Negative Interest Rates: An Admission of Capitalist Contradiction and Desperation Jason Unruhe (Maoist Rebel News) February 2013
Negative Interest Rates: An Admission of Capitalist Contradiction and Desperation Jason Unruhe (Maoist Rebel News) 2
Abstract Just a few days ago it was announced that the Bank of England deputy governor Paul Tucker was considering making the interest rate negative. There were other suggestions on the table but obviously this is the one that got all the attention. Mr Tucker said: "This would be an extraordinary thing to do and it needs to be thought through carefully." [1] This represents an important moment in English financial history. The contradictions of capitalism are so acute at the moment it s forcing the hand of the government to openly deal with it. The situation is rather simple, the banks must loan out to recover the economy, but they are refusing to do so. The economy is not repairing from the Global Collapse of Capitalism in 2008 in large part due to the refusal of banks to loan. The Bank of England has gone through a good deal of Quantitative Easing in order to make it easier for the bank by giving them much more money. To the chagrin of the economy and the government, the banks have categorically refused to do so. The announcement of a possible negative interest rate is their way of saying that the banks had better start loaning out that money or else it is going to cost them. The question before us is how will this affect the situation? And, how necessary is this? 3
What is a negative interest rate? Some people asked me if it was even possible, or if they (BOE) are allowed do that. The short answer is, yes they most certainly are. The idea is relatively simple, take the interest rate and make it a negative. This would mean the banks (and others) would have to pay in order to keep money. Here is a clearer way of putting it: Usually people have to make regular interest payments to their lenders when they borrow money. Under a system of negative interest rates this relationship would be turned on its head and the lender would pay the borrower for the privilege of lending. [2] Essentially the banks would be charged a rate for holding money in the bank. 4
How Would This Affect The Consumer? Consumers can be damned near unpredictable at times when it comes to economy. Even our best guesses can turn out to be completely misinformed. We do know they oppose one thing for sure when it comes to banking: They don t like paying more than they already do. Banks will begin to be charged for holding your money. In all likelihood this leads to two possible effects on the customer. 1. The bank will reduce the amount of interest they give you on your savings account to make up for the loss. The Bank base rate has a role in determining what you can get on your savings, but it is not the only factor involved. The rate on savings is generally determined by how much the bank wants to keep your money. A big factor has been the Funding for Lending which came into effect in August 2012. This caused the banks to become less interested in your savings because they have had a better source of money to use for loans and mortgages. Banks would end up getting charged for holding your cash. To compensate for the loss they'd most likely cut your savings rate, regardless of the base rate. 2. The most likely result would be an increase in service charges that would immediately aggravate the public leading to alternate means of storing their cash. I would estimate a possible doubling of the current services charges; maybe as low as one and a half times what they are now. This would certainly be an incentive to move one s money somewhere else. There s little doubt in my mind that some kind of financial institution would be born out of this situation to fill that demand. Some kind of special-purpose bank that would only have cash deposits to be held in a secured 5
facility. People pulling their money out certainly don t want to keep it in their homes; it s a huge security risk. This facility could act as a kind of checking account, but dealing in cash only with no possibility for loans. I think this is a very likely that this could happen as it would cause people to want to move their money. If this happened on a large enough scale it would mean that more physical currency would have to be printed. Right now the largest bill in circulation is a 50 note, to move even a million pounds would require 20,000 bills in order to make a withdrawal. This would cause a drastic increase in demand for physical currency leading the BOE to begin the creation of more of it. A shortage of cash would occur due to the amount time it takes to print new money. Sudden withdrawals of cash from a financial institution could have devastating effects if they totalled up to a large enough amount. Aside from this there are other measures people might take that are predicted by a NY Federal Reserve paper [4] :...a credit card holder might choose to make a large advance payment and then run down his balance with subsequent expenditures, reversing the usual practice of making purchases first and payments later. We might also see some relatively simple avoidance strategies in connection with conventional payments. If I receive a check from the federal government, or some other creditworthy enterprise, I might choose to put the check in a drawer for a few months rather than deposit it in a bank (which charges interest). In fact, I might even go to my bank and withdraw funds in the form of a certified check made payable to myself, and then put that check in a drawer. Certified checks, which are liabilities of the certifying banks rather than individual depositors, might become a popular means of payment, as well as an attractive store of value, because they can be made payable to order and can be endorsed to subsequent payees. 6
