ONE
is witnessing the emergence of a strange and unprecedented phenomenon
in the advanced capitalist world, namely the charging of negative
interest rates. The European Central Bank reduced its deposit rate to
-0.1 percent in June 2014, and since then it has reduced this rate
further, to-0.2 percent in September 2014, -0.3 percent in December
2015, and to -0.4 percent in March 2016. And apart from the ECB, four
other national central banks, those of Switzerland, Japan, Denmark, and
Sweden, have also reduced interest rates on certain parts of their
deposits to negative levels. In addition, the ECB has also announced
that if banks borrow from it to increase the amount of loans they give
by more than 2.5 percent of the prevailing level, then it would charge
-0.4 interest rate on all such borrowings at the margin. (In any case
the interest rate it charges on its loans to banks is zero at present).
This phenomenon, it should be noted, is still confined only to
transactions between the central bank and its constituent banks, and
does not affect transactions between the “public” and the banks. But
even this shift to negative interest rates has already had one visible
effect: if banks can get loans at negative interest rates then they will
also be willing to hold assets which give negative interest rates,
provided the latter rates are even marginally higher, and provided these
latter assets are otherwise attractive in the sense of being risk-free.
Government bonds are generally considered risk-free, and we find that
government bond rates in Germany and Japan have also entered into the
negative territory.
WORLD RECESSION
To understand why interest rates have entered the negative region, we
must look at the context provided by the world recession. A recession
entails low investment, which basically means that wealth-holders are
not very keen to hold reproducible physical capital assets; what they
are interested in holding instead is money. A recession therefore
entails an increase in what economists call “liquidity preference”,
namely a greater desire on the part of wealth-holders to hold their
wealth in the form of money rather than in the form of capital goods (or
claims on capital goods, such as bonds and equity).
One way of nullifying the effects of this increased “liquidity
preference” on the part of private wealth-holders, is to get banks to
show the opposite preference, for capital goods (or claims on capital
goods) instead of money, ie, to get them to run down excess cash
reserves, or even to borrow money from the central bank, to buy equity
and bonds which would then indirectly raise the demand for goods in general.
It would do so by making investment more attractive (because finance
for it has become cheaper) and by raising consumption through the
“wealth effect” (since the holders of bonds and equity feel wealthier
when the prices of these assets go up because of banks’ demand).
This is what monetary policy has been trying to do ever since the
beginning of the world recession in 2008. The Federal Reserve Board of
the USA, and the ECB, had brought down the interest rate at which they
make funds available to banks to virtually zero. Even so however banks
were unwilling to lend to corporations and households, because of their
bitter experience with being saddled with “toxic assets” earlier. In
other words it is not just the “public” but even the banks, which had
been afflicted with “excessive liquidity preference” in the current
crisis. Everybody, whether banks or the “public”, simply wanted to
hold money and nobody wanted to lend, which is why the recession
persisted.
This situation could be overcome, if instead of all this rigmarole of
making the banks give larger loans to the private sector so that this
sector’s demand for goods could increase (which is what monetary policy
tries to do), the government just directly bought more goods. The
government could simply borrow from the banking system (which is what an
increase in the fiscal deficit amounts to) to finance its larger demand
for goods, and the recession would be ameliorated. But a larger fiscal deficit is unacceptable to finance capital, which always insists on “sound finance”.
(Earlier such “sound finance” had meant balancing the budget, while
these days it means a cap on the ratio of the fiscal deficit to GDP,
usually at 3 percent; but in either case the fiscal deficit route for
overcoming a recession is avoided). But if the fiscal route for
overcoming the recession is avoided, then all that the system has, by
way of policy instruments at its command, is monetary policy. And if
monetary policy is unsuccessful in causing a revival, even when the
interest rate has been pushed down to zero, then the system is forced to
push the interest rate even lower, ie, to the negative region.
CAPITALISM IN A DEEP STRUCTURAL CRISIS
The pushing of certain interest rates to the negative region
therefore indicates a number of things: first, that the crisis of the
capitalist world, whose end, we are repeatedly told, is imminent,
continues to persist; second, that the worry over this persistence is so
serious that capitalist countries are desperate to use whatever
instrument they can to end it, even to the point of having negative
interest rates which are unprecedented in the history of capitalism.
