Amid all the strange, alarming and exciting things that have happened lately, the fact that real long-term (30-year) interest rates have fallen to zero has been largely overlooked. Yet this is the end of capitalism, at least as it has traditionally been understood. Interest is the pure form of return to capital, excluding any return to monopoly power, corporate control, managerial skills or compensation for risk. If there is no real return to capital, then then there is no capitalism. Not just a result of the pandemic. A trend that goes back to the GFC.
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John Quiggin 
I thought capitalism relied on the return on capital, so aren’t you mistaking money for the thing money measures here? Viz, as long as things like shares have non-zero returns in aggregate, capitalism still exists? Plus I’m sure there’s some kind of time element other than “in the long term we’re all dead”*.
With fiat money and the modern demand for inflation there’s a necessary gap between interest rates and return as well, so it might be that zero interest rates combined with deflation mean that capital still has a positive rate of return.
* long term might be very short if you get in the way of The Economy.
Isn’t this what Keynes meant when he wrote: ‘Now, though this state of affairs would be quite compatible with some measure of individualism, yet it would mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital. Interest today rewards no genuine sacrifice, any more than does the rent of land. The owner of capital can obtain interest because capital is scarce, just as the owner of land can obtain rent because land is scarce. But whilst there may be intrinsic reasons for the scarcity of land, there are no intrinsic reasons for the scarcity of capital.’
Fiat money. The redemption value of a A$50 bill is A$50 at all t>now unless the currency unit changes. Hence the ‘interest rate’ on currency A$ is zero for each period.
“real interest rate”? It is easy to write i/p where i is ‘the’ nominal interest rate and p is the price level. Fisher improved on the symbolic description of the ‘real interest’ by writing i/p[e] to denote price expectations. Unless all prices of tradeable commodities (including physical capital) and financial securities change by the same percentage (up or down), and there is agreement among all people on this future percentage change, one cannot sensible talk about ‘the real interest rate’. Ex-post calculations may result in numbers that have never entered a decision problem by any agent in ‘the economy’.
Financial securities. The financial system does not allow borrowing and lending (except among friends and in small amounts) of fiat money, as described above. Both borrowing and lending involve financial securities (including a demand deposit or a credit card loan, …) Saving in pure fiat money is possible (cash under the matres).
Relative price changes and heterogenous future price expectations.
An agent (individual or ‘firm’ or ‘government agency’) who wishes to buy a particular set of commodities in the future still has an incentive to save pure fiat money or buy a demand deposit security (put money in the bank at zero nominal interest rate) even when he/she expects the CPI (but not the set of commodities of interest) to show positive inflation but less than the decline in the price of the planned purchase of the set of commodities and the ‘best’ borrowing rate offered by banks is non-negative and therefore higher than the expected relative price change.
Another agent may wish to borrow (sell a security to the bank or on the debt market) in the expectation of buying commodities or financial securities to make a profit (with or without production) in the future. Only nominal values matter (‘cash flows’). The redemption of the security entails repaying the loan (or issuing a new security to ‘roll over’ the loan).
C.J. Bliss, Capital Theory and the Distribution of Income, North Holland, 1975 goes into great detail regarding rates of return on capital.
I can’t agree with the premise that the decline of the interest rate to zero at which the monetary authorities deal with the rest of the financial system has been overlooked. In terms of the commonly used model of money, the monetary base has increased since the GFC, in the USA in particular, while the velocity of money has declined, reversing its behaviour prior to the Lehman event (not surprisingly because the Fed bought securities from the private sector, which represents ‘money’ which had already been spent (when the securities were sold by the borrowers who could not repay, including interbank loans and swaps, etc); the GFC scenario.
‘Capitalism’ (I am still not sure what this word actually means) would die in the sense of private ownership of corporations being replaced by state ownership if the monetary authorities (speak the Fed) keeps on buying financial securities issued by these corporations.
Nice try, but. The bonds that JQ is looking at are the bonds of large sovereign governments. If they control their own currency, there is zero risk of their not being able to repay at term. There is a an inflation risk, that’s all. A blue chip low-risk non-state capitalist like Warren Buffett still has to pay 3% (his 2048 bonds, coupon 4.2%, go for 138). Any capitalist riskier than Buffett – which means all of them – has to pay more. i wonder what Trump has to pay.
Idle question. Germany can borrow 30 years for 0%. (So why are they still worried about the volume?) What if it issues consols, as the yield tends to zero? A zero-yield consol is indistinguishable from a large-denomination banknote, as long as you can pay your taxes with them.
Interesting post by J.Q. and interesting posts too by all posters above me. Each view carries its own definite form of validity, or at least is thought-proviking. My own views are as follows.
Capitalism is a set of relations in a system; a very complex set of relations at the real people (classes especially), real economy and financial economy levels. Interest, as the pure form of return to capital, is only one of these many relations. The fact that this rate is at 0% for real long-term (30-year) interest rates is diagnostic, not ontic, in system terms. In other words, it is a (dead) canary in the coal mine. It is not the coal mine. To continue the metaphor, the owners are seeking to pump or vent the poison gases out of the mine, without it blowing up, drag the dead bodies out and recommence production by sending more expendable humans down the shafts once again.
We see this in the ideological reflexes of Scott Morrison’s LNP government. Josh Frydenburg put this very starkly in one of his speeches where he essentially invoked Regan and Thatcher.
https://www.smh.com.au/politics/federal/frydenberg-channels-reagan-while-declaring-opposition-to-austerity-20200724-p55f76.html
Frydenburg clearly doesn’t realize it but going back to the old neoliberal ways will be equivalent to putting TNT in one of the shafts and pushing down the plunger… while rescuers with breathing equipment are still down there trying to save people trapped in breathable pockets.
