Watch out, negative interest rate may be a reality

I think this news did not get the exposure it deserved here. Swedish Riksbank has introduced negative interest rate on bank deposit, a world first. Bankers around are watching and monitoring this closely.

The motivation of the Swedish bank is to force liquidity. Apparently many banks still do not want to lend out the money. This is quite different from the impression we have seen in Singapore, where money seems like flowing fearlessly, both in stock market and property market.

However, if the move is proven working, I believe many bankers would be ready to be a copycat, as reported in the article.

What would the impact to depositors? A negative interest would mean that you pay the bank to help keep the money. In other words, the time value of money becomes negative. Will it encourage immediate spending and booast credit growth? Will it bring inflation? Or will it be time that we keep money in MILO tin?


http://edition.cnn.com/2009/BUSINESS/08/27/sweden.subzero.interest.ft/index.html

** Partial extract **

Bankers watch as Swedish interest rates goes subzero

August 28, 2009 -- Updated 0352 GMT (1152 HKT)

For a world first, the announcement came with remarkably little fanfare.

But last month, the Swedish Riksbank entered uncharted territory when it became the world's first central bank to introduce negative interest rates on bank deposits.

Even at the deepest point of Japan's financial crisis, the country's central bank shied away from such a measure, which is designed to encourage commercial banks to boost lending.

Pizza Hut pasta, anyone?

You must have watched the latest Pizza Hut advertisement. It is about a group of 80 diners tasting Pizza Hut pasta, without knowing it's from Pizza Hut. Many of them gave comments like, 'it is authentic', 'taste like that from xxx restaurant', etc.

Well, it is really a good idea by Pizza Hut to prove that their pasta is as good as any others, including those priced a few times higher.

Normally we would say that, well rental is a big part of the cost, so if you eat at a high class restaurant, obviously a big percentage of the price is towards paying the rental.

Let's look at it from demand side, and from a financial perspective. I believe many of us are aware of the term 'time value of money'. Basically what it means is that as money travels along the dimension of time, its value increases. In layman terms, money got to earn interest.

Now, think about it, what about 'money value of time'. As time travels across the dimension of money, does its value change? Put simply, at a particular point of time, does money change the value of that moment? Imagine you are in a romantic (and expensive) restaurant, would spending $30 for a plate of pasta makes you happy (value to you)? Or you rather just drink plain water and go for a $6 Pizza Hut pasta (proven just as tasty) later?