Tuesday, June 07, 2016

The Money Cult

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Previously, I have written about the progression from positive interest rates to zero interest rates (since 2008) and finally to negative interest rates. And I asked my readers a simple question: How will negative interest rates blow up the financial system? And apparently none of you knew the answer. Now, I must confess that to start with I didn’t know the answer either, which is why I asked the question, and my first attempts at finding it were somewhat tentative. But now, having thought about it, I do seem to have found the answer, and it is that…

But first let us back up a bit and answer several preliminary questions:

1. Why did zero interest rates become necessary?
2. Why are negative interest rates now necessary? and,
3. Why are negative interest rates a really excellent idea?*

* if you ignore certain unintended consequences (which is what everyone does all the time, so let’s not worry about them just yet).

1. Interest rates went to zero because economic growth went to zero. If you are just now wondering why that happened, just google “Limits to Growth” by clicking this link. (A public notice about the scheduled end of growth has been on display at your global planning office for four decades now. It is not anyone else’s fault if people of this planet don’t take an interest in their global affairs. I mean, seriously…)

Interest rates and rates of growth are related: a positive interest rate is little more than a bet that the future is going to be bigger and more prosperous, enabling people to pay off the debts with interest. This is an obvious point: if your income increases, it becomes easier to repay your debts; if it stagnates, it becomes harder; if it shrinks, it eventually becomes impossible.

Yes, you can nitpick and split hairs, and claim that there was still some growth, but in the developed economies most of this growth has been in financial shenanigans, fueled by an explosion in debt, and most of the benefits of this last bit of growth accrued to the wealthiest 1%, and did next to nothing for anyone else. Did this growth help support a large, stable and prosperous middle class? No, it didn’t.

In fact, wages in the US, which was once the world’s largest economy, have been stagnant for generations. In response, the Federal Reserve has been continuously reducing interest rates, until they hit zero in 2008. And there they have stayed ever since. But now, it turns out, that’s not good enough. If the Federal Reserve wants to keep the party going, they have to do more, because…

2. Once you are faced with a continuously shrinking economy, just holding interest rates at zero is not sufficient to forestall financial collapse. The interest rates must go negative.

Here are just a couple of particularly striking examples.

Australia has amassed a huge pile of debt—over 120% of GDP—and most of it is mortgage debt on overvalued real estate. Now that Australia’s economy, which was driven by commodity exports to China, has tanked, a lot of this debt is being turned into interest-only loans, because Australians no longer have the money to repay any of the principal. But what if they can’t make the interest payments either? The obvious solution is to refinance their mortgages as interest-only at zero percent; problem solved! Of course, as conditions deteriorate further, the Australians will become unable to afford taxes and utilities. Negative interest rates to the rescue! Refinance them again at a negative rate of interest, and now the banks will pay them to live in their overpriced houses.

Another example: energy (oil and gas) companies in the US have accumulated a fantastic pile of debt. All of this money was sunk into developing marginal and very expensive resources such as shale oil and deep offshore. Since then, energy prices have fallen, making all of these investments unprofitable and dramatically reducing revenue. As a result, energy companies in the US are a few months away from having to spend their entire revenue on interest payments. The solution, of course, is to allow them to roll over their debt at zero percent, and if you want them to ever start drilling again (their production has been falling by around 10% annualized) then please make that interest rate negative.

3. Are you starting to see how this works? Whereas before you had to be careful about taking on debt, and had to have a plan for how you will repay it, with negative interest rates that is simply not a consideration. If your debt pays you, then more debt is always better than less debt. It no longer matters that the economy continuously shrinks because now you can get paid just for twiddling your thumbs!

But are there any unintended consequences of negative interest rates? Unintended consequences are hard to think about, and most people get a headache even trying. How can it be that clean, plentiful nuclear energy will eventually pollute the whole planet with long-lived radionuclides, resulting sky-high cancer rates? How can it be that wonderful genetically modified seeds will render us sickly and infertile in just a few generations? And how can it be that ingenious mobile computing technology has turned our children into zombies who are constantly twiddling their smartphones as they sleepwalk through life? It’s hard to think about any of this without taking some happy pills; and how can it be that taking those happy pills has… you get the idea.

