Down for the Count: Negative Interest Rates
When people talk about interest rates they are referring to the rates that central banks set directly or indirectly. Directly, central banks can set a rate at which they pay back depositors (other large banks.) These deposits rate help set the rates for things like Treasury bills and other risk-free investments. They are considered risk-free because cental banks can always print more money to cover the rates they promise and because they are risk-free, they’re seen as a baseline for expected returns. Any other investment should at least return as much as the interest rate.
Central banks increase interest rates in times of economic prosperity and decrease them in times of despair. Lowering rates means lowering the expectation of returns. Keynesians believe that this increases investment. To them, economic slumps are caused by investors withholding investments. By lowering the expected returns on risk-free investments, investors are pushed into riskier options. Meanwhile, borrowers are more likely to take on investments because they’re more likely to be able to meet the necessary returns.
It is indicative of how bad the economic landscape is that European and Japanese banks have lowered interest rates into negative territory — which amounts to them charging investors not to invest. The basis of finance, future value, can best be summed up by the phrase, “a dollar today is worth more than a dollar tomorrow.” Negative interest rates reverse this; it’s better to be paid tomorrow than today because the money will be worth more. It means that holding onto cash and getting no return is more financially sound than depositing the money in a bank. It also means, ironically, that you can make money simply by agreeing to take out a loan.
There is a lower bound to interest rates even if that lower bound is negative. Monetary policy alone won’t even stem the tide of economic slowdown. And, central banks are not in a position to overcome another recession.
It seems like the monetarist dominance of the 80s and 90s has given way to a resurgence of Keynesianism. Keynesians will argue for fiscal policies such as government works, raising wages across the board, and even a guaranteed income. Monetarists will argue that central banks make direct payments to consumers — helicopter money. They might also argue for policy that amounts to a governmental guarantee of a higher rate of return. This would be manifested in some form of imperialist venture into emerging markets.
Neither will be capable of counteracting diminishing profit rates alone so they’ll most likely combine forces to unleash the full arsenal of bourgeois economic tooling. Such drastic action probably won’t come this side of a crisis, but it seems like some form of guaranteed income is coming down the pipe. This is, of course, assuming voters in the advanced economies rebuke the rise of fascism.
In my next article I will argue that a guaranteed income will become the next new obvious idea. This sounds great, of course — a Social Democratic dream. But, it won’t directly address the fundamental contradiction causing profit rates to fall and will therefore be subject to immediate reversal. Furthermore, the particularities of what guaranteed income looks like will reflect both the political power as well as the theoretical comprehension of the working class. I will outline one possible transitional formulation we can begin fighting for today.
