ATHENS – Objects of desire come at a cost. Only bad things, like toxic waste, have a negative price, the equivalent of a fee payable to anyone willing to make them disappear. Does this mean that negative interest rates embody a new perspective on money – that it has gone “bad”?
In market economies, money is the measure of the value of goods and services. And the interest rate is the price of that metric – of money itself. When the price is zero, it makes no difference whether money is kept under a mattress or lent, because there is no cost to holding or borrowing cash.
But how can the price of money – which, after all, makes the world go round, or, as Karl Marx put it, “transforms all my incapacities into their contrary” – be zero? And how can it possibly ever become negative, as it now is in much of the global economy, with the world’s moneyed people “bribing” governments to borrow from them more than $5.5 trillion?
The answer can only be of a type that economists loathe: philosophical, political, and thus irreducible to neat positivist explanation. In other words, the answer must concern the essence of money.
In a farmers’ market, sellers with many unsold potatoes start dropping the price until a level is reached (possibly very low, but still positive) at which all of the potatoes are bought. In contrast, since the 2008 global financial crisis, every time the price of money has been reduced, demand for it falls and excess savings rise. Clearly, money is not like potatoes or any other well-defined “thing.”
To understand how money can be our societies’ supreme good while fetching a negative price, it helps to start with the realization that, unlike potatoes, money has no intrinsic private value. Its utility comes from what its holder can make others do. Money, to recall Lenin’s definition of politics, is about “who does what to whom.”
Imagine you are an entrepreneur with money in the bank, or have a bank eager to lend large sums to invest in your business. You spend sleepless nights wondering whether you should invest in a new product – that is, whether you should exploit your access to money to cause an array of others to work on your behalf. In our current Great Deflation, what worries you most is your customers’ future purchasing power and sentiment. Will they be able and willing to buy your new product at high enough prices and quantities?
Suppose that, sleep-deprived, you then switch on the radio or TV only to hear that US Federal Reserve Chair Janet Yellen and European Central Bank President Mario Draghi are considering reducing interest rates further. Will you rejoice at the prospect that your financing costs will fall? Will you be motivated to invest your own money now that it earns lower (perhaps even negative) interest?
No and no. Your reaction is most likely to be one of alarm: “Oh, my God! If Janet and Mario are considering another interest-rate cut, they must have good reason to believe that demand will remain low!” So you abandon your investment plan. “Better to borrow money at almost no cost,” you think, “and buy back a few more of my company’s shares, boost their price, earn more on the stock exchange, and bank the profits for the rainy days that are coming.”
And so it is that the price of money falls, even as the supply of it burgeons. Central bankers who never predicted the Great Deflation are now busily trying to find a way out with economic and econometric models that could never explain it, let alone point to solutions. Unwilling to question the political dogma that central banks must be apolitical, they refuse to think of money as more than a “thing.” And so they continue the search for a technocratic fix to a problem crying out for a philosophically astute political solution.
It’s a futile quest. Once the price of money (interest rates) hit zero, central banks tried buying mountains of public and private debt from commercial banks to give them an incentive to lend freely. The ECB went so far as to pay banks to lend to business while, at the same time, punishing them for not lending (via negative interest rates for excess reserves).
But bankers and businesses, viewing these measures as desperate responses to self-fulfilling deflationary expectations, went on an investment strike, while using the central-bank money to inflate the prices of their own assets (stocks, art, real estate, and so forth). This did nothing to defeat the Great Deflation; it only made the rich richer, an outcome that somehow reinforced central bankers’ belief in central bank independence.
Not all central bankers, thankfully, are incapable of responding creatively to the Great Deflation. Andy Haldane, Chief Economist at the Bank of England, has courageously suggested that all money should become digital, which would permit real-time negative interest rates to be imposed on all of us, thus forcing everyone to spend at once. John Williams, President and CEO of the Federal Reserve Bank of San Francisco, recently argued that the Great Deflation could be beaten only by targeting the price level and nominal national income simultaneously – a New Deal-like approach featuring joint action by the Fed and the government.
What separates these central bankers from the herd is their readiness to jettison the myth of independent monetary policy, to accept that money is the most political of commodities, to challenge the sanctity of cash, and to concede that defeating the Great Deflation requires a progressive policy agenda.