The unintended consequence of negative interest rates is that they destroy money. This is true in an entirely trivial sense: if you deposit x dollars at -ρ% annual, then a year later you will only have x(1-ρ) dollars because xρ dollars has been destroyed. (In case you prefer to count on your fingers and toes, if you deposit $10 at -10% annual, then a year later you will only have $9 because $1 has been destroyed.) But what I mean is something slightly more profound: negative interest rates erode the very concept of money.

To get at the reason for this, we have to ask a slightly more profound question: What is money? I think that money is the cult of the god Mammon. Look at the following symbols:

€ $ ¥ £

Don’t they resemble religious symbols? In fact, that’s what they are: they are symbols of faith in money. They are also units—dimensionless units, of a peculiar kind. There are quite a few dimensionless units in math and science, such as π, e, %, ppm, but they are all ratios that relate physical quantities to other, identical, physical quantities. They are dimensionless because the units cancel out. For instance, π is the ratio between a circle’s circumference and diameter; length over length gives nothing. But monetary quantities do not directly relate to any physical quantity at all. It can be said that some number of monetary units (let's call them "yarbles") is equivalent to some number of turnips, but that, you see, is a matter of faith. Should the turnip farmer turn out to be an unbeliever, he would be within his rights to say, “I am not taking any of your damn yarbles!” or, if he were a polite turnip farmer, “Your money is no good here, Sir!”

Of course, if our turnip farmer were to do that, he’d land in quite a bit of trouble because, you see, the cult of Mammon is a state cult. You have no choice but to be a believer, because only by worshiping Mammon can you earn the money to pay your taxes, and if you don’t pay your taxes you get jailed. Nor can you produce money on your own, because that right is reserved for Mammon’s high priests, the bankers. Making your own money makes you a heretic, and gets you the modern equivalent of being burned at the stake, which is a $250,000 fine and a 20-year prison sentence.

But it goes beyond that, because the state insists that just about everything there is must be valued in units of its money. And the way everything must be valued is through a mystical legitimizing process that is central to the cult of money: Mammon’s “invisible hand” makes itself apparent within the “free market,” which is Mammon's virtual temple. The “invisible hand” sets the price of everything as a mystical revelation and, as with any revelation, it is beyond criticism. It is a redemptive ritual, in which people acting out of their basest, most antisocial instincts—greed and fear—manage, through Mammon's divine intervention, to serve the common good. The “free market” is also believed to have all sorts of miraculous properties, and as with all miracles it is all a matter of smoke and mirrors and suspension of disbelief. For example, the “free market” is said to be “efficient.” But it sets the price of turnips, and the result is that fully 40% of the food in the US ends up being wasted. That’s definitely not efficient.

This sort of inefficiency can be tolerated while resources are plentiful. Should throwing away 40% of the turnips cause a shortage of turnips develop, turnip producers can grow more turnips and sell them at prices that turnip consumers can still afford. But when resources are no longer plentiful, this trick stops working, and what you end up with is something called market failure. The current state of the global oil industry is a good example: either the price is so high that marginal consumers cannot afford it (as was the case until quite recently), or the price is so low that the marginal producers can’t break even (as is the case now).

And so a bout of supply destruction follows a bout of demand destruction, and then the pattern repeats. Everybody loses, plus this is terribly inefficient. It would be far more efficient to appoint some central planner to calculate the optimum price of oil once a month. Then all the marginal producers would jump out the window, all the marginal consumers would slit their wrists, and equilibrium conditions would prevail. As the oil supply dwindled (it is depleting at around 5% per year), some additional number of producers and consumers would need to sacrifice themselves for the greater good, and so on until the last barrel is produced and burned, leaving whatever producers and consumers still remained lying in pools of their own blood.

