| Possession of currency is possession of option.
Do you know option transaction? It is written in study guide that
[Buying and selling of rights to buy or sell a certain amount of commodities
or securities, on a predetermined day or within a period of time, at predetermined
price (exercise price)].
As it is buying and selling of rights, both to make a deal or not to make
a deal are permitted to buyer. If the price is advantageous, right is exercised.
If the price is disadvantageous, right is not exercised.
Buyer of option pays option fee. Cost as payback of right is paid to seller
of option. Seller of option must make a deal (be a partner of buyer) on
the condition of option when option is exercised by buyer. As payback of
it, seller of option can get option fee.
To hold money is to hold right to be able to buy services freely. Therefore,
to hold money is to hold a kind of option.
Owner of option pays option fee as payback of the right.
If to hold money is assumed to hold option, money holder must pay option
fee depending on the amount and the period.
Suppose, for instance, option fee to hold ¥100 for a day is ¥1.
Today ¥100 --> Tomorrow ¥99 ( Pay option fee ¥1 )
Day after next ¥98.01 (In addition, pay option fee ¥0.99)
If to hold money is assumed to hold option, as just described, amount
decreases as time passed.
In this case, because amount decreases, change ratio of amount of money
is minus.
For these reasons, if change ratio of amount of money is assumed to be interest rate, application of minus interest rate is needed for possession of money. (In order to pay option fee.)
In my book [Introduction of minus interest rate], it is explained that
introduction of minus interest rate is necessary for economic theory. Main
points of the book are described below.
1. Value of currency occurs only at the moment of economic transaction.
In this
case, amount of economic transaction corresponds to amount of currency.
(Same amount, reverse direction flow.)
2. Change ratio of scale of economic transaction corresponds to that of
amount of
currency perfectly. (This is conclusion of the premise of 1). This means that
(nominal) economic growth rate corresponds to interest rate perfectly.
3. If change ratio of scale of economic transaction doesn’t correspond to that of
amoun of money, economic transaction can’t be realized.
4. If (nominal) economic growth rate is minus, interest rate needs to be
minus.
As described above, needs for minus interest rate have been explained
sufficiently, but it is not clear to introduce these points to economic
theory / system. Prime reason may be that experts can’t sufficiently understand
the reason for interest rate to be minus. (Prevalence of electronic money
is needed for introduction of minus interest rate. (Privately owned paper
money and coin etc. can’t be decreased ))
Contents of this text is much more comprehensible explanation of necessity
for introduction of minus interest rate. If possession of currency is assumed
to buy option, it is quite natural that interest rate becomes minus to
pay option fee.
If excess debt is burdened, level of interest rate should be nominal economic growth rate or less.
The opinion [(nominal) economic growth rate corresponds to interest rate.]
is on the premise that [value of currency occurs only at the moment of
making a deal.]. If value of currency occurs at the moment of not making
a deal, this opinion is not applied.
In present Japan, debts of central and local governments are over 1000 trillion yen. This means that huge currency (credit / debt) that has value at the moment of not making a deal occurs. How should the level of interest rate be decided under this condition.
As the premise is [value of currency occurs only at the moment of making
a deal.], (nominal) economic growth rate should be applied to change rate
(level of interest rate) of amount of money used in economic transaction.
In addition, option fee occurs in currency not used in economic transaction.
Therefore, level of interest rate that should be applied to the currency
is minus interest rate.
Amount of currency of the former is defined as A, Amount of currency of
the latter is defined as B. If each level of interest rate of both A and
B is defined as r(A) and r(B), level of interest rate that should be applied
to whole currency is defined as follows.
R = { A × r(A) + B × r(B) } ÷ ( A + B )
As r(B) is minus, R is smaller than R(A) (nominal economic growth rate).
As described above, it is concluded that level of interest rate needs
to be far lower than nominal economic growth rate in present Japan that
has huge debts.
The opinion [(nominal) economic growth rate should correspond to interest
rate.] is not applied to present Japan. It is necessary for interest rate
to be lowered further in order to revive Japanese economy.
Attention: Because nominal economic growth rate in this book includes all
economic transactions, it doesn’t correspond to change ratio of GDP perfectly.
(This has been written in [Introduction of Minus Interest Rate.])
Feb 2007.
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