Sunday, March 1, 2015

Would You Like To Be Paid To Borrow Money?

Imagine if someone told you they will give you a loan of over 3 billion euros and they would pay you 0.08% to take the money?  Yes instead of you paying them - they would be paying you. 

Imagine you are running a business and you want to take a loan for your business. Or let us say you want to buy a new house or a car and need money. 

Usually you would have to pay interest to take money from the bank, lender or financial institution - but what if someone told you they will give you money and instead of you paying them interest, they will be paying you interest? 

How would it sound to you? Most likely you will think it is a scam, right or something that will happen only in a fantasy world? It will sound crazy to most people but it is happening. That is what makes the world of business, finance and economics so interesting. 

But this is what is happening today in several cases, people and companies are being paid to take money from banks and financial institutions. So if you want to borrow money, you will be paid.

This happened with Nestle, Germany and with people starting individual businesses in Denmark. 

Nestle issued bonds at a negative interest rate, Germany got over Euros 3.2 Billion at a negative interest rate, business owners are getting money at negative interest rates. This means investors are giving them money and are assured to lose money instead of making money in terms of interest. 

The flips side is that many people now are being charged to keep money in banks, so forget about getting any interest people are being informed by banks in Europe that if they want to keep money they have to pay the bank a fee.

Now the first question that will come in anybody's mind, is how can I get my hands on this money and of course another questions will be why is this happening? 

The simple thing is that prices are falling in Europe, it is entering deflation. So if you give Germany money at say a negative interest rate of 0.08% the prices of goods and assets in the country and region will fall by more - by say 1% - thus you make a gain.

This also means there are few safe options and opportunities for businesses in the European region. There are also other factors, such as investors feeling the Euro will strengthen over time and thus even though they may get negative interest rates, they will make gains through currency appreciation.
So what happens when people are paid to borrow money and people are charged to save money. Well if this continues people will end up removing money from banks, they will try to buy things that will appreciate like Gold or maybe simple keep cash with themselves in Europe. 

People will borrow, but if home prices are falling and businesses are losing money they will not be encouraged to start businesses. 

Another thought is people can borrow this money and use it in other emerging economies, where they can make higher returns. Here again the risk that comes in is if the currency of the emerging economy weakens against the Euro - then again the investor/entrepreneur loses money.

With everything in life a few risks come in, it is our knowledge and intuition that guides us to make the best decisions. 

These are interesting times for Europe, so on one hand Greece, Spain and Italy are facing economic challenges. Greece is borrowing money, other economies like Germany, Denmark and Switzerland are having negative interest rates.

But my question to you is, would you like to be paid to borrow money? What would you do with it if you were in  Germany, Switzerland or Denmark now?

Keep thinking, smiling and making the most of this lovely life we have!

Yogesh Chabria


Anonymous said...

Superbly creative post Yogesh, loved it. What I would do is simply borrow the money and use it in Emerging markets and make more returns.


Sarvesh said...

Thank You for giving such an interesting information.

AYusH P@thAk said...

hello @yogesh this is ayush pathak...
i'd really liked your post.. very creative one with something different..

Sir, i had also tweeted you on your twitter page and awaiting your response.. please make it soon..