As natural resources dwindle, our faith in the cult of Mammon is being sorely tested. But what alternatives are there? Well, there is an even older, ancient cult that’s based on idolatry: the worship of precious metals. Gold has some industrial and aesthetic uses, but it is primarily useful for making a golden calf for you to worship (or, if you are former Ukrainian president Viktor Yanukovich, a golden toilet). Economists tell us that gold is a “pet rock” or a “barbarous relic,” and they are right, but what is one to do when there is a Götterdämmerung (twilight of the gods) going on? Nature abhors a vacuum, and in a Götterdämmerung older pagan deities sometimes emerge and demand virgin sacrifices—such as poisoning entire river ecosystems by mining gold using mercury, or squandering prodigious amounts of fossil fuels in mining, crushing and sifting through millions of tons of hard rock to get at just 3 parts per million of gold.

Negative interest rates are Mammon’s Götterdämmerung. The money cult is bolstered by the idea that its huge and all-powerful deity will be even more huge and all-powerful tomorrow; if the opposite is demonstrably the case, then people’s faith in it begins to falter and fade. Negative interest rates are like an icy-cold bath for Mammon, causing its godhead to shrink a little more with every dip. People see that, and think, “I don’t want to worship his shrinking yarbles.” Then they go and spend their own yarbles on anything they can find—fallow land, vacant houses, golden calves, boxes of brass knobs... They don’t bother investing their yarbles in growing turnips, because what’s the use of turnips if all you can do with them is sell them for even more shrinking yarbles?

Negative interest rates are an excellent idea—and perhaps the only way to keep the financial game going a bit longer—but, given these unintended consequences, they are also a terrible idea. The bankers know that. They want to preserve their cult’s status, and constantly talk about raising interest rates. But they haven’t yet, because they also know that just a small increase will result in trillions of dollars of losses, triggering widespread business failures and ushering in the Greatest Great Depression Ever. This is not a problem for them to solve; this is a predicament. They will delay and pray, and make pronouncements loaded with keywords designed to please the high-frequency trading algorithms that are in charge of artificially levitating the “free market” with judiciously timed injections of “free money.” But in the end all they can do is act brave, wait for a distraction and then… run for the exits!

And your job is to make it to the exits before they do.


Jan Schmidt said...

Thanks Dmitri, stunning analytical work! Is there a german version of this text? If not i would gladly translate it ...

Trmist said...

Very enjoyable piece. Speaking of unintended consequences how about America removing itself from the gold standard. This act is what got started a chain of events that culminates in negative interest rates and soon to be very high inflation. I'm don't like how gold is mined but it's supply increase by roughly 1.5% per year, much less than 7% plus our money supply is inflated by every year. Gold imposed limits to growth, the system wasn't perfect but it was an anchor to moderate the financial damage out of control governments could do. Events transporting in Venezuela should be a warning to to everyone. When the farmer no longer accepts yarbles my guess is he will trade for gold, or even silver.

Paul Warfield said...

Good, concise summary. However, I would add that while growing turnips is arguably the best strategy, from a tactical standpoint owning gold at this point time would also be wise. Unless, that is, one believes that for the first time in several thousand years it be a nonpareil wealth preserver during a period of extreme financial stress and instability.

Siggy Galaen said...

A central problem with financial crises is the failure to distinguish financial economy from the real economy. Values created through abstract mathematics aren't the same as values created through production or services. This asymmetry is eventually what collapses; a so-called correction of (overvalued) stocks, real estate etc. It is also what causes debt slavery.

In his paper "Neo-classical economics: A trail of economic destruction since the 1970s" Norwegian professor of economics Erik Reinert argues that:

"the international financial crisis is just the last in a series of economic calamities produced by a type of theory that converted the economics profession from a study of real world phenomena into what in the end became mathematized ideology."

"A reconstruction of widespread welfare will need to be based on the understanding that what unleashed the juggernaut of welfare destruction was not ‘market failure’; it was ‘theory failure’."

"Neo-classical economics (...) tends to see this destruction of real wealth and accumulation of idle capital merely as an innocuous market activity."