Capitalism, and all its reactionary apostles and acolytes, will keep thrashing about for some time yet in their death throes. If they can’t have their profits, they may yet deliberately bring the mine down and their own mansions with it in the gated village, which improvidently, in this analogy, are really built right on top of some of the shafts. I do fear their motto is “If we can’t control the world then there’s not going to be a world.” They are not above holding the whole human race hostage. I think this particularly applies to right-wing American capitalists. It’s going to be a most difficult and most necessary revolution for the people. Can we save something? I hope so.
The real rate of return on government bonds is zero, but the real rate of profit on capital is not. In fact, isn’t the profit share of national income the highest it has been in decades?
Contrary to the OP, “monopoly power, corporate control, managerial skills or compensation for risk” is the very essence of capitalism in its modern form. The idea that capitalism is a bunch of Lancashire mill owners vigorously competing with each other is long gone. Baran and Sweezy wrote about the essential monopoly nature of capitalism way back in the 60s. These days its Google and Facebook etc as the monopolists. Locally, its CBA, Telstra, Qantas etc.
Coupon rate vs yield.
Warren Buffett (Berkshire Hathaway) continues to pay the coupon rate of 4.2% annually on its 2048 issue. The coupon rate is contractually fixed. The yield is determined on the secondary market (ie traded bond market) and it changes over time. See
https://www.boerse-berlin.com/index.php/Bonds?isin=US084664CQ25.
Yield vs price.
The yield(t) is inversely proportional to the price(t) at time t. As for the BH 2048, the 52 weeks low is 97.28% and the high is 138.2% (last observation)
What happened around March 2020?
Among many other events in March 2020, there is also the behaviour of the EURO/US$ exchange rate
https://www.ecb.europa.eu/stats/policy_and_exchange_rates/euro_reference_exchange_rates/html/eurofxref-graph-usd.en.html
And there is the Fed and the ECB and the Japanese central bank and there is China and there are many thousands of other corporate bonds and government bonds.
To assume one can look at government bonds (of various maturities!) in isolation of everything else is to abstract from the reality of financial markets and their interconnectedness . The mention of the word sovereignity doesn’t change this.
Yes, the requirement to pay taxes in the currency unit of the juristiction is indeed important for the value of a currency. However, I don’t think I could use a console (assuming it would be available in Australia) to pay my taxes except by chance (very small probability), either because the market value (price at the time I want to use it) of my console would be too high, relative to my tax liability or it would be too low. I would have to sell this financial security – at a little fee.
A zero yield on (a given) quantity of Bunds (German bonds) is still better than a negative yield, no? I don’t believe anybody believes an unlimited number of Bunds could be issued at zero yield (otherwise Germany could finance the entire EU budget and that of the rest of the world).
An idle question. Suppose ‘global corporations’ (formerly known as multinational corporations) succeed in getting their tax rate to zero. Who among all the agents in the global economy would then be the effective ‘sovereign”?
“A blue chip low-risk non-state capitalist like Warren Buffett still has to pay 3% ” Bill Gates, or rather Microsoft (along with J&J the only AAA rated US corp) is paying 2.5, and has exchanged lots of outstanding debt for 2050 bonds at that rate (paying a 40 per cent premium for higher-interest bonds). That’s about 1 per cent over Treasuries (a reasonable allowance for default risk over such a long term) and 0.5 per cent real if you assume that the Fed sticks to its current 2 per cent target and hits it on average. There’s a lot more room for inflation to surprise on the upside.
I am a capitalist. This is because I want a lover and have no redeeming qualities other than potentially possessing a large amount of money. My return to capital was fine before the GFC and pandemic and is fine now. Or at least, or at least good enough to make amassing vast quantities of wealth look like a better bet than learning how to have a pleasant conversation or bathing regularly.
But if inflation remains above the bond rate for developed countries that would be good as it would make aristocrats living of bond returns less attractive to gold diggers, leaving a capitalist like me with a better chance of attracting a disaffected aristocrat gold digger with low standards.
“A zero yield on (a given) quantity of Bunds (German bonds) is still better than a negative yield, no? “
German bonds are at negative yields. If they get very negative it will a better investment to buy a safe and shove a lot of cash in it.
There is also the date to maturity to be considered, Smith9. As at last Friday, the yields are:
https://www.bloomberg.com/markets/rates-bonds/government-bonds/germany. The 30 year Bund yield was approximately zero last Friday.
(You are being funny in your self-characterisation, Ronald, while having a swipe at historical characters.)
Good thread. I was hoping for some feedback on my consols puzzle.
The fall in corporate debt rates is having a salutary effect on investment in renewables, according IIRC to Goldman Sachs. Oil and gas, let alone coal, are seen as much riskier. The WACC of 9.6% that Lazards obstinately still use to compare LCOEs now looks quaint or wishful Wall Street thinking.
Piece at Voxeu by Corsetti et al arguing against Euroconsols. https://voxeu.org/article/using-perpetual-bonds-finance-european-recovery-fund
The problem, which applies even to patient investors like pension funds and university endowments, is that the market value of consols is the most volatile of any debt, making it impossible to match liabilities and assets over time. Corstti proposes the EU should borrow short (currently at 0%) and lend long to the assisted member states.
@James W. Interesting. Relies critically on the existence of a term premium, making very long-term debt expensive. The point of the OP is that this premium is disappearing. Hence, contra the authors, it seems possible that consols could be sold at very low levels. In particular, an inflation adjusted consol at zero seems like it could sell.
In so far as money and investing are concerned, how doesn’t zero interest in effect = Islam?