Commercial banks might find their liabilities shifting from deposits (on which they charge interest) to certified checks outstanding (where assessing interest charges could be more challenging). If bank liabilities shifted from deposits to certified checks to a significant degree, banks might be less willing to extend loans, because certified checks are likely to be less stable than deposits as a source of funding. As interest rates go more negative, market participants will have increasing incentives to make payments quickly and to receive payments in forms that can be collected slowly. This is exactly the opposite of what happened when short-term interest rates skyrocketed in the late 1970s: people then wanted to delay making payments as long as possible and to collect payments as quickly as possible. Some corporations chose to write checks on remote banks (to delay collection as long as possible), and consumers learned to cash checks quickly, even if that meant more trips to the bank, and to demand direct deposits. However, if interest rates go negative, the incentives reverse: people receiving payments will prefer checks (which can be held back from collection) to electronic transfers. Such a reversal could impose novel burdens on payment systems that have evolved in an environment of positive interest rates. Seemingly this could cause the velocity of money to increase from consumers, but it s unlikely. The most probable scenario would be for people to find new ways to store their savings. It s the sudden withdrawal from the banks that could have nasty effects. The banks could find themselves in a situation where their deposits are too low leading to a new set of problems. 7
How Would This Affect The Capitalist? Negative interest rates can work out very well for capitalists because it allows them to get a hold of loans more easily. Those who do want to get into production again or even expand current production will now have a much better chance of doing so. There s no telling how many people are lined up ready to get started but can t because the banks are holding them back with credit. Low interest on credit can do a world of good for the ability of the capitalists to get things moving again. Of course it is not dependent only on the interest rate; there must be a market for the commodities they wish to produce. In the very advantageous position is Department II consumer industries subsection that produces necessities. They can never truly stop production because people regardless of economic condition must purchase food and clothing. All around this will be a boost to those in the capitalist class on the lower end who are struggling to get back into production. It s unlikely that industrial capitalists holding funds in banks will end up paying that much in increased service charges or a reduction in savings rates. Generally they don t save, they loan money ahead of production and then pay that money back with the profits they generate. Thus they don t keep that much money in the bank for very long leading to less in terms of losses by using the bank. Besides if it really was that harmful they could use the specialpurpose financial institutions that would spring up avoiding any losses. 8
Why Are They Considering This? The main reason why the UK is now considering the drastic measure of negative interest rate is the bank s refusal to loan money out. During a recession the only way to recover in capitalism is to have the banks loan out money for people to start production once again. Investing in production creates jobs which in turn allow workers to be taxed and have them spend money on consumer goods raising demand, encouraging new investment to meet it. The problem the UK and the US is facing now is that the banks are not making those loans. The reason is simple; the economy is bad so it is a bad time to invest. However the only way to recover the economy is to loan out the money. But no one is loaning out money because it s a bad economy. Some might interpret this as circular logic, but Marx saw it as contradiction. Capitalism s motivations are its own worst enemy when it comes to recovering from its own failings which are caused by contradiction in overproduction, which is driven by its profit motive. It would take a fair amount of denial to ignore this. The very thing that makes capitalism supposedly so great, the profit motive, is a direct hindrance to its recovery. That is not to say that recovery cannot happen, it can and has, but it is exacerbated by this contradiction. In this crisis we can see that the banks more than in the past are refusing to loan out that money. The solution to this lack of loaning was supposed to be Quantitative Easing, where the central bank creates more money and gives it to the banks to put into the economy as loans. Unfortunately it didn t work because the banks did not loan it out. Now, because this is the preferable solution they did it more than once leading to a QE of 375 billion. [4] (The US has done the same putting out over a $1 trillion.) More and more money was put out through QE trying to stimulate the economy. Unfortunately the banks continued to refuse to lend it. 9
The real problem here is that there was is no way to force banks to loan out the money that they were supposed to. Creating a negative interest rate is the government s way of forcing the banks to give out the money by threatening to charge them for holding on to it. This is basically the only measure they have that doesn t transcend the law, or at least, doesn t push the ruling class too far. 10
