That’s the self-explanatory title of my latest piece in The Conversation. It’s wonkish, but important. As I’ve explained here and here, an economy with zero real interest rates works very differently from the kind we are used to.
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John Quiggin 
Occam’s razor suggests interest rates are low because they have been intentionally financially engineered to be low by the financiers and their regulatory capture of the system via political donations. I’m not sure why this answer is not explicitly on J.Q.’s radar.
In other words, decisions were made and continue to be made to create a lot of money and/or increase money supply with Q.E. However, the way the increased money or money supply enters the system is engineered to NOT be through workers’ and the unemployed’s pockets, which policy is known as austerity. Instead, the money is directly supplied (at approximately zero real interest rates) to rich people and large corporations. These are very deliberate political decisions made to assist rich oligarchs and corporations and to bypass working people and the poor.
If J.Q. is suggesting zero interest rates (for the rich and not for the poor by the way) are here to stay then he is suggesting that austerity policies are here to stay. The first implies the second because the second (austerity plus Q.E.) causes the first. Under such conditions, belief in supply and demand begins to look decidedly quaint and naive.
There is an alternate view that blames the stagnation of the Japanese economy for near zero interest rates on western styled money markets. By the mid 1990s the real estate bubble, for Japanese surplus units , had burst. With mountains of liquid funds these surplus units went heavily into bonds. Large one off purchases of $9 billion dollars of government bonds, both domestic and foreign, became common. Japan was awash with liquid funds looking for positive returns. Yes a lot leaked out onto stock exchanges in Japan and overseas. But the conservative nature ( and age) of many of the surplus units in Japan precluded large sums of money from such high risk investments. This led to a tsunami of liquid funds pouring into government bonds both old and new. This trend continues to this day.
Now that is the hypothesis. Proving this hypothesis is especially difficult given the secrecy inherent with the financial affairs of many of these conservative surplus units inside Japan. Unlike the American rich, rich people in Japan do not advertise their wealth. Often activities observed on Japanese financial market, undertaken by Japanese brokers and financial agents, are just the tip of the iceberg. Inter company loans, venture capital credit lines and debt forgiveness are often done under a veil of secrecy.
Still it must be said that until this veil of secrecy can be lifted, the above hypothesis remains untested. JQ may be completely on the right track. But it is also possible that Ikonoclast is on the right track. I make no judgements of either case or claim to primacy of causal factors to do with near zero interest rates.
I think that near zero interest rates and seemingly perpetual QE have a very simple explanation and once understood gives us the potential to eventually dismantle the welfare state (‘illfare’ state actually). Technological progress – automation – is inherently deflationary and is accelerating. The next 10 years are going to see absolutely massive disruptions in energy, transportation and food – see RethinkX and Tony Seba for details. These sectors are exponentially deflating in costs and the only reason it isn’t so obvious is that it has only just begun ( 20 – 30 years into a 50 year process, most growth in an exponential process happens near the end). Increasing costs in the government businesses of education, health and ‘government’ have also hidden this deflation but these sectors are starting to be disrupted as well.
We are now at a point where advanced countries need to offset this deflation by providing a stipend or UBI. Governments have been spending money like crazy and all they are doing is creating pointless debt and causing asset inflation in the stock market and elsewhere. This money should be given directly to the people and it should grow at a rate sufficient to prevent deflation. It needs to start low so that people can get on board with it, and it will eventually replace the welfare state.
I suggest that advanced economies start giving every adult citizen a permanent stipend of beginning at around $2000 per annum as a UBI. This stipend should be paid for by just ‘printing’ the money, no debt. It won’t create any inflation because it is becoming pretty obvious that increasing automation is causing a technological deflation that requires a sort of permanent ‘QE for the people’.
The amount of $2000 should also increase at a steady rate of about 20% per year for the foreseeable future and as it grows (exponentially!) it should gradually replace all other welfare payments. In this way the welfare state can be slowly dismantled leading to huge increases in all spheres of productivity. Why 20%? The rate needs to be set to an amount that causes about 2% inflation. We live in a debt driven society and 2% is widely considered an ideal balance that reduces debt over time. The worst thing would be a debt deflation where debts became more onerous over time.
