natural rate and risk premium.
Of course this is in theory but even if this was the case the markets would function. People would still lend money, etc.
Correct logic (Yen is good example) for the present monetary system. But in gold standard nobody will expect inflation premium in the long run so that you won’t see zero nominal rates.
If the original debtor purchased something with the money, then someone else has the money and that person is now saddled with the cost of safeguarding it (and has also charged for it in their transfer). This is true no matter how many times the money is transferred, just as in my car example where the bad brakes don’t somehow fix themselves no matter how many new owners the car is transferred to. Also consider that whatever is purchased with the money also has its own cost of protection, unless it’s used for immediate consumption but think about the default risk of such a loan. There’s no way to escape these costs. You can only find a cheaper safeguarding service. By loaning your money out, you’re only adding a default risk. If someone can protect your money cheaper than you can, then use that protection service.
Well, safekeeping is not expensive that you have to lend to cover it. For example UK based Bullion Vault charges 0.12%. and GLD ETF 0.4%.
But I really saw nominal short-term negative rates in fiat asset JPY in the interbank market. You know BOJ under quantitative easing charged banks for exess reserves and banks charged their customers on liabilty side. It was profitable to lend at slightly negative rate because they paid even more negative rate.
I read russian press - there is huge demand for safekeeping service so banks raised fees. People draw money and put it in deposit boxes sacrificing sort of 10% interest in 12% inflation environment. See there is market for full reserve banking its just not connected with payment system yet.
No, because the marginal cost of lending an asset to holding the asset would be negative. It would be silly to lend at a non positive interest rate in any circumstance.
I AM VERY PLEASED WITH THE THOUGHT AND DON’T FEEL LIKE ADDING ANYTHING IN IT. IT A PERFECT ANSWERS.
Time deposits. Easy.