The Meaning of Low Interest Rates
We hear about low interest rates all the time, and yet they must mean different things to different people. For perhaps most people they are an abstruse metrics whose implications are unclear. For many interest rates are a tired, old story; they have been ultra-low for a very long time. In financial circles there is endless circular discussion about when rates will be raised. For some low rates are a boon, an easing, a great relief. Virtually mana from heaven, low rates are the succour to every financial price. For others, interest rates are the dripping poison of modern finance: a drug keeping the economic patient high on malinvestment and otherwise moribund, weak, and stagnant.
Most of the interpretations of low rates have to do with the analysis of asset prices and macroeconomics. Few have ventured to guess what low rates mean at a societal level. What does it mean to our culture that interest rates are so low, even negative, in many places? What does it mean in the human context, that a loan be can be issued at zero or negative rates? How does one entity justify to itself the lending of money with the guarantee of zero return? What does it say about our vision of the future and what are the implications for our youth and our society? These are seldom posed questions.
Put simply, ultra-low rates are a statement of deep pessimism about the future.
For interest rates to be so low effectively means that there are not a lot of good ideas about how to make life better in the future. Vast sums of money lay idle at this very moment. Trillions of dollars currently earn less than the stated inflation rate; in other words, they are already guaranteed real losses. This means that there are not enough ideas for how to employ capital. Money managers sit on vast sums but don’t know how to use them productively. In a normal age that money could be directed in factories, tooling, exploration, research, and all sorts of miscellaneous efforts that will pay off later. Today all the obvious ideas have been already pursued. All the low-hanging fruit has been plucked. The only remaining options with a decent possibility for return are highly risky: junk-bonds, startups, and growth stories.
If there were a buoyant enthusiasm for the future, we might all be brimming with ideas for growth. The demand for credit would be enormous. We would be at pains to allocate scarce resources between so many promising enterprises. Banks would groan at the plethora of possibilities and the paucity of resources. Rates would be high to reflect the abundance of demand and the scarcity of supply. This is an optimistic future in which the movers and shakers of the world believe that opportunity abounds. The high rates themselves mirror expectations for high returns in productivity. Energy is in the air.
But instead we have the complete opposite. The low rates are a statement of despair. There are no low-risk ideas for allocating scarce capital anymore. So instead the appetite for risk has shifted and businesses with certifiably bad chances of return attract our still-scarce resources. This is the very definition of malinvestment.
We have only to look to the countries with the lowest rates to see the most profound malaise. Europe and Japan keep rates at rock bottom, and indeed negative in places, to placate otherwise-tottering balance sheets of zombie enterprises. The inability to honestly face failure has led to its subsidization. The mood is bleakest where rates are lowest. No growth is foreseen in the paralyzed, negative interest rate world. There has instead been a very clear and unambiguous choice to preserve the edifice of the status quo (the many companies and governments that would be bankrupt at higher rates) at the expense of the future.
Choosing the present over the future is a gravely mistaken choice. What is today envisioned as possible has received over investment at the expense of the future thing which is not yet envisioned. The youth have and will continue to suffer, most especially in those places where the malaise is worst.
While it may seem paradoxical, high interest rates are the statement of optimism in the future that these depressed societies need. If it means burning down the already-rotten balance sheets of contemporary behemoths, so be it.
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