Negative Interest Rates are the Price We Pay for De-Civilization
Negative Interest Rates are the Price We Pay for De-Civilization by Jeff Deist for Mises
Do central bankers really think negative interest rates are rational?
“Calculation Error,” which Bloomberg terminals sometimes display1, is an apt metaphor for the current state of central bank policy. Both Europe and Asia are now awash in $13 trillion worth of negative-yielding sovereign and corporate bonds, and Alan Greenspan suggests negative interest rates soon will arrive in the US. Despite claims by both Mr. Trump and Fed Chair Jerome Powell concerning the health of the American economy, the Fed’s Open Market Committee moved closer to negative territory today — with another quarter-point cut in the Fed Funds rate, below even a measly 2%.
Negative interest rates are just the latest front in the post-2008 era of “extraordinary” monetary policy. They represent a Hail Mary pass from central bankers to stimulate more borrowing and more debt, though there is far more global debt today than in 2007. Stimulus is the assumed goal of all economic policy, both fiscal and monetary. Demand-side stimulus is the mania bequeathed to us by Keynes, or more accurately by his followers. It is the absurd idea, that an economy prospers by consuming and borrowing instead of producing and saving. Negative interest rates turn everything we know about economics upside down.
Under what scenario would anyone lend $1,000 to receive $900 in return at some point in the future? Only when the alternative is to receive $800 back instead, due to the predicted interventions of central banks and governments. Only then would locking in a set rate of capital loss make sense. By “capital loss” I mean just that; when there is no positive interest paid, the principal itself must be consumed. There is no “market” for negative rates. The future is uncertain, and there is always counterparty risk. The borrower might abscond, or default, or declare bankruptcy. Market conditions might change during the course of the loan, driving interest rates higher to the lender’s detriment. Inflation could rise higher and faster than the agreed-upon nominal interest rate. The lender might even die prior to repayment.
Positive interest rates compensate lenders for all of this risk and uncertainty. Interest, like all economics, ultimately can be explained by human nature and human action.
If in fact negative interest rates can occur naturally, without central bank or state interventions, then economics textbooks need to be revised on the quick. Every theory of interest contemplates positive interest paid on borrowed capital. Classical economists and their “Real” theory say interest represents a “return” on capital, not a penalty. Capital available for lending, like any other good, is subject to real forces of supply and demand. But nobody would “sell” their capital by giving the buyer interest payments as well, they would simply hold onto it and avoid the risk of lending.
Marxists think interest payments represent exploitation by capital owners lending to needful workers. The amount of interest paid in addition to the capital returned was stolen from the debtor, because the lender did not work for it (ignoring, of course, the capitalist lender’s risk). But how could a borrower be exploited by receiving interest payments for borrowing, i.e., repaying less than they borrowed? I suppose Marxists may in fact cheer the development of negative rates, and perversely see them as a transfer of wealth from lenders to borrowers (when, in fact, we know cheap money and credit overwhelmingly benefit wealthy elites, per the Cantillon Effect). So negative rates require Marxists to drastically rethink their theory of interest.
Austrians stress the time element of interest rates, comparing the lender’s willingness to forego present consumption against the borrower’s desire to pay a premium for present consumption. In Austrian theory interest rates represent the price at which the relative time preferences of lenders and borrowers meet. But once again, negative interest rates cannot explain how or why anyone would ever defer consumption without payment — or in fact pay to do so!