Simone Weil once said, “If you want to know what a man is really like, take notice of how he acts when he loses money.” Likewise, if we want to know what our societies are really like, we must take notice of how they react to negative interest rates.
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Comment Commented david b
Stanley Fischer's Bizarre Justification For Negative Rates
"Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that and we have to make trade-offs in economics all the time and the idea is the lower the interest rate the better it is for investors."
http://www.zerohedge.com/news/2016-08-30/stanley-fischers-bizarre-justification-negative-rates
The greek bailouts go to the banks and not the greek people, yet it seems here you ask us to suspend real world evidence and think monetary policy isn't about helping the rich (investors) but for the real economy. Please, central bankers serve the rich, period Read more
Comment Commented The Other
@ Jason H
Where would they utilized it? What area of investment would bring profit? Even if they find it, how long will it last? What about all those workers with their new families that just began to develop, and program stops giving profits.
I suppose that politicians are afraid to propose economy that’s not based on profit. After all, politicians made us believe that economy is about profits. We used profit as justification of inequalities and uneven development. But now, it seems that investment based on profit is becoming too risky to invest in, if the profit is main focus point.
Development itself is becoming more profitable then profit itself. Of course, it’s all about how you measure it, but when was different? Profit itself is a creature of measurement, or, better to say intentional partial measurement. Besides, where would capitalistic profit be today without state interventionism? If the next step is bankruptcy of the profit based development, then the left needs to prepare society for a development based development.
The left needs to develop new system of measuring of development, it needs to quantify it so that everyone understands it, it needs to develop new educational standards that will correspond with new development measuring.
What is the fear of the left? That that is too much recursivity for units based on puritanistic skepticism? Doesn’t the amount of possible production already overshadow infantile capitalistic mono-separatism? The next step is not that hard to explain and implement.
Perhaps we should speculate what is the fear of the right? But who can penetrate so vast amount of empty space just to reach nothing at all?
Perhaps it is better to stick with the helots project. At least the right likes that and will not make retarded points. Read more
Comment Commented scott baker
The negative interest rates only apply to banks excess reserves. For everyone else, the rates are merely very low. On top of that, there are perverse incentives to buy back stocks or "invest" in the asset markets, like, in the U.S., 15% capital gains tax - far lower than those who have significant capital gains would pay in their income tax bracket, including billionaire hedge fund managers who have engineered the Carried Interest rule which lets them pay 15% on OTHER people's money invested with them (without that rule, this useless rent-seeking industry might disappear, all's the better!).
If money were actually available at zero cost, people would borrow liberally, just as a play against inflation, which, whatever the ivory-tower economists say, is not zero for anywhere but Greece and a handful of otherwise similarly distressed areas. Even then, it is better to have money than not to.
The cure for deflation is easy. Just send every man, woman and child a check for 10,000 dollars (or Euros), and see how quickly it gets spent into the economy and interest rates start to rise just slightly. Since the cost of money is negative, there should be no addition to the debt to do this, right? The fact that governments don't - forget Central Banks, since they are NOT independent of the banks at least - shows that money has a value after all, especially if you're wealthy and wish to keep it that way.
Meanwhile, for the average Joe, or Senior living on a fixed income, who is getting no interest on his account, money is far from free and they are terrified of losing what they have, a fear which will only be heightened by the thought of an all-digital economy. Far from "courageous," as you said of Andy Haldane, Chief Economist at the Bank of England fro suggesting it, a policy like that would lock in slow-speed asset confiscation from those who have the least assets already. Then no one would spend anything and a depression greater than anything hitherto experienced would be guaranteed.
Perhaps there is no new policy after all.
- Scott Baker, Senior Advisor & NY Coordinator for the Public Banking Institute, Author of "America is Not Broke!," Managing & Economics Editor for Opednews.com Read more
Comment Commented M M
Scott, are you serious about the negative interest rate Sbout the interest rates of Greece? About helicopter money? No wonder why the banking system is in such a mess.. Read more
Comment Commented scott baker
The negative interest rates only apply to banks excess reserves. For everyone else, the rates are merely very low. On top of that, there are perverse incentives to buyback stocks or "invest" in the asset markets, like, in the U.S., 15% capital gains tax - far lower than those who have significant capital gains would pay in their income tax bracket, including billionaire hedge fund managers who have engineered the Carried Interest rule which lets them pay 15% on OTHER people's money invested with them (without that rule, this useless rent-seeking industry might disappear, all's the better!).
