Wednesday, July 19, 2017

Catastrophe of bank interest rates – 17

Continues from the previous post -
Gross Domestic product (GDP) is a noted count to see if economy is improving or not. However, I would advise that instead of Gross domestic product we should have a ratio on gross domestic sells, or say GDS. So far, this count is not considered and that is the shortcoming. When we notice a big difference in them due to low sells while production is good the market begins to suffer. Very often, they presume that since production happens commensurate sells also must happen but our experience shows that this is not true. There are companies loaded with commodity produced and filling their godown. With low rates of interest on borrowings, this happens. Apparently, it appears that economy is growing but actually, it is slowing down. Such situations are responsible for depression. To recover losses producers are tempted to increase prices of products that are not selling due to paucity of funds with buyers. This they do with logic that, there are some buyers, who need it so eagerly that they will buy it anyways; whatever be the price. This causes higher prices of products not in demand. This causes inflation in economy. This explanation shows how low interest rates on deposits of depositors in banks cause both depression and inflation; two measure ailments of economy. Understanding this reality, we should consider GDS in place of GDP while deciding economic condition. Gambler group will not allow this because if they do; then their purpose is harmed, rates on deposits will increase to ease the market and corresponding rise in rate on borrowing. We notice that every effort is made by this group to avoid making GDS as the corrective count.

We have been observing the way many business activities are closing down. The more reduction in interest rates on deposits, more closers are observed. The link in these two phenomena seldom noticed by concerned observers however, if we understand interlink in these two phenomena we can appreciate the importance of good sizable interest rate on deposits. The benefit to "Real economic group" by reduced interest rate on loans is negligible. Benefit by higher business return becomes important to keep their activity survive. To get that if there is increase in interest rate on loans they should appreciate that because over all increase is very small and they will appreciate the proportional rise in demand. For example, if interest rate is 15% on loans, the total expenditure on interest annually will be about 4% and if interest rate reduced to 12% (3% less) over all reduced expenditure on loans will 3.85%, that means, benefit of 0.15% only. For such a meager benefit at the cost of loss of business is definitely not acceptable to business. Very few businesspersons bother to look to this phenomenon.

Continues in the next post –

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