Negative Interest Rates, or in plain English a situation in which custoers pay the bank interest on our saving in return for their gambling with our money, have been an idea that has bounced round central banks, supranational bureaucracies and political assemblies as it has become clear to even the most blinkered neoliberals and Cultural Marxists that globalism has failed. Twenty years ago, as economically developed nations experienced boom after consumption led boom, fuelled by cheap credit and mainstream economists confidently pronounced that thanks to Modern Monetary Theory (MMT) the good times would never end, Society General’s Albert Edwards predicted an economic “Ice Age” in which every debt issue would end up with a negative yield as capital markets and economies collapsed into a deflationary abyss.
Commenting more recently on the interest rate collapse he has been predicting ever since he first observed Japan’s great bubble economy burst at the end of the 1980s, resulting in both a Negative Interest rate Program (NIRP) and Quantitative Easing (QE) a,k,a money printing. Neither worked and while Japan remains a prosperous nation it’s growth compared to other South East Asian nations has been pathetic.
The way nations and large corporations borrow money is by issuing bonds. These pay a nominal fixed interest rate on their face value, but when they are traded in financial markets, if the price drops the real interest rate (yield,) rises while if the price rises above face value it falls. Obviously if your yield is less than the rate of inflation, the investment is losing value.
Governments and central banks use interest rates to stimulate or slow down an economy but since rates hit rock bottom in 2008 this avenue has been closed to them. We have had a situation where the major nations have been taking on increasing levels of indebtedness to fund budget deficits but have left themselves no options for stimulating the economy by offering incentives to spend. So while national treasuries have been lending money at 0% or 0.25% they have still been issuing bonds at around 3%.
Borrowing money at 0.25% and lending it straight back at 3% is easy money for the banks, so why would they take on higher risk loans for only slightly more interest? So now governments have painted themselves into a corner where they cannot offer incentives to stimulate consumer spending and thus generate more tax revenue, all they can do is threaten punishments for those misanthopes who hoard cash or invest their hard earned. Who is going to leave money invested when instead of earning them interest it costs them money? Cue Negative Interest Rate Programs.
As I have suggested before, for NIRP to work, cash has to be eliminated to stop people buying gold, precious arefacts, antiques etc. or stuffing their saving in the matress, which explains why there has been a push for a Cashless Society. But even if we are denied the options offered by cash, can Negative Interest Rates work or do they threaten to disrupt industrialsed societies more that the boom and bust economics of Keynes or the reckless bubble blowing of MMT?
Had the central banks not intervened to bail out banks with taxpayers’ money in 2008 the global financial system would probably have collapsed. According to many economic pundits and business commentators the world’s economy looks to be at greater risk now: government debt levels are higher than ever; big banks and investment companies have grown bigger and more powerful; and although there does not seem to be a looming sub — prime mortgage housing crisis brewing because few millennials can afford to get on the housing ladder, we are seeing financial problems afflicting many areas of economic activity, from student debt to the volatility in financial markets due amongst other things to algorithm — led trading. At the same time income inequality has further distorted economies and inflated asset prices have hamstrung the less privileged in society, effectively killing the 1980s sacred cow of ‘upward mobility.’
With hindsight, we can say the monetary policies of central banks, (Quantitative Easing aka printing money) created a false sense of security among politicians and business leaders and that the unresolved problems from 2008, 2000, 1991 and all the way back to the Wall Street Crash of 1929 could still come back to haunt them? There is no reason to think the impending chaos can be controlled with untried economic theories such as negative interest rates (NIRP), (it is not a new idea at all, the system was used by medieval goldsmiths but was superseded by ‘fractional reserve banking’ in the seventeenth century.
Since 2008 the focus has changed, the US Federal Reserve, made clear that the objective of monetary policy — and specifically quantitative easing — was basically to stimulate consumer demand and increase GDP. And since then we have had all the central banks around the world pursuing that objective through increasingly crazy measures.
There is, however, a fatal flaw in the idea of using monetary policy to prop up stagnating economies. The fundamental problem when there is too much debt in an economy is that eventually governments or corporations have to start borrowing in order to service their loans. In the true sense of the term this is insolvency. Central banks cannot correct this by printing money, because the value of the money they create is underwritten by issuing more bonds, i.e. creating more debt.
So given that stupid people do not get to run The Bank of England, The Federal Reserve, The Reichsbank and the rest, why does this keep happening? Simples, the politicians find it convenient to believe that the central banks have it all under control.
This is not true, because what we have observed politicians and central banks have been doing is losing control because Quantitative Easing has failed, while the unintended consequences of money printing are becoming more and more evident. And of all the unintended consequences, lulling the governments into a false sense of security is probably the most important.
In a modern nation, financial liquidity is mainly created by banks lending money secured on assets or lending against future expectations. This kind of credit creation has been called magic money and has largely been responsible for the exponential growth of debt and corresponding rise in personal wealth as asset values were inflated to secure credit. When that kind of money creation slows down typically the goes into recession. So as the banks were forced to deal with credit and balance sheet issues from 2008 onwards, the central banks stepped up to the mark by cheapening the cost of credit and by issuing vast amounts of bonds to maintain liquidity throughout the economy.
However, even that has not been enough to rekindle economic growth, prompting some central banks to go a step further and adopt negative interest rates (“NIRP”). Japan was the first major nation to adopt this approach but Germany and the US Federal Reserve are moving the same way.
After ten years of the vast amounts of money being pumped into economies producing little growth (economies have grown at a slower pace than the inflation rate, thus they have contracted in real terms,) and all the evidence we can cite sugests that negative interest rates (legalised theft of customers money by the banks) will be no more effective than printing money ( QE, i.e. stealing peoples’ money by inflation and low interest rates thus robbing savers and investors of its true value.)
Not only have easy credit, quantitative easing, and now NIRP led many people to get the feeling bankers and governments are panicking, as a result of the associated uncertainty consumers have stubbornly refused to spend savings or take on more debt, and spending money to kick start the economy as the theory promised they would. So, clearly, monetary policy only works for short periods. That governments and business leaders are still presevering with the same quick fix approach to a ‘short term’ crisis after ten years means that, to put it bluntly we’re fucked, I’m fucked, you’re fucked, we’re all fucking fucked.
Time to abandon neoliberalism, return to real money and get ourselves a firm grip on reality.