This also coincides with much of what Yanis Varoufakis points out about the global economy.

Btw, amusing point about the religious aspect of money. Ever watched "They Live" by John Carpenter? The dollar bill there shows "This is your God".

Robert Magill said...

Economics 101 Revised
The universal dynamic of capitalism is to strive for growth. The opposite of growth is not non-growth but rather...sharing. Thus anathema. Apostasy. Taboo.

forrest said...

Something similar proposed in (I think) the 30's deserves some consideration as well: incredible shrinking money. You could, of course, hold on to this, but over N months its value would go down to V*X^N, for some X<1. The idea was that this was money to be spent on Real Stuff, hence enhancing the flow of goods & nices flowing through the economy...

The mysterious process by which actual prices goes like this: as Adam Smith said somewhere, ~No sooner do two tradesmen in the same business bump into each other, than they set up 'a conspiracy in restraint of trade.' That is, they fix a price they will both charge, high enough to lift their net cash incomes to make their lives comfortable. If they don't do this (I don't know whether he added this part) market forces will inexorably drive them into Begger-Thy-Neighbor policies guaranteed to make business bad for everybody -- or until some lone crazed survivor squeezes everybody else out, establishes a (wicked) monopoly, and commences to squeeze the public. In Galbraith's day, the situation he described came down to fixed fights between companies large enough to effectively dominate their markets through large-scale advertising and brand-name monopoly, ie Any newbie starting up with the same product would be driven under by the fact that No-one-ever-heard-of-this-stuff. Each established firm would mysteriously set their price at 'what we would really like to get for this', find out what everybody else was going to charge, raise their prices enough to keep things stable. (It wasn't as though driving the other businesses out would increase what anyone could charge, certainly not anytime soon; while trying to do so would certainly have made life unnecessarily rough.)

More recently, of course, you had the Trump-clones looting and pillaging such corporations -- not to increase profits, but to sell off the scraps in pursuit of a briefly-higher stock price. And so brand names soon stopped meaning anything whatsoever, beyond: "A company with this name used to make good stuff; what happened?!"

(Hence a friend of mine, once working in Quality Control, found himself increasingly pressed to sample & reject less and less, until (eventually) his department was eliminated altogether.)

Now if you wanted to make negative interest rates helpful to the public, you would beg 'your' government to go on loaning money to the kleptocratic class, at a fixed negative rate -- with the insistence that they loan this money out to the lowly public (gasp!) at a fixed, slightly lower negative rate. The banks could go on profiting enormously, but a typical member of the public would now have this loan which was worth money for him to keep... Alas, he would have to spend it anyway (He is, alas, a typical member of the public, and needs to eat, pay rent & taxes, etc, no matter how much that costs him. And since There Is No Inflation he would continue to have to pay more for all this; it's not as if he could afford to spend his money on high-quality cheap toys.)

There'd just need to be an upper limit on how much a poorschmuck could borrow -- which should be a natural consequence if his bank could only borrow some limited amount to loan out, after which further loans would merely be a liability to them.

Would people still accept money under these conditions? Hey, they've gotta have something to pay the taxes with; they wouldn't want to lose their banks!

Cortes said...

Money is but a medium of exchange. When faith in its supposed usefulness as a measure of wealth dissipates then regressive steps such as ZIRP and NIRP are unlikely to be considered by anyone of average intelligence to be other than trigger mechanisms for exit signs. Exit meaning conversion of abstract wealth into physical substance. Why rely on US$10m in paper gold/silver/platinum when you can have US$500k of the real commodity squirrelled away.
And yes, a store of value needs agreement to confer value on a material which may itself have little intrinsic or immediate utility in persuading another to make an exchange. Other real life commodities (food and access thereto, shelter and access thereto) seem to me destined to figure larger in the collective imagination and perhaps will lead to acute price inflation soon. Exchange may revert to its solemn origins with mutually acceptable obligations rather than the whim culture of today.
Another fine essay: thank you.

Jon said...

