why are interest rates always positive? is there any reason -at all- that makes sense?

Answer 1

While it sounds too weird to be true, interest rates are NOT always positive. This happens two ways:

1) Negative nominal interest rates. Believe it or not, Japanese interest rates were NEGATIVE for a while on deposit rates. That's right. It was until recently that the Bank of Japan was trying to fight a liquidity trap. That is, an economy was stagnant, expected returns on non-deposit investments was low and deposits keep high despite extremely low interest rates. Essentially money piles up at banks and traditional monetary policy stimulation fails to get banks to loan. Due to the "lost decade" in Japan, things got so bad that rates actually turned negative to disincentivize deposits. Rates have turned positive since then.

2) Negative real interest rates. Real interest rates take into account inflation. When inflation is higher than nominal (advertised) interest rates, you are losing money by keeping money in the bank. This is much more common.

Having cleared that up, interest rates tend to be positive due to "time value of money". There are several components to time value of money.

First, there is the time/risk element. Basic financial theory says that investors want to be compensated for the risk on their money proportional to the time they invest. That is, there is a trade-off between risk and potential returns. The longer the time, generally the greater the risk (except in things where time decreases risk - like options). This is why longer interest rates (e.g. 10 year) are higher than short rates (1 year).

There is a second element, which is default risk. US government bonds are generally seen as risk free, which means there is no default risk. However, every other entity is going to have some sort of risk that they are not going to pay up. For example, Fannie Mae is not a government entity, but is sponsored by the government and therefore has an implicit promise of no-default (very low default risk). Conversely, GM is going to have a much larger default risk given their production and pension issues. Investors want to be compensated for the risk that they are not going to get paid in the event that GM defaults.

There are other premiums (e.g. liquidity premium), but these are the two main variables why interest rates are positive.

Answer 2

An interest rate is a premium rate of return. It can be negative but who would want a rate of return to be negative? We all strive for positive gains. Thats how we survive!

Answer 3

Interest is the profit the lending institution makes for lending you money. If the interest rate were negative, or below "par" (the break-even point for the bank) than the bank would be losing money to lend you money. And nobody's in business to lose money.

Answer 4

A negative interest rate would be like a tax.

Example at -10%

You deposit $100.00 and after a year you get $90.00 back.