I should add this. Maybe J.Q. had a word limit on his article but he should have added some advice (which he gives multiple times elsewhere) under the heading of Too Little Investment. And that is for public investment to be scaled up in a major way. Clearly that is the answer to the problem. As J.Q. has said before, we should increase public investment and give more assistance to poor people; especially in the fields of renewable energy, science, R&D, education, health, welfare, aged care and housing and especially at those zero real rates.
The zero interest rates are not really a puzzle in my opinion. They are the almost axiomatic outcome of austerity for the masses plus money printing and Q.E. for the rich. One can’t be sure whether the neoliberals stumbled on this strategy or whether it was planned on and baked in all along. In retrospect it looks like a brilliant plan, if you want to impoverish and cull the masses and enrich the elites.
Soon, the elites will not need the unskilled masses. These masses will be rendered superfluous to requirements. Robots, drones and AI will perform the major proportion of production, logistics and even security and defense. The elites will need human science technocrats (STEM), management ideologue-technocrats (to manage and justify the system) and “securitats” meaning security force personnel running police and military drones and robots.
The big question is whether the superfluous masses will revolt and whether they will win or not. I suspect there is a closing time widow for this kind of revolt. Fairly soon, AI and remote controlled robots and drones will outperform people at all tasks except AI programming itself. Then self-programming and learning AI will likely be developed which will out-perform humans. A future revolution could belong to human programmers who back-door learning AIs so they can take them over at need. The oligarchs and corporate suits won’t know what’s hit ’em at that point.
The human revolutions will continue, at least until human extinction, which might not be that far away now.
For those who might doubt the exponential pace of this, the RethinkX Executive Summary of the coming food disruption is worth a 2 minute read:
https://www.rethinkx.com/press-release/2019/9/16/new-report-major-disruption-in-food-and-agriculture-in-next-decade
The interesting thing I find about all this is that it is being largely driven by economics, not politics. The rate of change is such that politics, if anything, will just get in the way.
Ikon – I don’t think the QE strategy was either planned or stumbled upon. It is just that in the not to distant past too much money printing would lead to inflation. It still does in less advanced countries and will also in the advanced countries if done to excess. But a small and exponentially growing amount of QE will finance the beginnings of a UBI and eventually finance most government activity ( ie eventually no taxes – yeah! a further boost to efficiency).
This is the real change and result of technological advance. As I have said, technology is inherently deflationary. Marc Andreessen once said that ‘Software is Eating the World’ and this is becoming more true every day. The marginal cost of software is almost zero in more and more cases. Software that once cost hundreds of dollars can now be had for free and increasingly software is driving inefficiencies out of the world. Ie AI, automation, food as software, etc.
The interesting thing about software is that it isn’t subject to the same scarcity factors that the material world is. As more of the material world becomes software it is far more likely that we have a world of abundance rather than scarcity. Pretty easy to put a spanner in the works though, so I’d be careful what you wish for.
JQ is using “interest rates”‘ in the central banker sense of the yield on low-risk long-term bonds. There is a bit of a logical gap between this and the interest rate in the macro IS equality he also relies on. This has to represent the whole spectrum of liquid asset classes. It ranges from cash (= bank deposits), with a riskless yield of minus the rate of inflation (so currently -1% to -2%), through T-bills, safe bonds, junk bonds, equities, and venture capital (maybe >10%). This may not matter much for workhorse macro, but it does for Piketty analysis. His r is the weighted average summing over all asset classes, including real estate. It probably isn’t zero. Is it now less than g (say 2%-3%? Dunno, needs a lot more work, but may be close.
What does seem safe to say is that the inequality engine has probably stalled. If nothing is done, inequality will look much the same in five years as it does today. Of course, this is not good enough. But we have a breathing space.
Iko: “Occam’s razor suggests interest rates are low because they have been intentionally financially engineered to be low by the financiers . . ” This is not an application of Occam’s razor but of Marx’s hammer, to which everything looks like a nail. I don’t deny there are nails.
James Wimberley,
Perhaps it is Maxwell’s silver hammer! I mention this because of “pataphysics” but I will get back to that. There are no fundamental laws to interest rates or anything in financial economics. A fundamental Law is any hard science law, like the laws of thermodynamics for example, which humans did not create and which humans cannot alter but rather can only work within. To command nature you must obey nature, as the philosopher Francis Bacon wrote.