If money were actually available at zero cost, people would borrow liberally, just as a play against inflation, which, whatever the ivory-tower economists say, is not zero fro anywhere but Greece and a handful of otherwise similarly distressed areas. Even then, it is better to have money than not to.
The cure for deflation is easy. Just send every man, woman and child a check for 10,000 dollars (or Euros), and see how quickly it gets spent into the economy and interest rates start to rise just slightly. Since the cost of money is negative, there should be no addition to the debt to do this, right? The fact that governments don't - forget Central Banks, since they are NOT independent of the banks at least - shows that money has a value after all, especially if you're wealthy and wish to keep it that way.
Meanwhile, for the average Joe, or Senior living on a fixed income, who is getting no interest on his account, money is far from free and they are terrified of losing what they have, a fear which will only be heightened by the thought of an all-digital economy. Far from "brave," a policy like that would lock in slow-speed asset confiscation from those who have the least assets already.
Perhaps there is no new policy after all.
- Scott Baker, Senior Advisor & NY Coordinator for the Public Banking Institute, author of "America is Not Broke!", Economics Editor for Opednews.com Read more
Comment Commented Jason H
Two words. Fiscal policy. That's all that's required. Keynes taught the world this nearly 100 years ago yet its ideologically opposed or simply forgotten. Read more
Comment Commented david b
The adoption of negative interest rates would make a rational disciplone realie they got it wrong and messed things up but economics isn't rational
res ipsa loquitur (Latin for "the thing speaks for itself") is a doctrine that infers negligence from the very nature of an accident or injury in the absence of direct evidence on how any defendant behaved.
the defendant here is economics
The problem is a lot of what is called economics is not economics. It is more ideology or religion.
Joseph Stiglitz Read more
Comment Commented david b
And the interest rate is the price of that metric – of money itself. When the price is zero, it makes no difference whether money is kept under a mattress or lent, because there is no cost to holding or borrowing cash.
Please excuse me, but this statement represents just about what is entirely wrong with economics. I was a biology major, spent time in a lab, got an Md degree, and worked in labs during. Upon taking some into MBA economics courses I cane across statements such as this. found them to be confusing and did a small survey of actual people on how they would behave. They would save more knowing they would have less in the future and felt they needed a larger reserve. there's a drop in total income. So I decided like any real scietist to try and find real empirical data regarding actual human spending. I couldn't find any, despite and exhaustive search. In fact I found suggestions to the opposite of accepted theory. Since that time (2009) a good amount of empirical evidence has some out against predicted spending and economic theory. Yet you repeat it as truth. Yeah it was proven true via math assuming homo economics, that isn't proof.
When is your discipline going to wake up to the major problem. You have a methodology problem.
Here's just one link, and I could fill up a page showing the real world doesn't work like your theories
Household Inflation Expectations and
Consumer Spending: Evidence from Panel Data
These findings are surprising because theory
predicts that consumption of durable goods should be more sensitive to real interest rates than
consumption of nondurable goods. In addition, consumers in our sample, on average, did not
expect their nominal income growth to match inflation, and therefore an increase in expected
inflation would create a negative income effect that discourages spending in both the present
and the future. The findings suggest that, as a policy measure, raising inflation expectations
may not be effective in boosting present consumption
http://www.bostonfed.org/economic/wp/wp2013/wp1325.pdf
from the boston fed
several studies
Economists Mystified that Negative Interest Rates Aren’t Leading Consumers to Run Out and Spend
http://www.nakedcapitalism.com/2016/08/economists-mystified-that-negative-interest-rates-arent-leading-consumers-to-run-out-and-spend.html
there honestly are more than just this. Look I like the author, supported his political party, but I get infuriated when economists say something is true where the data is bad and often the opposite of what theory states
here's another
http://www.nytimes.com/2015/10/20/upshot/when-gas-becomes-cheaper-americans-buy-more-expensive-gas.html?_r=0
If I recall the bis has debunked your statement more than a few times.
