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Negative interest rates can be a brilliant concept

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BY Dr. Mark Hendrickson, The Center for Vision and Values

I have to admit that initially I was uninterested, even close-minded, about the negative yield being offered on a growing share of European sovereign debt.
“It must be a short-term aberration,” I thought at first. “Completely nutso,” I sniffed dismissively as the phenomenon spread. “Who in their right mind would invest in a financial instrument that would guarantee a loss of principal?”
Upon calmer reflection, I would shrug and think, “Well, to each his own, but none of those topsy-turvy debt instruments for me.”
More recently, I have taken a more tolerant attitude toward negative-yield debt. As I teach my Econ 101 students, the key to success in the economic marketplace is to set aside your own preconceptions and preferences and to acknowledge that the consumer is always right.
In fact, the more I think about it, I find myself attracted to the idea of offering such a service to satisfy this unfathomable consumer appetite for negative yields. Maybe I should announce that anybody out there who would like to send me money on the condition that I return less than all of it to them in the future is free to do so (as long as they include payment for any incidental transaction costs). From that perspective, negative interest rates are quite ingenious.


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