Interest rates on the other hand, like money and like legal property are human creations; social fictive creations. They have not Fundamental Laws but are based on implemented rules employed as axioms. From axioms you may derive theorems, proofs that inevitably follow, if you are clever enough to work them out. In political economy, those with the political power can change the axioms at will, subject only to other competitors in the sociopolitical power game and ultimately in the physical power game (gangsters, police and military).
Looking for fundamental or natural laws in finance (like the “law” of supply and demand), is a fool’s errand, in my humble opinion. Rather, we should simply look for those with the power to set the rules (axioms), by fiat or by privileged negotiations. The masses do not participate in these negotiations except by indirect and usually ineffective actions like voting or by direct and sometimes very effective actions like strikes and revolutions.
Margaret Thatcher infamously said there is no such thing as society. Au contraire, Maggie! In fact there is no such thing as economics. There is only political economy. All the rules of economics, as founding axioms, are made by humans and can be changed by humans but specifically by those humans wielding effective power of some sort in society. Conventional bowdlerized economics is “pataphysics”. I offer this below as a whimsical, but at heart still serious, critique of conventional economics.
All quotes below from Wikipedia:
“Pataphysics … ; French: pataphysique) is a difficult-to-define “philosophy” of science invented by French writer Alfred Jarry (1873–1907)[1] intended to be a parody of science.”
This is appropriate as conventional economics itself parodies science, specifically 17th C to 19th C mechanistic, classical physics.
“One definition is that “pataphysics is a branch of philosophy or science that examines imaginary phenomena that exist in a world beyond metaphysics; it is the science of imaginary solutions.””
Conventional economics, at least of the bowdlerized Mankiw sort, is a science of imaginary solutions. There is something different to Arrow-Debreu, and their modelling, who at least, by my understanding of Ernestine Gross’s interpretation, essentially propound that their modelling is axiomatic not empirical; prescriptive and not descriptive. Then they rigorously derive theorems from their assumed axioms. This allows their statement that an unregulated free market without a minimum wealth condition set for all participants does not permit free choices (of consumption) by all participants. This is a useful insight.
The whole matter turns on the fact that there is a real economy and there is a financial/legal/regulations economy. The first is a real system (as hard science would use that term). The second is a formal system. At heart is the following question. What do formal rules (financial, legal, regulatory) do to real systems (and what can’t they do to real systems) when the formal rules are followed and enforced to some significant degree. The formal rules, followed or enforced, program human behaviors to some degree just as computer code programs a computer, albeit humans are creative (and resistant) interpreters of codes.
Political economy creates economics. That is the sense in which I say there is no such thing as economics. I mean it is not free-standing with its own inherent laws. Rather it is conditioned by political economy, the current realization of our social fictive constructions especially when we remain largely unconscious (false consciousness ignorance) of their constructed fictive or artificial (made by artifice) nature. Change the rules (laws and regulations) and you will change economics. We are now realizing that we must change the rules because free market growth economics is inhumane (as shown by “Piketty’s Law” which is actually a theorem derived from the current axiomatic rules of capitalist economics whose elucidation is backed by empirical evidence that the theorem plays out in practice) and because free market endless growth economics is ecologically unsustainable.
Iko: Wow. I do notice that you fail to offer any defence of your remarkable claim that financiers have been conspiring to lower the return on capital.
Lifted from the parallel CT comment thread, a really interesting paper by Schmelzing for the Bank of England finding a multi-secular decline in real interest ates since (gulp) 1300: https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/eight-centuries-of-global-real-interest-rates-r-g-and-the-suprasecular-decline-1311-2018
The distributional effects of this seem rather non-straightforward to me. One bad version would be a mere redistribution within asset owners from fixed income to equity/real estate owners which tend to be the richer ones among asset owners. Prices for real estate/stocks are merely bidden up, increasing asset valued in relation to gdp and the capital income share of gdp remains constant.
Granted, some 50% of the population tends to have close to zero assets over the entire lifecycle (excluding acquired government pension entitlements). So in some sense they can be indifferent. Albeit their (often rather theoretical) chances to improve their or their children’s lot by saving does not get better either.
John – you have hinted at (or spoken more clearly and strongly) about the cost of energy being effectively zero, and separately of the cost of money being effectively zero. Does having the two things simultaneously change your thinking on where we are headed? And in such a world, what are the scarce resources? Public goods of high quality, including capacity for the maintenance of life to continue adapting (ie as wide a range of organisms have numbers, space and resources for evolution to continue)? Work? Although if energy is free, I can’t see why human labour should carry much cost.
