What is negative interest rates?
Quintessentially, interest rates are known as the price to pay when a party borrows money. Thus the interest rate controls how much others borrow as they will have to pay back more than they borrowed. However, this becomes very different when the central banks turns to negative interests rates. Essentially, central banks will be “paying smaller banks” for borrowing money from them. At the same time, banks will be charged by central banks for holding reserves in their accounts. As for consumers, they will no longer be receiving any returns from their deposits in banks as banks will be charged for those desposits.
Does negative interest rate make sense?
Short Answer is Yes
As much as its a very new concept, change is still in many ways a necessity in this world. With negative interest rates, people will have to accept that their currency is no longer as valuable nor will it appreciate consistently over time even without factoring inflation. To me, this is but a new phenomenon as nothing should grow indefinitely without any actual cost. For centuries, countries has been inflating its currency while sustaining growth to slow down the impacts of currency depreciation; however it is clear right now that this stance is becoming increasingly unsustainable.
Why is traditional currency going sideways?
Historically, currencies are hedged on precious metals but ever since the creation of credit, currencies have become more complicated. This is because value is no longer tagged to a source. The issue worsens when there is a lack of regulation when it comes to printing of money. As paper currencies are tangible “assets” with value, this means that value can be created by printing money. That is the reason why many unexplainable phenomenons are occurring.
Where are we heading towards?
One of the biggest signals of the fall of traditional currencies comes from the rise of Cryptocurrencies. Cryptocurrencies are attempts to deregulate currencies but at the same time limiting the amount of currencies that can be produced. As such, “currencies” can no longer be created to justify distribution, whereas cryptocurrencies are divided into smaller units to facilitate transactions. To say the least, cryptocurrencies cannot be fabricated to falsify transactions thereby increasing its reliability.
Is this the end of traditional currency?
To rival against cryptocurrencies, digital currencies are currently marketed as the better choice as there is still regulation in terms of price volatility and at the same time provide convenience for consumers. However, there is still a long way for adaptation and security for all kind of digital currencies including cryptocurrencies because the consensus required stems beyond just consumers but also nations.
In my perspective, it will be status quo until such time when traditional currencies are increasingly devalued despite regulations, otherwise it will take a major currency in the world to take the lead in regulating cryptocurrencies for it to take flight in the world.