In my honest opinion, as someone who likes the author and doesn't think he knows he's saying something that is dubious at best as a fact, this is the single biggest problem in economic. What is truth in economics may have no relation to the real world. YOU NEED EMPIRICAL VER$RATIFICATION. Note, this was why I was laughing out loud, to the dismay of my econ professor. Some truths in economics must in fact be false in the real world. homo economics, I laughed when I was told about the assumptions required in black scholls. People win nobles in economics for "crap"
fix your profession, that's the fist thing needed in economics Read more
Comment Commented Pavlos Papageorgiou
Marx understood that Capitalism would eventually reach a self-limiting stage where all the money is in the pockets of capitalists and no investment can yield profits unless the capitalists chose to first share the money, so that it can be recycled and recaptured.
It took a while for Karl to be proved right because a series of upheavals, colonialism, wars, demographic and social changes, geopolitics, and technical innovation caused capitalists to share and recycle the surplus involuntarily. Every time things changed, old capital depreciated and new capital rose, creating new cycles.
But now we've reached stagnation. Sometime in the 90s, capital figured out how to be generic. Investments are no longer technology or location or domain specific, they morph to wherever they need to be. Old money is increasingly here to stay. Google and Facebook are probably the last great disruptors, East Asia is the last pole of Capitalism. I don't think Africa is next.
Because there are no more shocks capable pf causing capital to depreciate and recycle (unless we contrive a world war) Capitalism is in stagnation. All the money is in the coffers of companies and there's no way to make a profit unless companies choose to liquidate, or mis-invest, or voluntarily raise wages.
Central bankers know this are use money creation as a substitute for recycling. Its only function is to make its way to company valuations, through buybacks, margin exposure, or bond buying. Unable to form a loop, states pour money at one end of the one-way surplus conveyor belt to keep it going. We urgently need a better method of surplus recycling. Read more
Comment Commented Graham Hodgson
What does possession of money mean? It means that you have contributed, or have been credited with having contributed, more valued benefits to society than you have drawn. A net contributor is generally seen as having a higher moral status and therefore possession of money is a desirable indicator of status. But reluctance to part with money means that others who are trying to contribute cannot make their contribution effective and so do not receive the status boost that a similar contribution would have brought in the past (demand is deficient and prices are falling). Negative interest rates (and demurrage as proposed by Silvio Gesell) are one attempt to get money moving again but what we are seeing is not that hoarders are become consumers but that they are exchanging their depreciating monetary tokens of status for other high status assets.
What if, instead, the tokens given in exchange transactions carried not the repute of the contributor, but the stigma of the freeloader. Possession of such tokens would bring down the opprobrium of society. They would be handed to the purchaser together with the goods or services purchased and the purchaser would then be incentivised to create other goods or offer other services sufficiently desirable that they would be sought out and by others prepared to accept in turn the stigma tokens. Read more
Comment Commented The Other
Amount of things we do without money. Reading. Create information. Create emotion. Speaking.
That’s about it.
How do we create information? Very similar how we create emotion, or speak. It can be compared with lightning. Discharge that connects two levels searches for best possible connection. It sends many very fast micro steps to determine next phase of direction. That can be seen on high-speed captures of lightning. Discharge tries to understand the complexity of space between levels before making connection with the ground.
What fascinates is thoroughness the lightning goes to connect two levels. It can be presumed that It does not know its real path; it calculates it. However, direction is there, it exists before discharge feels the path.
So, why the left refuses to publicly address the space between levels? Perhaps because it feels that it cannot lead the current, or it’s afraid that discharge will refuse to go to college. Maybe left doesn’t like the autonomy of the search that discharge do, or it is too much accustomed to life without development?
