So what’s the go with the 0% then?
The Reserve Bank’s rate cut to 0.75% has us heading towards 0% interest, and then into negative territory. Much of the advanced world is there now, and has been for some time. Yet for many the prospect of negative interest rates is some sort of through-the-looking-glass territory, world gone mad, etc. Jessica Irvine had a brave go at explaining it in the Nine news pages last week, but she is too embedded in bourgeois economics to get very far.
Let’s have a crack. Just my take. Happy to be argued with.
The first thing to say is that the amazement at negative interest rates is a testament to the success of naturalising capitalism. Interest rates are presented as if they were a biological process, the natural growth of money. Were it so, negative rates would be weird. Trees don’t become seeds.
But the thing is, in that sense, there’s no such thing as “interest”. There’s simply a price to lease money from the limited number of licensed suppliers, and it’s set as a function of time and amount. There’s no reason why a bank couldn’t charge that lease as a flat fee. Borrow a grand, borrow ten, it’s a hundred bucks. The interest rate is just a pricing mechanism.
A pricing mechanism based of course on there being demand for the lease. But what if there’s no demand? Then you’ve got to store it somewhere. You run a pony hire business and no one wants to pay to ride your pony; it must be stabled. There is negative interest in your sorry pony. Damn, now I feel sad for the pony I just imagined. Which is the 21st century economy in a nutshell.
That you should have to pay to store your money is hardly new. It is, after all, how banks came into business, offering notes to represent your gold that they held in their keep. The charge for keeping money is being applied by central banks to commercial banks, who have so far resisted the temptation to pay people to rent their money to reduce the stabling costs of the pony. Now that has started to break.
Denmark has had negative interest rates for longer than anyone, and is now offering a -1% rate mortgage. Take a 100% mortgage on a €200,000 flat, and you only pay back €198,000, which saves the bank the extra €2000-4000 it would pay to Danskpony. Part of that will then be made up with charges to high cash-holding accounts.
So why is your pony so not in demand that you can’t even give it away? Let’s face it, we’ve all asked ourselves that at some point.
Here we have to go back to money talking money, unless we suppose ponies become not just fun but fungible. The answer is currently being given in system terms: that there is no confidence in the returns available under particular conditions, and people are holding out until they become so. But this official position among economists is beginning to crack, simply because conditions are so unprecedented. Currently around $17 trillion of the $113 trillion global bond market is in negative yield territory — i.e. it will cost you just to hold bought bonds. That is such a serious level of under-confidence that it suggests something a bit more than mere wobbles.
Various reasons for these particular conditions have been offered: anticipation of a system-wrecking trade war; starving of demand by the relentless downward pressure on wages; skilled-labour shortages in the US; accumulated under-spending on infrastructure. But the particular explanations may mark a more general trend, which is the beginning of the end of general returns on private investment. This would be occurring because various socio-technical forces — exponentially expanding interconnection, rapid and mass automation — which are inherently post-capitalist, have developed within capitalism to the degree that they are undermining its dominant value form and mode of accumulation.
Large corporations are, to paraphrase economist Rudolf Hilferding, implicitly socialised. With corporations of the Uber generation, their socialised character — the company is a social network of drivers, whose coordination is charged a rent-fee by the company they work “for” — is so close to the surface as to be visible to the market. Uber’s recent announcement that it may never make a profit is an acknowledgement that the company, in some form, may outlast capitalism as we know it. And Uber looks like Standard Oil compared to what else has been on offer — from WeWork to Theranos.
With all this surplus liquidity around has come the answer: more quantitative easing! Now your pony is drowning.
The reason for all this must be political: the desperate need to preserve the value frame of accumulation unaltered, on the expectation that a positive investment era will return. A larger intervention — either green or non-green infrastructure investment on a grand scale, a universal basic income or universal basic services guarantee, mandated wage rises, matched by expanded services, compulsory share transfers to workers (and subcontractors, a la Uber) — would all work, but they all advance the cause of post-capitalist socialisation; the management of the economy as a series of overall inputs and outputs, private action a subset of public management.
What’s the go with the pony and the 0%? To hold real change off as long as possible, they will starve the pony. And despite being imaginary, it’s standing by the fence in the moonlight with a tear in its eye.
Stockbroker, Marcus Padley, recently recommended this Youtube piece from Daniel Amstad who runs the large Aberdeen Standard Investments. In this 18 minute monologue he explains, in layman’s language, the global financial situation & how we arrived at it. Even if money is not your specialist subject this is fascinating:
https://www.youtube.com/watch?v=3WclYu5l4G0
terrific youtube explanation…but frightening
Sent a cold shiver, the youtube clip- particularly with the recollection of the trillions conjured up by Trump for armaments “The US economy under Trump is going gangbusters” said someone on Fox News. It must be very tempting to fire off and flatten some foreigners – Jobs for the good old boys.
The Reverse Bank is confused it hasn’t a clue what is happening in the real economic world – looking at computer screens generating beautiful meaningless graphs then extrapolating trends and predictions which then require more erudite explanations when they are plainly wrong – or blame altered conditions. Once its mantra or raison d’être of ‘checking inflation ‘ disappears thy are lost and useless . Australia should have been at 0.05% 18 months ago- any lowering now, which is inevitable, is economically pissing in the wind.It is irrelevant to the economy as conditions will continue to slowly spiral downwards. That is why previous Bank Governors were feted – they said nothing beautifully- just like the Delphic oracles .
It is a governments State & Commonwealth decision making that will alter the economic picture. But don’t hold your breath! No one makes decisions these days – They rely on some sort of inquiries etc – –so the actual decision making is which inquiry to set up – not solving the actual problems . The politicians are only fixated on one cycle – the electoral cycle.
It’s worth watching this lecture by Brown University political economist Mark Blyth on the plight we’re in. His argument is we’ve shifted to a new operating system post-GFC from a deflationary, neo-liberal power structure to an inflationary, nationalist one. Trump’s trade war and beggar-thy-neighbour monetary policies are part of that. So far, it isn’t working. But Blyth sees a silver lining in climate change. With interest rates at zero and unlikely to rise any time soon, there is an enormous opportunity to reshape global infrastructure for a post-fossil fuel economy.
https://www.youtube.com/watch?v=tJoe_daP0DE&feature=youtu.be
What we are seeing with interest rates is probably just the beginning of Modern Monetary Theory becoming the mainstream economic consensus.
That the economic system is forcing govts into MMT territory is largely just a natural process as we move into a new economic era driven by automation and cheap limitless growth as the energy problem is progressively solved – which in turn essentially solves all other resource problems.
All of this is predicted in many sci-fi stories and is the basis of the Star Trek economy. However, instead of taking centuries to arise – the obsolescence of money may be happening right now and could be largely complete by mid-century.
Economic growth – effectively predates our own species – and is probably some 1.5 million years old and arose among Homo Erectus as tool making began to flourish and drove better survival outcomes. If anything – the technology economy is what made us human, and today the economic form in which that takes places is rapidly evolving into something completely different from the past 500 years following the end of classical serfdom.
Going forward both traditional Marxist and Capitalist economic theory are basically obsolete.
It’s possible that the problems of climate change and environmental stress are the perfect economic demand that can be addressed while the entire existing economic/social contract is shredded.
All that economic stimulus to fix the planet should keep us busy for decades to come while Greta and her children figure out what comes next.
What has the pony got to do with it? No one has ponies anymore. Could you do one about widgets, – but they don’t get made anymore either. Hard to figure this out, we all look well fed and clothed, even if badly, and no shortage of booze or petrol, yet.