There have of course been negative real interest rates (when the rate of inflation exceeds the nominal interest rate), but not negative nominal interest rates.
A slight digression is in order here. Bourgeois theory holds that
investment entails a sacrifice of consumption. It entails that some
goods which could have been consumed today are set aside from today’s
consumption but are added to capital stock so that society becomes more
productive tomorrow, and an even greater amount of consumption goods
than what is sacrificed today is obtained tomorrow because of this
addition to capital stock. All capital stock, which is simply the
cumulative total of such investments, is thus based on “sacrifice”; and
profit (or surplus) as a category of income constitutes a “reward for
sacrifice”.
A necessary condition for the validity of this view is that the
economy should always be operating at full employment, ie, that all
resources are always fully utilised. But this has never been the case
under capitalism, which instead has always had unutilised resources
(except during wars, but these do not reflect the “normal” functioning
of the system). It follows therefore that an increase in investment,
instead of requiring a fall in consumption, actually leads to a
concurrent increase in consumption. This is always the case (except
during wars); but it becomes particularly visible in situations like the
present.
Now, if profits and, by inference interest rates, were a reward for sacrifice, then negative interest rates could never arise. They would simply be impossible to explain. The fact that the system has to have such negative rates points yet again to the vacuity of bourgeois theory.
Even with negative interests rates however there is unlikely to be
any significant recovery from the crisis. If investment was not getting
stimulated at zero interest rates, it is unlikely that a slightly lower
(ie, negative) interest rate will change the situation all that much. It
is not as if a whole stock of investment projects have been waiting in
the wings, which would suddenly become worthwhile because of the slight
fall in interest rate; on the contrary such desperate measures, which
underscore the gloomy economic scenario, will take away whatever
euphoria the capitalists may have acquired of late, make them more
“edgy”, and hence further dampen their “animal spirits”. Negative
interest rates could mean at best a substitution of high-cost debt of
firms by lower-cost debt within their existing portfolio, but not an
expansion in the overall capital stock, or even much enlarged
consumption.
A fall in the interest rate no doubt can weaken the currency of the
country, and hence work in the direction of snatching demand away from
other countries even within a generally stagnant world market. But even
this route to recovery is unlikely to be of much help in a situation
such as now, where all countries are lowering their exchange
rates vis-à-vis the US dollar, ie, all countries other than the US. The
US itself however is increasingly resorting to protectionism as is
evident from firms being penalised for outsourcing services to countries
like India.
Even if perchance there is some recovery caused by the negative
interest rates through the creation of a new “bubble”, since the
continuation of the “bubble” would require that the negative interest
rates should be allowed to persist, when such a “bubble” does collapse,
the rates would have to be pushed into a further negative region for bringing about a recovery from that situation.
Negative interest rates in other words, even assuming that they do work to stimulate a revival, ie, in the most optimistic scenario for capitalism, are likely to end up being analogous to providing drugs to a drug-addict whose need for the stuff keeps increasing over time.
The reason why such measures, notwithstanding their
unconventionality, are both unlikely to work and push the system towards
greater dysfunctionality even in the event of their working is because
capitalism today is caught within a deep structural crisis.
For a very long period, right until the First World War, the system
had the prop of a colonial arrangement which ensured that recessions
were brief and were ensconced within an overall long boom. In the
post-Second World War period, State intervention in demand management
played a similar role and came to the rescue of the system, even after
the prop of the colonial arrangement had ceased to be effective as a stimulus
(which is not the same as saying that imperialism had become
irrelevant). Capitalism today however has no such props: the colonial
arrangement not only cannot be revived but would also be inadequate as a
stimulus for a long boom (because of the limited relative size of the
colonial markets in the present context); at the same time, State
intervention in demand management cannot work as a stimulus because of
finance capital’s insistence upon “fiscal responsibility”.
Measures like monetary policy, which really amount to tweaking the
system here and there, work only if there is some basic underlying prop
that keeps the system going. But in the absence of such a prop, as is
the case now, such tweaking, even if it takes unconventional forms like
negative interest rates, is unlikely to work.
Courtesy : The People's Democracy, Vol. XL No. 13
Source : http://peoplesdemocracy.in/2016/0327_pd/phenomenon-negative-interest-rates
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