It may look like the left just has its own clown-cloning sub-calculation that uses power collected from lightning protection systems, just like doctor Frankenstein, however, left is not just afraid of taking down the necklace of harmonia just because it doesn’t want her husband to see how old she is, but she can also intuitively understand that her husband wouldn’t be enraged just over her age. Read more
Comment Commented Jason H
What does the left have to do with the problems of negative interest rates? It's mostly right wing governments implementing these crazy policies. The real left would say fiscal spending to increase demand and utilise the mass unemployed labour. Read more
Comment Commented Steve Hurst
Since the Gt Recession consumer behaviour (in what is a consumer society) has changed particularly in the younger demographic and saving has increased and spending declined for them. The changed landscape has broken the trad retail model for majors and this has kicked back onto investment.
As such the argument in this article is back to front. It is suggested that because negative rates occur this is cutting back investment. In fact negative rates are due to a lack of investment. That lack of investment is due to consumers getting burnt and saying I dont trust the system to not let it happen again. If you are interested in our customers the last thing you ever do is change a behaviour that benefits you. That is exactly what the financial sector and guvnts have done, changed their customers behaviour.
Once established behaviour is difficult to change, that is the whole principle for trying to establish customer behaviour.
This article imagines interest rates will change things one way or another and it will not past a certain point. People who suffered in the GT Depression carried that for the rest of their life Read more
Comment Commented Jose araujo
@Steve, I'm with you. Until we address the why don't investors have confidence, we will not move out of the ZLB.
Now Yanis should know that. He should know that what allowed us to move from the great depression was addressing the confidence of the agents, not only through monetary and fiscal policy but with better and more regulation of the financial markets. Read more
Comment Commented Paul Daley
Long-winded way of making a simple point-- continually pumping money into asset markets does little more than fuel asset price speculation. Central banks need channels for lending against income or otherwise topping up income flows; operations in asset markets do little more than fuel inequality, as Varoufakis says. Read more
Comment Commented Jose araujo
@Paul, how is the money being pumped into the "assets market"?
How is that being done? Can you please explain the mechanism? Read more
Comment Commented Louis Woodhill
An interest rate is not the "price of money," it is "the rental price of capital." Money and capital are not the same thing, and their prices do not have the same units.
The true "price of money" is the inverse of the CRB Index. Right now, the price of capital (interest rates) are low, because the price of money is too high. This chokes off demand, and therefore demand for capital for expansion.
There is little more to say about an article that gets something this fundamental completely wrong. Read more
Comment Commented Jose araujo
@Steve, the question was Yanis use of the term "price of money", which wasn't incorrect.
Regarding what money is, well we all money money isn't what it is but what it does, so has long has a good performs the three functions (medium of exchange, store of value and unit of account) , than it is money. Read more
Comment Commented Steve Hurst
@Jose
Money is a belief system based on exchange of tokens, it says 'I promise to pay the bearer' as such its value is based on the strength of your belief you will be paid by the bearer. Interest rates are a secondary attribute Read more
Comment Commented Jose araujo
Merriam Webster definition of price of money: the net rate of interest paid for borrowed money.
http://www.merriam-webster.com/dictionary/price%20of%20money
Also its obvious to all what Yanis means with the price of money Read more
Comment Commented dan baur
You want to force everyone to spend at once?!?
What else do you want to force people into? A concentration camp perhaps? Read more
Comment Commented Jason H
Someone needs to spend. Government needs to spend until there is enough demand for the private sector to spend. Keynes taught us this simple fact. Read more
Comment Commented dan baur
@Jose
Are you the communist commissar in charge of censorship? Read more
Comment Commented Jose araujo
Dan, I don't think you should be reading PS, its dangerous for your mental health and it is starting to show Read more
Comment Commented Gunnar Eriksson
Money is an object of desire for the poor with interest rates that often reach 25% and for the superrich, 0,1 %.
The first because they badly need them to spend and the second because they earn 8 - 12 % profit. None of these pay any taxes because the first are too poor and the second have enough power to avoid paying taxes.
The toxic waste is left for today's and tomorrows taxpayers
Read more
Comment Commented dan baur
Nonsense once again from a guy that quotes Marx (wow!):
1. Deflation is not the enemy any more than inflation - prices going down 2%/yr are not earth-shattering more than if they go up by that same amount.
