maandag 7 maart 2016

Equation for Interest Rate Vs. Savings Rate

It seems like Japanese, Swiss, European people are saving more when we have negative interest rate policy. Why are people saving money when their money yields nothing?

The fact is that the higher the interest rate, the more you save as it gives nice returns on the bank. But when the interest rate hits 0%, weird things happen. Suddenly people start to save more due to uncertainty (in physical cash of course). No normal person will buy stocks because banks will collapse as they see their deposits go up in smoke. No normal person will buy bonds at negative interest. And no person will leave their cash in the bank. See chart below.

This is how I see the equation.

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