Beinga former IT person, I look at all problems as a question of information processing. When all you have is a hammer, as they say. So money is information about a living system. Our economy is alive and money describes how it works. I think this is a useful metaphor. A sick economy is going to communicate that sickness throughout itself. Money is not the problem. It's the symptom. Gold is no solution, either, since in a sick economy gold, no matter how fungible, divisible, durable, etc., is still going to communicate the underlying economic sickness. You can't eat gold. Sick economies produce sick money and sick individuals. Clam shells, tulip bulbs, fiat notes or gold bars. They are all the same and all say the same things. Will anyone listen?


NowhereMan said...

@ Jon: Great comment! Just to add, negative interest rates are also useful for stimulating money velocity, aka economic churn, at least until most of us simply run out of money to spend. Unfortunately, this will also likely lead to bouts of inflation along the way for key commodities such as food and energy. Fortunately for the hyper-rich, since monetized wealth is inherently relative, they win either way, whether the economic pie is growing or shrinking. In the end a few of them will be left standing with all the money and resources and the rest of us will be forced to essentially go feral and fend for ourselves once again, although that won't be easy in a country where every square inch will be owned and locked down tight against those who lack the ability to pay. That won't be a pretty sight after 100 years of luxurious, mostly labor-free living.

Villager said...

Let me see how this works. The gubmint "lends" a bank a million bucks along with an agreement to pay the bank $10,000 a year in negative interest. The bank is somehow "forced" to lend the million to its borrowers but will only pay them $5000 in negative interest. The bank will immediately put its sidelined physicist quants to work figuring out cockamamie schemes based on their deep theoretical knowledge of the infamous "pushing on a string theory" to keep from having to give away $5000 that would otherwise remain a profit. It's a lot easier to convince a bank to lend at positive rates. When they're negative there's no incentive at all. Force won't work. The banks own the government so who's gonna hold the gun to their heads? Hillary? Right! And who do we think the banks would loan to if they were "forced" to lend at negative rates? Their buddies and off book accounting entities. Count on it.

The banks will most likely lend out the money "borrowed" at the usual usurious 20% credit card rates and wallow at the trough. They can truly have their cake and eat it too. I'm not waiting for home loan rates to turn negative either.

The only way to understand the dynamics is in terms of incentives. Negative interest makes the principal of borrowed money attractive to hold. Why would I want to spend the money you are paying me to hold? At the end of the loan period I can pay you back if I have the money in my coffers. I will spend the "interest" you are paying me and hold the principal for repayment. Hey! If I need more money to spend I'll simply borrow more using the money I already borrowed as collateral.

And what happens to the idea of "marginal reserves" when rates are negative? When rates are positive a bank wants to lend out $9 for every $1 it borrows - the so called multiplier effect. When rates are negative, banks want to hold as much as possible since they are only holding the money to acquire the negative interest. Things just don't work right through the looking glass.

This is, as you say, a desperate gambit to "buy" (literally) a bit of time at the end of the age of growth. The paradigm of growth is failing but let's pretend and extend as long as we can. Maybe we can give the "string" a bit of Viagra before we push on it with a bit of Old Crone Capitalism.

Hillary has a call in to Lloyd Bankfiend on her Blackberry as I write this.

Tomuru said...

What a wonderful to eliminate the U.S. national debt! Think about it. When rates go negative the U.S. Treasury bond gets bought up at negative rates to "preserve" wealth in the world's "most stable" ultimate currency. As the U.S. turns over its' debt from positive to negative interest rates, Presto Changeo no more national debt. The world is now a better place to live, at least if you get paid in dollars. Let the rest of the world produce turnips, we'll just buy them with dollars like a perpetual motion machine.

taawaciclos said...

Hello! Negative interest rates is the beginning of the end of the present model of the monetary system called "capitalism".

There is no "capitalism" with zero IR, much less with, negative ones!

But these are historic times we are living... We are living the actual days of the end of capitalism (at least the illusion of capitalism).