What I Think Will Happen I don t know how successful such an idea would be. There s more to increasing consumption and stimulating production than interest rates. The premise is sound for low rates, make it easy to borrow and people will be more likely to invest in new production or services because they will have to pay back less after that round of production. However this makes the assumption that there is a market for whatever is being produced. Supply doesn t automatically create its own demand regardless of what one might have to Say. (Sorry I couldn t help it.) A capitalist is only going to enter into production if he believes that he is going to make a profit. Even if you gave money at a 0% interest rate, a capitalist won t invest in new production if he sees 0% profits coming. Supply is not everything; you need a demand for what one is supplying. This low interest rate won t accomplish anything in that regard. So what would be different with a negative interest rate? This obviously takes loaning out of being incentivized to being coerced. This could possibly force the hand of banks to make bad loans to borrowers with bad plans simply to ease what they will be paying for holding the money. There s a good chance that a good number of bad investments that might not have otherwise been funded get approval. If enough of these bad investments hit the economy we could be looking at a second dip in the recession as borrowers are unable to pay back creditors. Enough fictional money not being realized in loan payments would cause a sudden contraction in credit which would be somewhat similar to what precipitated the Global Collapse of Capitalism on 2008. Obviously this would be nowhere near the same size, but it would do a quite a lot to compound the situation we already face. If a negative interest rate is pursued by the Bank of England it would no doubt be a gamble. It s a risk to repair the economy; it could possibly be a very big risk depending 11
on the public and financial reaction to it. After all, it doesn t address the real problem faced by production, the lack of demand for finished goods and services. I don t believe that any amount of cheap credit or QE is actually going to stimulate it. England has already had 375 billion in QE already and it doesn t seem to be doing the trick. The money has been put out there for the banks to lend out but they have not being doing so as I have said. This is why I believe they are resorting to a coercive mechanism to force them to do so. It really is a desperate move given how risky it is. It s really hard for me to say what will happen, it s been done a few times in the past, but it s hard to look there and know for sure. This could either help the UK to recover or it could be a disaster and create another dip. It s just too difficult for me to tell what is going to happen, I can only speculate what can happen. 12
Conclusion What we are seeing here is the frustration the government has with the financial aristocracy. The capitalist class is essentially blocking the recovery of the economy by refusing to make loans. The government is appointed by the ruling class to watch over the country as a semi-autonomous body. Their job is ensuring the economy functions as they go about their daily business. However the government as a representative of the ruling class has been placed in a bad position. Their boss, the capitalist class, is standing in the way of doing their job. The capitalist class is harming the economy through its own self-interest. Ironically self-interest is the motivating force of capitalism, without which it would simply cease to function. This is a contradiction; it is both sustained and destroyed by the same motivating force. What is happening here is the contradiction of capitalist recovery is becoming more acute than ever before. The capitalist class (at least the financial class) is refusing to do what is necessary to end the recession. This situation has become so acute that it has broken out into the public sphere in the form of the Bank of England deputy governor Paul Tucker overtly and specifically stating that a coercive arm is necessary for the banks to take the correct course of action. Industrial capitalists and others are demanding that the financial capitalists do what is necessary to get the economy to recover restoring their profits. In a way this is an open example of contradiction among the ruling class that is showing out in the open. This proposed move by the Bank of England is a sign of growing desperation. The risk being taken by the financial class on the economy is likely to have deadly consequences. The BOE has done all that it can peacefully to try and repair the economy. I think this aggressive move is a desperate attempt to deal with this contradiction that is destroying capitalism itself. The 13
financial class is being warned, we will go against you to save the system. The extent of this move shows how close we may be to the absolute destruction of the economy. This is how desperate it may actually be. 14
References: [1] http://www.bbc.co.uk/news/business-21589128 [2] http://www.independent.co.uk/news/business/news/qaso-what-is-a-negative-interest-rate-8512008.html [3] http://libertystreeteconomics.newyorkfed.org/2012/08/ifinterest-rates-go-negative-or-be-careful-what-you-wishfor.html [4] http://www.guardian.co.uk/business/2012/nov/14/bankof-england-quantitative-easing-growth 15