The interest rate guides the flow of funds

We hear the words interest rate and interest almost every day, and we all know it. When we deposit money in the bank, the bank has to pay us interest, and when we borrow money from the bank, we have to pay the bank interest.

So, what is this interest rate or interest? Why do we deposit money in the bank, the bank has to pay us interest, and we have to pay the bank interest for the loan? In the next few sections, we will specifically talk about interest and interest rates.

Why credit cards are so popular

It is reported that in 2017, the annual cash out of a large bank reached 100 billion yuan. According to conservative estimates by the industry, the annual cash-out scale of the entire industry exceeds 1 trillion yuan. Where did the funds withdrawn by credit card go? Most of them have entered the fields of real estate, wealth management products, private lending market and so on. It is said that credit card cashing out is very simple, all you need is a mobile POS (point-to-point sales) machine.

Why do so many people use credit cards to cash out? Credit cards have an interest-free period of up to 56 days. During these 56 days, the money in the bank is for you to use for nothing, and you don’t need to pay any interest to the bank, that is to say, there is almost no capital cost. The cash that has been cashed out is placed in the private lending market, and the annual interest rate is as high as 20%, or even 30%.

So in the case of credit card cashing out, the most important reason is two words: interest rate. What is the interest rate? Interest rates are the “prices” of financial markets, the cost of money. It is necessary to emphasize here that everyone should never use credit cards to cash out. Credit card cashing out is illegal, and once discovered, it will become a stain on your credit.

Price is the “invisible hand”

In the commodity market, it affects whether manufacturers manufacture and sell a certain product, and whether consumers buy a certain product An important factor for a product is price. Why do governments, manufacturers, and consumers care about prices? Because it determines the production, sales and consumption of products.

For example, in the first half of 2019, the number of domestic pigs was not enough, leading to a sharp rise in pork prices . The sharp rise in pork prices had two impacts: on the one hand, ordinary people chose not to eat or eat less pork because of the high price of meat; on the other hand, pig farms were profitable because of the high price of meat And increase the breeding quantity of live pigs, so invest in the construction of live pig farms. The price of pork has led to an increase in the number of pigs raised, which has also led to a decrease in pork consumption. The result of this change is that the number of pigs raised is equal to the consumption of pork, and the price of pork has reached a level acceptable to manufacturers and ordinary people.

So, the price is too high, the manufacturer is happy, but the common people don’t agree, so the common people don’t have to buy it The manufacturer’s product; the price is too low, the common people are happy, the manufacturer does not agree, and the manufacturer does not have to produce. In this way, in a market economy, without the intervention of the government, changes in prices will automatically adjust the supply and consumption of pork.

Economists call prices the “invisible hand” of the market. Interest rate is the “price” in the financial market. In the financial market, capital is also a commodity, and it is the only commodity in the financial market. At the same time, it is a special commodity. Its particularity lies in that it is currency itself. Since money is a commodity, it also has a price. What shall we denote the price of the particular commodity money? We express it by interest rate, which means that interest rate is the “price” in the financial market.

However, there is another special feature of funds—the interest rate is the price of using funds, that is, A fee for the use of funds, not the price of the funds themselves. For example, if you deposit 10,000 yuan in ICBC for one year, ICBC will pay you 2% interest. The 2% is the fund usage fee, that is, the price that ICBC pays you if you temporarily lend the 10,000 yuan to ICBC, because the 10,000 yuan is still yours, and you can get it back when the deposit expires .

Similarly, if you go to the bank for a loan of 1 million yuan, the bank will charge you every 10% interest. However, the bank only lends you the 1 million yuan temporarily, so the 10% interest is the fee the bank charges you for allowing you to use its funds temporarily, that is, the fee you pay to the bank for using the bank’s funds. In the end, you still have to return the 1 million yuan to the bank.

Interest rate is the cost of funds

In the shopping mall, the price of a mobile phone is 6000 yuan, you spend 6000 yuan To buy a mobile phone, the 6,000 yuan is not only the price of the mobile phone, but also the cost of obtaining the mobile phone. The same is true in the capital market. When you buy a house with a loan from the bank, the bank charges you 5% interest per year. This 5% is not only the price of funds, but also the cost you need to pay for using bank funds. In the example of credit card cashing out, the bank has given an interest-free period of 56 days, so the cost of credit card cashing out is basically 0. However, after lending the cashed out money to others in the private lending market, you can get 20%-30% % interest income, so many people use credit cards to cash out.

