Tipos de interés negativos o finanzas que andan de cabeza

Expanded version of the article with the same title published in Noticias Obreras , number 1,588 of October 2016

For some time now, central banks have been applying negative interest rates to deposits held by private banks. The same has happened with government bonds recently issued by various countries (including Spain). Some banks are even starting to charge their customers instead of paying interest on their deposits, to the point that many people with large sums of money in countries like Japan or Germany have begun buying safe deposit boxes en masse to keep their fortunes in cash.

The meaning of negative interest rates is quite clear: lenders, instead of receiving a return for lending to someone, have to pay to do so. And depositors, instead of earning money when they leave their funds in a financial institution, must also pay to keep their money deposited in the bank. The financial world turned upside down from what we’ve always known.

This is undoubtedly an anomaly and may seem nonsensical, but in reality, it is to some extent normal for something like this to happen when economies and finances have been in such an irregular, and almost limiting, situation for some time as the current one.

The first reason that explains why the price of money is negative is its abundance, the impressive expansion of means of payment and bank deposits that has occurred in recent years.

To get an idea of ​​the recent increase in the money supply, a single example may suffice. In the United States, the so-called monetary base (cash in circulation plus bank deposits at the Federal Reserve) increased by $821.585 billion in the 63 years from 1945 to 2008. However, from the beginning of 2008 to the end of 2015, it increased by $3.1 trillion. That is, in 7 years it grew about 3.7 times more than in 63. It is difficult to grasp, even approximately, what such large growth generated in such a short period as in recent years truly represents for the economy (in just the first six months of 2008, more monetary base was created in the United States—$950 billion—than in the previous 50 years—$840 billion).

This massive money creation occurred when central banks injected trillions of dollars into private banks to plug the capital hole they themselves created by accumulating the enormous amount of financial junk that triggered the crisis. The injection took the form of either trillions of dollars in practically free loans or massive purchases of their securities to «recycle» this junk. Central banks thus acquired the accumulated junk from private banks at inflated prices (thanks to having previously allowed them to keep it on their balance sheets valued at its acquisition price rather than the much lower market value), and «in return» the banks received trillions of dollars. This has resulted in the impressive surge in private banks’ deposits at central banks, which has exponentially increased the monetary base.

Theoretically, these injections were supposed to allow banks to grant more loans, according to the official explanation from the authorities. This explanation is simplistic and false, not to mention downright stupid: the global economy (not just the US economy) would have imploded if all those trillions (4.7 times more than existed at the end of 2006) had been disseminated throughout the real economy as quickly as it was created. Prices would have skyrocketed, when in fact the opposite occurred: most economies entered deflation. What they were really after was simply bailing out the banks when they could have bailed out the people with far less money.

The truth (and this is the second explanation for negative interest rates) is that the recent crisis and the inequality of the last few decades have severely weakened productive investment options. Although there has been some increase in credit, it hasn’t been enough to match the increase in the monetary base I just mentioned, nor has it been sufficient to revive the economy. In Europe, the situation is particularly curious in this regard because the economies that save the most (Germany and the Netherlands) barely invest and are thus the ones generating the abundance of idle funds: in other words, they themselves cause the low interest rates they later complain about.

The third reason why an anomaly like negative interest rates persists is the predominance of speculation. In principle and under normal conditions, no investor should be interested in placing their funds at negative rates. But they can be attractive as a gamble when speculative investors are so powerful that they themselves can generate upward trends from which they profit almost instantly.

Furthermore, with the financial system in such disarray, the prevailing uncertainty, and the lack of profitable alternatives, holding money idle also comes at a cost. Negative interest rates are also explained by the fact that investors will always prefer to lose a little rather than lose more. Especially, as I just mentioned, if they find themselves in the midst of a constant cycle of speculation.

On the other hand, the consequences of negative interest rates are not exactly as positive as they might initially seem.

Thinking that lower interest rates will lead to increased demand for credit from economic actors investing in the real economy seems quite naive, because their demand for credit doesn’t depend solely on cheap credit. It only increases when there are opportunities to make it profitable, and that remains very difficult given the weak state of the productive economy, as I’ve mentioned.

On the contrary, and for the same reasons, negative interest rates incentivize the continued increase in debt that they claim to want to control: private debt, used for all kinds of speculative operations (the truly profitable ones when inequality has weakened the markets for goods and services), and government debt. So, in the end, negative rates only increase debt, which is the banking industry’s big business and what bankers try to grow, especially since international banking has been completely bankrupt for some time and is nothing more than a zombie artificially propped up by governments and large international organizations by every means at their disposal. And they have many, thanks to the extraordinary political and media power they have amassed.