In the end, the present (and future) owners of the monetary system, will continue to dominate the system... After all they are the ones controlling the "EXIT" door, and not everyone will be granted a pass!

Jmu Murch said...

Interesting speculation about NIRP. Has it ever been used prior to the 21st century?
I wrote about the possibility of a demurrage currency, which has an ancient history, and seems to me to be appropriate in a declining economy. Before money ancient Egyptians kept track of grain deposited in the state granaries with chits or scripts. Their value declined over time to account for spoilage. This was, in effect a demurrage currency. When Germany and Austria entered into hyperinflation during the depression, local currencies sprang up to take the place of the state currency. One of the most successful was a demurrage currency that lost value over time, based on the date stamped on it. It would be much easier to use something like that in our age of ubiquitous computing.
OK, demurrage currency is BORING. How about an ancient tradition that has a record of success for over a thousand years? Jubilee was a tradition in all Western civilizations until the Romans. Forgive the debts periodically. Personally, I would like to see personal and national debts forgiven, but not corporate, and no, corporations are not, have never been and never will be, people.

Jim R said...

But ... electronic yarbles! They're better! (because you can always trust a tiny clique of anonymous trolls on the internet) OK, that's enough.

Loved the H2G2 riff back there ... plans at the global planning office. Now where did I leave my towel?

Then there's this deadly toxic meme floating around that "war is good for the economy". Of course, this is only true if 1) you win the war; and 2) there was something worth winning. Since these conditions are somewhere between untrue and exceedingly unlikely, it would mostly end in a prompt distribution of those long-lived radionuclides (as outlined in last week's essay), rather than having them dribble out over years and decades.

Thanks, Dmitry.

taawaciclos said...

Quoting Jmu Murch

"Personally, I would like to see personal and national debts forgiven, but not corporate, and no, corporations are not, have never been and never will be, people."

I agree with this approach. It's probably the only one that can reset the current model, and restart the cycle!

But, no matter what, this will happen sooner or later. So, if it's done in a controlled environment - meaning not letting time passing by - the probability of success is much higher.

Jay Moses said...

note that there really is no such thing as a negative interest rate. if i borrow from you at an interest rate of -1%, then you are paying me 1% interest for the privilege of loaning me money. every interest bearing transaction is a two way street, someone is paying interest and someone else is receiving it.

what "negative" interest rates actually do is reverse the historical relationship of creditor and debtor so that the creditor side of the transaction becomes the payor and the debtor becomes the payee. thus bank deposits becomes money drains for the depositors. this is very difficult if people have the option to hoard cash. predictably, and already underway, this will lead to attempts to ban cash. another spur to accumulating gold and other hard assets.

Patrick DeBoard said...

That's some hard satire, Dmitry. I was shaking my head the whole time I read it. The way this world works, man, is all wrong. A tiny fraction of greedy scumbags has set up this system to enrich themselves, and the rest of us have fallen for it. We are really that stupid. It will bring me pleasure to see the global economy collapse. When the hoards of hungry start roaming the countryside killing folks for a look inside their pantries, that will bring me fear.

Anyone who has gold will be killed and robbed by those closest to them. Same for silver, jewels, anything idiots think is "valuable".

This whole human experiment has just about run its course. Time for all the apocalyptic scenarios now.

Me? I'm going to find a remote-ish, small community, buy a few acres, and start growing turnips. Nobody likes turnips, but they will keep me alive while everyone else is dying.

Bryan Hemming said...

The average bank account holder has being paying a form of negative interest for a couple of decades now. If you leave your salary in your current, account without spending it, the bank will charge you an administration fee, instead of paying you interest, as used to be the custom. And as inflation still exists, however small the amount, another slice is being creamed off.

And then there is the hidden negative interest charged every time you pay by cash or plastic. The banks charge the retailer, and the retailer supposedly 'absorbs' the costs, in other words he adds the sum the bankers charge to the price of the article. You didn't think it came out of his pocket did you?