How funds flow

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In the financial market, it is the interest rate that guides the funds, and the interest rate is the “price” in the financial market. The liquidity of the funds guided by the interest rate is a This is a scarce resource. At the end of April 2019, the total deposits in China’s commercial banking system reached 186 trillion yuan, of which 78 trillion yuan were residents’ deposits. This amount seems a lot, but compared with the national demand for funds, it is still Not enough.

As anyone who has ever started a business knows, raising the capital needed to produce It was very difficult. Since they could not raise funds, many private enterprises had to find money through underground channels, and private lending came into being. How big is the scale of private lending? According to a study by Southwestern University of Finance and Economics, in 2015, private lending The scale is about 7 trillion yuan.

Since capital is a scarce resource, it should Make full and effective use of it. The most basic function of the financial market is resource allocation, that is, to guide funds, a scarce resource, to the place where funds are most needed and can be used most effectively. How does the financial market allocate resources? The financial market Use the interest rate as the adjustment mechanism of financial activities to guide the flow of funds.

If an enterprise has There are many good opportunities to make money, and if it needs funds, it can attract investors’ funds by promising investors high interest rates. As long as Company A’s return on investment is higher than that of Company B, investors’ funds will flow to Company A. For example, if Company A’s stock pays more dividends than Company B’s, or if Company A’s stock price rises more than Company B’s, investors will sell Company B’s stock and buy Company A’s stock, so that funds Flow from company B to company A. In this example, the interest rate is reflected in the form of dividends or stock price increases.

In a developed market economy, funds flow through the market from unprofitable enterprises to profitable enterprises, from unprofitable industries to profitable industries, and from unprofitable regions to profitable regions, increasing the flow of capital. Use efficiency to improve the efficiency of the entire economy. It is the price of funds that guides the flow of funds, that is, the interest rate.

Here, we do not need government intervention, the “invisible hand” of interest rate will automatically guide the flow of funds to the most efficient place.

Interest Rate Failure: One of the Reasons for Rising Housing Prices in China

We know that in a market economy, resource allocation is done through price and competition. If bananas sell for 4 yuan per catty in Beijing and 0.5 yuan per catty in Hainan, someone will transport bananas from Hainan to Beijing without government intervention. In the middle, price plays a key role.

In the financial market, we rely on the “price” of interest rate to regulate the company’s business activities Consumption activities with the public. When there are many companies or individuals who need funds and want to borrow money from the bank, the bank may increase the loan interest rate, which will inhibit the company’s investment activities and the public’s consumption activities; conversely, when no company or individual borrows money from the bank, the bank It is possible to reduce loan interest rates, attracting companies and ordinary people to borrow money for investment and consumption, which will stimulate economic development.

In this way, we will know why there must be something like “price” in the financial market , and interest rates must be sensitive to the supply and demand of funds. If there is no such thing as interest rates, or if interest rates are slow to respond to the supply and demand of funds, or if companies and ordinary people do not respond to changes in interest rates, Chinese companies and the 1.3 billion people in China may go to the bank to borrow money or not. China’s economy will be in chaos.

Of course, the adjustment function of interest rate and market also fails sometimes, and interest rate and market Market failures can lead to capital flow to inefficient companies and industries, resulting in wasted capital. For example, during the stock market bubble in China from 2006 to 2007, the stock prices of many companies with poor operating conditions skyrocketed, causing many investors to pursue these stocks and invest a lot of money in these companies. After the stock market bubble burst, they invested in these companies. All the money was wasted.

In China, there is another example of interest rate failure, that is, people’s interest in housing mortgage loans Interest rates don’t appear to be very sensitive, which is a big reason why China’s housing prices keep rising. Especially in first-tier cities such as Beijing, Shanghai, Guangzhou and Shenzhen, if the restrictions on purchases and sales are abolished, even if the annual interest rate of the bank’s housing mortgage loans rises to 20%, people who take out loans to buy houses will flock in droves. As for why the Chinese are less sensitive to changes in interest rates, this question deserves careful study.

Follow us and grow together. This article was first published by “Mr. Jin Yi 2022”, and the WeChat public account has the same name.