But from another perspective, negative interest rates pose a serious problem for banks (even though they increase their business, as I just mentioned). To maintain their margins and profits, they must resort to other mechanisms that also have negative consequences, such as increased fees, cosmetic operations to conceal further losses, and staff or branch cuts to reduce expenses, which ultimately limit their own commercial success. And if banks begin charging customers for their deposits (as is already happening in some of them), withdrawals will be inevitable, making bank insolvency (which is already a reality) undeniable and obvious to everyone. This is why banks and the economists who make their living from them are increasingly advocating for the elimination of cash, which is what their customers can physically withdraw from their accounts and take to their safes.

Another negative effect of negative interest rates is that when the cost of financing is lower, investors can logically opt for riskier products, since the lower financial cost compensates for the higher probability of loss due to the increased risk. And this is what, hand in hand with negative interest rates, is making the global financial economy as a whole even more volatile and dangerous.

The obvious question in light of all this is: if negative interest rates have these risks or drawbacks, why do central banks maintain them and not raise them as soon as possible?

It is not easy to answer that fundamental question in a few lines, but I will point out some hypotheses that in my opinion can explain the situation.

First, because central banks have no choice but to inject money into the economy to prevent it from collapsing spectacularly. It’s true that trying to stimulate the economy solely by injecting money into private bank deposits at the central bank is almost as futile as trying to pull a cart with a rope (as demonstrated in Japan, where the massive monetary injection failed to pull them out of recession). But it’s the only means available to them when:

a) They do not want to resort to the more expansionary fiscal policy because they would have to renounce their ideological dogmas on budgetary stability and assume its more evident redistributive effect on the population.

b) the economies do not have sufficient endogenous forces to get going vigorously due (as I have already pointed out) to the progressive weakening of the productive economy to the detriment of the one based on financial speculation.

c) They refuse, above all, to allow the economy to recover by increasing the wage bill.

Secondly, they resort to negative interest rates because the increasing concentration of income in groups that spend only a very small portion of their earnings on consumption has weakened economic activity dedicated to producing goods and services, resulting in deflation (falling prices) that they try to avoid by increasing the money supply. However, they are unlikely to achieve this because, for prices to rise, the money created by banks would have to enter the economy and not remain in deposits or on the balance sheets of private banks, as I mentioned earlier.

Third, because, as I’ve already mentioned, this massive money creation increases debt, which is the banking industry’s business, thus allowing bankers to continue earning fabulous sums of money even though their businesses are essentially bankrupt. It’s a prodigious sleight of hand that central banks and bankers perpetrate right before our eyes, with hardly anyone noticing the deception.

Finally, we must consider the conditions under which the global economy, and finance in particular, have operated in recent years, especially after the crisis. These include, among others, the hypertrophy of monetary circulation, which has increasingly disrupted the relationship between the real economy and finance; the spiral of extraordinarily dangerous debt, which has become an end in itself because it is the banking sector’s main business; widespread speculation based on transactions executed in milliseconds; and growing inequality, which weakens wealth creation, trade, and productive business. All these conditions have been highly successful in reinforcing the profits and power of the most powerful economic groups, the elites worldwide, but they have undermined the economic «order» that, until now, could explain and help govern the dominant conventional economic «wisdom.» For some time now, and especially after the crisis, as I just mentioned, they no longer have a roadmap to ensure they can steer the ship of macroeconomics without new and increasingly severe shocks. As former Federal Reserve Chairman Alan Greenspan said at the time, the crisis not only collapsed the economy but also «our mindset.» Now, as the current chair of that institution, Janet Yellen, acknowledged a few days ago, macroeconomics presents entirely new features, rendering the expansionary and stabilization instruments used until now largely ineffective. They are adrift because they neither know the effect of their actions nor what they should do to get out of the predicament their previous misguided policies and the banks’ greed have led them to.

In short, interest rates are an anomaly. Certainly, but not only that: they are yet another expression of the disorder created by capitalism in our

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time.

What we don’t know is how long such injustice can be sustained simply by concentrating power, exploiting the labor of others, and increasing debt. Interest rates cannot remain negative forever, and debt cannot continue to grow without imploding, so the question is who will bell the cat, and how.