Is having these two parameters of our system at their current and foreseeable levels a fundamental disruption, or simply a bit like peak Victorian Britain, when interest rates were low, there was plenty of coal and other resources whether from Britain or the Empire, and the idea of public goods was undeveloped?
Rob
Not sure if J.Q. has said that the cost of energy is or can be effectively zero. I don’t see how that can be possible. Solar energy is a free gift from nature (taking nature broadly as the solar system) but harnessing it is still not free. There are the real costs and opportunity costs of the real resources and energies used to harness solar energy.
Money costs on the other hand are neither here nor there. Money is not real. It’s a formal, notional and (somewhat useful) social fiction. Money via market operations is supposed to model economic “value” and to allocate resources efficiently according to value. This is mostly a fiction. Markets, money and “value” are manipulated and gamed in multiple ways that have nothing to do with genuine human values, aggregate values, value comparisons or environmental sustainability.
Some say that money measures human needs and desires as demand. If so, that means humans desire catastrophic climate change and extinction because that is what they are buying currently.
The cost of energy won’t be zero, but it will be flat. The supply of solar electricity can be expanded by several orders of magnitude before it starts hitting physical limits, and the same holds for pumped hydro storage (see the Blakers atlas). The potential supply of wind electricity would hit physical limits sooner, but these are still a long way off. especially with the advent of floating wind. The practical question is not zero cost, but whether it’s worth paying rents to intermediaries and charging overheads to run a market, or better to just offer too-cheap-to-meter electricity as a unpaid service like garbage collection, financed collectively through taxes. Red Plenty beckons! For some things.
There is no technical reason that we can’t increase interest rates easily.
It is simply a nominal number set by the supply / demand and inflation limitations.
Imagine if we just created $5000 a year for every adult in Australia and gave it to them (not debt financed with bonds, just simply created). This would probably cause inflation (if it didn’t, you could simply raise the number).
This would then require higher interest rates to clamp down inflation.
The real question is then why don’t they do this?
Firstly, people might not be happy with this kind of UBI. You could easily solve this just by making it a tax refund credit. For example X% of your tax from last year is refunded every month. So that way it basically just becomes a tax refund keeping everyone in proportion (if people are against this being a “handout”).
So that problem is easily fixed. So now we get to the real reason. The real reason is that capitalists like 0% and low interest rates because it encourages oligopolies and increases the moat around large scaled businesses.
More than 70 percent of retail sales in the mid-1950s went to independent retailers with a single location. However when you give mega corp 0% interest rates, and your local independent retailer 15% interest rates. It doesn’t take long to see that this results in large scale consolidation, and domination of a smaller number of firms. This simultaneously enriches the few, creates more inequality, reduces GDP growth (the large firm can be more inefficient, yet generate greater return on equity due to cheap debt, thus it wins even while being less effective in the real world). Everything that we have been seeing in recent times.
James Wimberley,
Remember the LIBOR scandal?
“Libor scandal: the bankers who fixed the world’s most important number – T
With arrogant disregard for the rules, traders colluded for years to rig Libor, the banks’ lending rate. But after the crash, the regulators were on their trail. – by Liam Vaughan and Gavin Finch, Guardian.
Remember the Paradise Papers?
https://www.bbc.com/news/world-41880153
The idea that financiers, bankers and rich people DON’T conspire is absurd. Of course they do conspire ALL THE TIME. There have been many exposés about this.
“Everything Is Rigged: The Biggest Price-Fixing Scandal Ever
The Illuminati were amateurs. The second huge financial scandal of the year reveals the real international conspiracy: There’s no price the big banks can’t fix” By Matt Taibbi, Rolling Stone.
The reference to the illuminati is jocular. The reference to the true riggers is not.
It is the job of the Governors of the Federal Reserve to set interest rates. That’s their job one would say. But who are they? Well, they are private bankers, hence they set their own rates to suit themselves and their mates. Ask yourself, “Who owns the US Federal Reserve?” Well, it’s privately owned and thus riddled with conflicts of interest.
See “Who Runs the Fed?” in Dissent Magazine. Remember it was Adam Smith himself who said every profession is a conspiracy against the public. “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.” ― Adam Smith, An Inquiry into the Nature and Causes of the Wealth of Nations.
