 Hey guys, it's MJ the student's act tree and in this video I want to explore why our interest rates going negative But before we do that, let's consider what interest rates are with a simple thought experiment If I said to you would you like a thousand dollars today or a thousand dollars next year? Which one would you choose? Most people would prefer to have a thousand dollars today So how much must offer you the following year in order for these two amounts to be equal? I mean if I offered you two thousand dollars the following year Would you still prefer to take one thousand dollars today and This is quite an interesting question But it can be broken down or simplified into the magic formula that underlies a lot of actual science and That is today's amount times interest rate is equal to next year's amount But what determines that interest rate is It's supply and demand Well, not really because the question we should be asking ourselves is not what determines interest rates, but rather Who determines interest rates and I'll give you a clue. It's not the Illuminati. No, it's not them in order to find out this answer we need to ask ourselves well who's printing money and Who's in control of money and The answer is the central banks central banks or reserve banks of countries are normally in control of the monetary Supply they set the interest rates and they do various other things and they look after the economy Now they're supposed to be separate from the government But I mean we just have to look at some cartoons and think to yourself Governments kind of set up these financial institutions, so Is there as much independence and so we have to ask ourselves is maybe the government setting the interest rates Remember banks are not the the most honest or moral Institutions in history. I mean there have been quite a lot of scandals quite a recent one has been with this whole libel Scandal and that was with an interest rates. And so you can see I really like that cartoon He says I'm not robbing the bank madam. I work here And it's because of all this greed and this scandalous behavior That a lot of people think it is the Illuminati That control interest rates and control the world economy and it's because of these reasons that also People are looking to Alternatives, you know, is there maybe a decentralized currency that we can all take up But anyway, I'm getting a little bit off the topic. So let's go back to interest rates and Some fun facts about interest rates. I mean in America and the past world from 1954 2008 interest rates have been as low as 0.25 percent all the way up to 19 percent in the UK From 1989 to 2009. It's been anything from a half a percent to 15 percent Now the range can broaden quite widely, especially if we look at Germany. I mean from 1920 to 2000 they went they had interest rates between 2 percent and 90 percent and this actually gave Hitler The economic conditions for him to to get his party into power Also talking about how politics and interest rates are influenced one just has to look to Zimbabwe where their president has totally stuffed up the country and I mean in 2007 there was interest rates of 800 percent. I don't even think they their money's worth anything today. That's how ridiculous it became but coming back to interest rates, sorry, I'm getting a slide tracked here is that interest rates are Supposed to be positive because you're supposed to get interest rates as a reward I will give you money today and tomorrow you'll give me money back with a little bit extra for Rewarding me for taking the risk That you might not pay me back, you know, you might default for the opportunity cost I could have used that money elsewhere I've lost liquidity that could have helped me in certain cash flow situations So people are used to getting rewarded for lending money So I'll give you money if you give me more money back And it should never go below zero percent because if it goes below zero percent, well then instead of I mean giving you money, I'm just gonna hide it on my bank, you know, if the bank's got a negative interest rate Why don't I just keep my money under my mattress? So why is this happening? Why is interest rates dipping below zero? If you do a bit of research or if you listen to government Their reason is to help the economy They'll say negative interest rates stimulate the economy They get all that type of growth and and that might very well be the case but one thing to consider is that Governments are one of the big biggest borrowers in the world. So governments like to to issue bonds and With negative interest rates, it means they will be making money by borrowing money Just just let that sink in so government are gonna borrow money from the people and Then they have to pay them back less money that if they make so they make more money by borrowing money Now if you think that's a little bit cray-cray You you're thinking along the same lines as me So the next question comes is well, why are investors buying this, you know, why? How on earth can this happen if if interest rates are negative then why are Institutions and investors still buying these type of bonds Well to understand that we need to look at who are the biggest investors and they sadly, it's not you or me biggest investors are your financial institutions or Pension funds Asset wealth managers hedge funds all those type of guys, but but let's look at pension funds pension funds according to the economist magazine in 2008 Have 20 trillion US dollars under management those all the pension funds in the world 20 trillion dollars That's a lot of money Now why are they investing all this money or they've got all this money Why am they investing it into these government bonds? Is it because other assets are too risky? I mean they could invest in the stock market in property But they might argue no, it's a little bit overvalued or it's too risky. We might lose our money You know, there could be a stock market crash. So, you know bonds are safe but if you look at Regulations, this is something that you'll come across in subject CA1 In actual science as you'll see regulation puts a lot of restrictions on what these massive institutions can do with their money how they can invest them and Some of the restrictions are they can't buy certain type of assets. So pension funds can't go and buy classic cars Currency normally it has to be in the local currency, which the government bonds are then issued in if they are going overseas Only certain custodians. I mean, there's lots of solvency mismatching liquidity exposure to certain assets But look at that one over there in the bottom left and corner Regulation says that these big pension funds have to give a certain proportion to bonds So why are these big institutions buying bonds? Well in a weird way, it's because they have to because the government told them to And that's a little bit unsettling when it comes to finance and it's almost a flaw of regulation I mean Japan now has just issued billions worth of these bonds with negative rates Which means they are making money by Borrowing money and I know that is that is crazy and that's why I want to welcome you guys to to participate in this discussion So I want to hear what your opinion is. I mean negative interest rates Are they good? Are they bad and There's there's no right answer. I mean, we don't know if they're good. We don't know if they bad So feel free to to comment in the comment section below Give a little reason why you think negative interest rates are good If you think it's gonna stimulate the economy or bad because it's gonna destroy the economy Let me know and let's have a little bit of discussion around this, but overall I just want to say Thank you so much for watching and I'll see you guys next time for another video where we discuss finance and how Crazy it can sometimes get. Thanks guys. Cheers