But not only does the debit card owner pay those charges, so do the ones paying cash, unless they get a discount amounting to the percentage charged by the banks. The retailer spreads the extra costs over to those paying in cash. In effect the banks are now charging the buyer and the seller for doing all the work for what amounts to giving banks money for nothing. Work it out for yourself, it's really easy.

Cherokee Organics said...

Dear Dmitry,

I generally only comment over at the ADR, but I was asked my opinion of your analysis this week. Firstly, I agree with you that money is merely a token of wealth and not actually wealth itself. And yes, the likening to Mammon is quite relevant.

However, negative interest rates are a function of the current economic policies being pursued by developed countries around the world. As you are aware there has been a lot of expansion of the monetary supply in recent years (otherwise known as money printing).

This economic policy has historically led to hyper-inflation and this time I expect that it will be no different. And we are currently experiencing inflation, but the excess money supply is being directed into financial assets which have no theoretical upper price. Those assets can cost whatever, it does not matter.

I'm an Australian and down here the excess money supply is being swept into the housing market (which is bordering on insane) as well as the share market and I recently spotted a plug for the bond market. Every year you need more tokens to buy the same financial stuff as the previous year. Some fools may call this a return on investment and it can certainly make someone feel wealthier (and can be used to get a person further into debt), however it also has a lesser name which is rarely used because it is distasteful: Inflation

The economy of tokens is a reflection of the underlying economy of goods and services. Changes in that real world economy of "stuff" take a while to reflect in the more abstract economic world. That is just how it works. Look at the time it took for mortgages to default in the US to the time that the mortgage bonds failed to the time that the CDO's (and synthetic CDO's) tanked. It all takes time and is delayed.

That time is also a reflection of the amount of effort being pumped into the abstract world of economics to keep it afloat for a bit longer than it would otherwise. It is in peoples benefits to ignore this analysis because it is dark.

Viewed this way, negative interest rates are simply another way to destroy tokens in the economy so that those tokens are not directed into the world of goods and services which will drive up prices. And for that to become necessary is an interesting sign of the times.

Once you begin to contemplate the realities and implications that the number one objective of economic policy is to halt inflation in real world goods and services - the world starts looking a little different than you may otherwise believe.

I dare you to prove me wrong.



Junaid Shahid said...

"Personally, I would like to see personal and national debts forgiven, but not corporate, and no, corporations are not, have never been and never will be, people."

I agree with this approach. It's probably the only one that can reset the current model, and restart the cycle!

Iconoclast421 said...

Negative rates exist for one simple reason: to make the bondholders more money. If you are holding $1 billion of 30 year bonds and rates are 1%, then if you sell them right now you can only sell them for $742 million because the remaining $258 million is what you earn in interest. But if rates fall to 0% then that entire $1 billion is available to you right now because there is no interest to be paid over 30 years. This move from 1% to 0% represents a $258 million profit on a $742 million investment, a return of 35%!! This is why they keep pushing rates down, to generate returns in a zero growth world. But it doesnt stop at zero. At -1%, that same $1 billion of 30 year bonds goes from a current valuation of $1 billion @ 0% to $1.348 billion @ -1%!!! The reason it is worth so much is because that is the amount of money you need to invest at -1% to end up with $1.000 billion after 30 years! Again this is a huge return. But it is really the exact same thing as going from 1% to 0%, or 2% to 1%. It is just simple money printing. The bonds sit on the central bank balance sheet, so what does it matter if they lose money over time? It is simply a giant racket because who in the world sits on a huge bond portfolio except the rich? This is free money for the rich.

Bob M said...

"Something similar proposed in (I think) the 30's deserves some consideration as well: incredible shrinking money. You could, of course, hold on to this, but over N months its value would go down to V*X^N, for some X<1"

We already have "shrinking money"...we call the Federal Reserve Note, sometimes erroneously referred to as the "dollar" (of course the dollar is constitutionally defined as a certain number of grains of silver).

Phil Harris said...

"Uncharted waters" atill seems an appropriate phrase.

However, there are one or two very old indicators.

