Negative interest rates

July 2020 Forums General discussion Negative interest rates

  • This topic has 6 replies, 5 voices, and was last updated 1 month ago by ALB.
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  • #202744
    Young Master Smeet
    Participant

    Paul mason has flagged up this article:

    https://www.bankofengland.co.uk/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018

    “I show that across successive monetary and fiscal regimes, and a variety of asset classes, real interest rates have not been ‘stable’, and that since the major monetary upheavals of the late middle ages, a trend decline between 0.6–1.6 basis points per annum has prevailed. A gradual increase in real negative‑yielding rates in advanced economies over the same horizon is identified, despite important temporary reversals such as the 17th Century Crisis. Against their long‑term context, currently depressed sovereign real rates are in fact converging ‘back to historical trend’ — a trend that makes narratives about a ‘secular stagnation’ environment entirely misleading, and suggests that — irrespective of particular monetary and fiscal responses — real rates could soon enter permanently negative territory.”

    That’s permanent negative interest rates!

    https://twitter.com/paulmasonnews/status/1263729412912156672

    Now, I think this doesn’t indicate a problem in the rate of profit, as Mason does, I suspect that this reflects capitalism’s disproportionate production of monetary wealth, and in particular the distortions caused y trying to get each person to save for their retirement, rather than paying for living costs of pensioners from current funds: from a personal perspective, my savings are not governed by interest, and I’ll keep saving even if I had to pay.

    #202745
    Young Master Smeet
    Participant

    Oh, and at the risk of derailing my own thread, this seems to be the official view of the BoE now:

    https://www.bankofengland.co.uk/knowledgebank/how-is-money-created

    But, I think this is the key line for us:

    “This also means as you pay off the loan, the electronic money your bank created is “deleted” – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too.  So essentially, banks create money, not wealth.”

    So, banks are financial intermediaries after all….

    #202746
    alanjjohnstone
    Participant

    Related

    The UK government sold gilts with a negative yield for the first time in its history on 19 May, meaning investors paid for the privilege of borrowing from the UK government. The three-year bond, which matures in 2023, raised £3.75bn, and offers a yield of -0.003%.

    https://www.theguardian.com/business/nils-pratley-on-finance/2020/may/20/investors-are-actually-paying-for-the-privilege-of-owning-uk-ious-gilts-bond-coronavirus

    #202748
    ALB
    Participant

    Negative interest rates, knowingly and voluntarily offered by the lender, mean that the lender is in effect paying the borrower to store their money; which would reflect the fact that the alternative uses of the money are more risky. This is what appears to have happened the other day with some government bonds ( which are loans to the government); some capitalists must be buying them because they don’t think much of the economy’s profit-making chances.

    The government has also been reported as contemplating a negative bank rate ( as it used to be called) as the rate the Bank of England, as the central bank, pays commercial banks on deposits with or borrowings from it. In this case it would be a (probably forlorn) attempt to get the banks to lend more to productive capitalists by penalising them for letting their money lie idle . People will always want to borrow money for some money-making project but banks have to judge whether these projects are viable so as to be sure they get their money back. When profit-making opportunities are not good, the government can’t force banks to make risky loans. You can bring a horse to water but you can’t make it drink. as governments have repeatedly discovered.

    Allowing inflation to reduce the real purchasing power of a loan is a ploy governments have traditionally employed to reduce what they have to pay back. This  may happen with the loans governments have taken out to deal with the pandemic. But it would go against the practice of recent decades of favouring the lender rather than the borrower. Some reformists have been campaigning, with their calls to cancel debts with a “jubilee”, to reverse this and favour instead the borrower. Not much chance of that happening, I would have thought.

    Forgot to add that all this confirms that what is important for the operation of the capitalist economy is the rate of profit not the rate of interest.

     

    • This reply was modified 1 month, 2 weeks ago by ALB.
    #202750
    Ozymandias
    Participant
    #203136
    marcos
    Participant

    What about negative interests for the working class? Peoples should see that this economic system was created for  a minority group known as the capitalist class and stop defending somebody else interests

    #203453
    ALB
    Participant

    Good explanation of the two types of negative interest rates in Monday’s Evening Standard (I June), by HSBC’s Senior Economic Adviser, Stephen King. HSBC are of course against formal negative interest rates since, as he explains, this could threaten banks’ profitability but he explains clearly how banks work and where their income (part of which is profits) comes from. No nonsense about banks’ income coming from charging interest on loans conjured up out of thin air.

    “Banks traditionally make money through the “spread” between the interest rate offered to depositors and the interest rate demanded from borrowers. With negative interest rates, banks would effectively have to take money, out of savers’ bank accounts, a deeply unpop­ular outcome. In the face of this banks might end up letting lending rates fall more than deposit rates, in effect cut­ting the “spread”. That, however, would lower bank profitability and reduce the volume of lending, the opposite of what policymakers would be hoping for. Borrowing costs would be lower, but a dwindling proportion of people would actually be able to get access to credit. The biggest objection to negative interest rates, however, is that they have the same redistributional conse­quences as periods of unexpectedly high inflation. In the 1970s, those with cash savings — pensioners, most obvi­ously — ended up poorer as a conse­quence of inflation being continuously higher than interest rates. Now, the Bank of England is thinking of doing roughly the same thing, this time by making sure that interest rates are con­tinuously lower than inflation (even when inflation itself is excessively low).”

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