Those were games by investment banks to make short term speculative gains. Quite a different animal from manipulating long term interest rates down for the long term(why exactly, how would that profti anyne in finance/banking?).Taibbi tends to ascribe competences and capabilities to financial sector actors they simply do not have right since the Goldman article. There is a fine line between the real amoral behavior and an old school antisemitic conspiracy theories with all their omnipotence attributions. Yes, people in finance often do have a privileged position in the information flow and yes they have in the US in particular major influence on politics and policy responses as well as the agencies that are supposed to regulate them. Also: Large parts of the work at investment banks is done by inexperienced sleep-deprived young graduates. Insiders should have shorted much more while watching like a hawk that the counterparty has enough collateral much earlier and not taken any of those toxic trash things on their own balance sheet far earlier if they were that competent. At least bankers should have done that with their private money if they had some government will bail the institutions out plan.
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This is not quite the same world as the ivy league connected high finance insiders, still illustrative: Bafin staff and Wirecard.
Wirecard was a big fraud cooking the books since at least 5 years.The Financial Times wrote about suspicions since quite some time. Meanwhile, Bafin staff was investing in Wirecard derivatives. Going all short with professional instruments you think? Oh no, they were buying the crapy overpriced derivates banks issue to private investors, going long and short with no reason behind it just like every other gambling addict does on the stock market.
One person was “investigating” the many suspect things about Wirecard, by writing nice Letters to Wirecard asking them what they have to say about those issue that emerged from journalists/short sellers investigative research.
Bafin was also investigating Wirecard short sellers and journalists doing negative reporting. The Financial Times wrote some opinion piece about how this was based on nationalism and anti-British prejudice. Project more. My thesis is quite different – the short sellers and journalists genuinely did not look particular clean either. Investigating them was simply much easier, bureaucratic business as usual regarding possible minor wrongdoings.
Investigating an outright accounting fraud with a complicated web of cover-ups on the other hand? Too few staff, too little legal authority and a culture that simply did not permit anything but a standard low level bureaucratic response to anything.
Iko: It is theoretically possible that financiers might want to rig the rates at which they borrow (eg at central bank discount windows) while keeping their lending rates high. It is not credible that they would try to keep tbeir lending rates, and the linked bond market, unprofitably low. These are the interest rates JQ is talking about in the OP.
James Wimberley,
“Keeping short-term rates low . . . is particularly helpful to the big banks like Bank of America (BAC) and JPMorgan (JPM). Their raw material is short-term money, which is effectively free right now. They can borrow at 0.25% or less, and then turn around and invest those funds in, say, a 5-year T-note at 2.50%, locking in an almost risk-free profit of 2.25%. On big enough sums of money, this can be very profitable…” – Dirk van Dijk.
They make money on volume and (even modest) differentials. This is the way to make money when there are no or relatively few genuine productive investments to make. It’s a rigged system via finance and government collusion Politicians are bought by donors. The whole system is completely rigged by the rich and powerful. Admittedly, there are competing rich interests, competing capitals, but this competition is undertaken not in the market but in breach of the market by monopolization, political influence and regulatory capture. Any belief that free market competition has anything to do with it is completely at variance with the known facts.
“There is no such thing as a free market, never has been, never will be. All markets are regulated, but some markets are regulated in the interest of the many and others in the interest of the few. The American economy is now clearly and indisputably regulated by the few and for the few who now control the wealth of the nation…
The top 20% own all but about 15% of the privately held money and assets in this country. The top 10% of taxpayers owns roughly 72% of the wealth and over 90% of the stocks, bonds, and mutual funds. Between 1981 and 2005, federal taxes on business declined 43 percent. Corporate income taxes accounted for about one-quarter of federal revenues in 1950; today, corporations contribute a mere 6% to the Treasury.” – Counterpunch.
The proof is in the pudding. Who owns it all (the capitalists of course) and who owns almost nothing (the masses of course) Either free markets don’t work or free markets don’t exist in capitalism. These are the only extant possibilities based on the empirical evidence of outcomes of the neoliberal (and even imperialist) eras. Take your choice. To continue to maintain an explicit or implicit belief that market competition (as opposed to political competition and brute force competition) still exists in the extant, real political economy system (except at the fringes) is as I say to hold a position against all the evidence.