Under some conditions it seems the token value of gold can go negative. Some 1500 years later quite large hoards (still large by today's standard but 'hoard' is the wrong word in my opinion) are still occasionally dug up. Britain was one of those places that went "off the map" back in the day. The key data point seems to be that none of those old-time 'savers' ever came back. If they managed to flee they did not dare try take the metal with them - too dangerous I suppose.

Phil H

Gail the Actuary said...

Great post!

I imagine you saw this morning's news in the WSJ: "Japan bank balks at negative rates: Nation's largest lenders considers ending role as primary dealer for government bonds."

According to the article, "Banks say negate rates haven't created more demand for loans but have hit their stock prices and threaten their profits."

MoonShadow said...

Once again, Dmitri, you have a very unique way of framing the problem.

MoonShadow said...

@Bob. Shrinking money was called demurrage, and the idea was to approximate the costs of storing gold, in order to encourage investments. This is very much what negative interest rates are *intended* to do on a macro level, but like so many things, the actual effects were a bit different. Not that they were unforeseeable, for many predicted what has actually happened, but they were unforeseeable to those for whom their own paychecks required that they did not foresee them.

MoonShadow said...


There are two, distinct, economic systems with the name "capitalism" in our modern world. The first, and older, version is a set of praxeological, social & economic laws. As such, this capitalism will not cease to exist, it will return to dominance. For the second version of Capitalism (henceforth denoted with a capital-C) is the dominate form that has existed across much of the "free" world for about 100 years, and is predominately defined by the private control of production & resources mirrored by an officially public & hegemonic control of the 'legal tender' medium of exchange. It this second form of Capitalism that is about to die, and it sorely deserves it. The two versions of capitalism are not compatible.

taawaciclos said...



Why do you believe the way forward is the return of an older version of a system that brought mankind to this misery, and that ultimately will produce the same results?

Be cool!

messianicdruid said...

Great article and comments.

@Phil H. What you described was simply "hoard" management. A traveler would bury his metal (wealth) before entering a town or village taking in only what was needed to protect himself and purchase supplies or the items he would take to trade at another location. Sometimes his fears were fulfilled and he did not return.

The borrower is the servant of the lender. Usury is sin. Slavery to usurers is punishment for lack of foresight.

Gold is a sapling, silver is an acorn. Plant some now for the times when rebuilding comes.

Phil Harris said...

@messianic druid
Congrats. Very imaginative! ;-)

I now have a whole new take on money management. ;-)

Perennial problem! Have you ever heard of Solon?
Later, after the empire screwed up, Islam and Christianity tried to deal with usury: but there you go, eh?

Zarlenga has an interesting account of the long distance trade / exchange rate of gold and silver between East & West. It mattered to the money supply. Farther east in Burma to this day they still paper the outside of temples with the gold stuff. Apparently it was never used as token in those parts.

Phil H

HeyZeus said...

Brilliant... you get all the turnip points for the H2G2 reference. Question... where does politics fall in this analogy? Bread and 'games'?

rapier said...

Negative rates exist for many reasons but most important is the given reason which provides the political space to enact them. That stated reason is the low rates encourage borrowing which leads to demand which leads to sacred 'growth'. Most people believe that even the Fed and it's many true believers but there are many other reasons some of which are palatable to the opinion leaders and a few which are not. In no mans land is the understanding that borrowing a ultra low rates is great for those who are borrowing to pay off old debt. However nobody wants to admit this is happening since it is a bit unseemly.

Rarely mentioned because it is not understood by many is that falling rates create a capital gain or potential one for the holders of debt, as someone above mentioned. The bull market in bonds is now almost 29 years old and the gains have been stupendous. A significant rise in rates would create devastating potential losses in longer term bonds across the investment universe. Rising rates are by definition a bear market in bonds. A 29 year bull market means an entire generation has no clue.

I propose that there is no limit to the trillions which will be printed in order to prevent that bear market. No limit at all.

Positive Dennis said...

It is difficult to evaluate anything with negative interest rates. What is something worth? How can you know. This is one reason a lot of cash is just siting.