2. People refrain from investing at zero cost because of the impossible barriers AGAINST business raised by the tyrannical government. Who cares that your cost is 2% lower if they force you to pay in taxes and regulations contrary to your business much more than that? And they do all the time.
3. Keynesianism is a dead horse. Stop beating it such as in "stimulus" and "price targeting".
4. We are 8 years into "recovery" and now you propose a "new deal" such as the one that extended the Great Depression at least another 8 years until 1941 when the utter destructive power of WW2 made growth possible again. Will you propose WW3 8 years from now to increase "growth"? Read more
Comment Commented Antonio Mendonca
Not only Marx, but Lenin's definition of politics to justify his assessment on money! AHAHAHAH (Marx+Lenin)= ... Read more
Comment Commented Tomas Kurian
There are more reasons for introducing fully digital currency:
Periodic taxation of accumulated capital
http://www.genomofcapitalism.com/index.php/16-periodic-taxation-of-accumulated-capital-2
Evolution of monetary systems
http://www.genomofcapitalism.com/index.php/16-5-evolution-of-monetary-systems
Benefits of negative interest rates for the rich
http://www.genomofcapitalism.com/index.php/16-1-3-benefits-of-negative-interest-rates-for-the-rich
Negative interest rates as condition of democracy
http://www.genomofcapitalism.com/index.php/16-7-negative-interest-rates-as-condition-of-democracy-2
Read more
Comment Commented Jose araujo
We are in this situation (liquidity trap) because the mechanism of transmission between the money market and the real market is broken due to the change in liquidity preferences.
How is money supply impacting the price os assets if money os npt being spent? What are the mechanisms? Some sort of Vooddoo that prevents this opperations from being accounted? Read more
Comment Commented Steve Hurst
@Hugo
The minute guvnts said private venture is too big to fail because it is essential infrastructure and because of that private debt becomes public debt so there is only one outcome and that is in process. Reform is muted and will remain muted because it requires political implementation and no politician will impose the immediate downside requirements on voters; they will always opt to defer. GR is the model, the public said reform, face down the Troika, at the end of the day the GR guvnt did not despite the mandate because of the immediate downside that had to be imposed, they deferred. Similar loops will and are occurring. French reform attempts - neutered, Italy due up shortly, German pension reform, deferred. As CBs cannot do it on their own they just end up becoming a depository of public debt. Public debt will build until is a mountain nobody can climb. When the majority point in the electorate with dissatisfied voters and there is the opportunity then a Brexit type event occurs. Italy will be interesting and some domestic parties are already trying to back away from a referendum
The fact so much negative interest rate money is about - that has never occurred before in the history of capitalism - says the stresses are all building up
Read more
Comment Commented Hugo Rego
The price of assets, not the price of goods. Major banks/funds have been using excesse reserves and liquidity offered by Central Banks to pump it in the markets. Adding to this, big companies have been doing the same with excess reserves, thus generating markets on steroids, all depending on the velocity of liquidity transmission within this very narrow environment.
Will the ultimate price be paid ? Yes, of course it will. When and by whom ? Well, that will depend. So far, the tabs are being sent to Central Banks balance sheets and to public debt. In other words, "we, the people" are going to get it the hard way. Once again... Read more
Comment Commented Jose araujo
What evidences are there of inflated price assets?
If we were living in times where the replacement cost of assets were far lower than the market prices, wouldn't we experience arbitrage (remember Milken) and a new influx of IPO's and private companies going public?
IMHO one of the consequences of a change in preferences twards safe assets is the increase of risk premiums which will increase bond prices and growth stocks prices.
All is coherent with a liquidity trap situation... Read more
Comment Commented M M
The sun must have been very strong this summer in Aegina. Read more
Comment Commented Steve Hurst
Negative interest rates says nothing about money but a great deal about the economy(s) Read more
Comment Commented Jose araujo
@Steve, that's why interest rates has everything to do with money, even in the current situation of negative rates which is a situation explained by the extreme liquidity preference. Read more
Comment Commented Steve Hurst
@Jose
Yes Jose, and money would not be parked at negative rates if there was opportunity in the economy. Its says risk outweighs return Read more
Comment Commented Jose araujo
To my knowledge, Interest rates are set on the money market... Read more
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