June 09, 2016
- Previously, I have written about the progression
from positive interest rates to zero interest rates
(since 2008) and finally to negative interest rates.
And I asked my readers a simple question: How will
negative interest rates blow up the financial
system? And apparently none of you knew the answer.
Now, I must confess that to start with I didn’t know
the answer either, which is why I asked the
question, and my first attempts at finding it were
somewhat tentative. But now, having thought about
it, I do seem to have found the answer, and it is
But first let us back up a bit and answer several
1. Why did zero interest rates become necessary?
2. Why are negative interest rates now necessary?
3. Why are negative interest rates a really
* if you ignore certain unintended consequences
(which is what everyone does all the time, so let’s
not worry about them just yet).
1. Interest rates went to zero because economic
growth went to zero. If you are just now wondering
why that happened, just google “Limits to Growth”
by clicking this link. (A public notice about
the scheduled end of growth has been on display at
your global planning office for four decades now. It
is not anyone else’s fault if people of this planet
don’t take an interest in their global affairs. I
Interest rates and rates of growth are related: a
positive interest rate is little more than a bet
that the future is going to be bigger and more
prosperous, enabling people to pay off the debts
with interest. This is an obvious point: if your
income increases, it becomes easier to repay your
debts; if it stagnates, it becomes harder; if it
shrinks, it eventually becomes impossible.
Yes, you can nitpick and split hairs, and claim that
there was still some growth, but in the
developed economies most of this growth has been in
financial shenanigans, fueled by an explosion in
debt, and most of the benefits of this last bit of
growth accrued to the wealthiest 1%, and did next to
nothing for anyone else. Did this growth help
support a large, stable and prosperous middle class?
No, it didn’t.
In fact, wages in the US, which was once the world’s
largest economy, have been stagnant for generations.
In response, the Federal Reserve has been
continuously reducing interest rates, until they hit
zero in 2008. And there they have stayed ever since.
But now, it turns out, that’s not good enough. If
the Federal Reserve wants to keep the party going,
they have to do more, because…
2. Once you are faced with a continuously shrinking
economy, just holding interest rates at zero is not
sufficient to forestall financial collapse. The
interest rates must go negative.
Here are just a couple of particularly striking
Australia has amassed a huge pile of debt—over 120%
of GDP—and most of it is mortgage debt on overvalued
real estate. Now that Australia’s economy, which was
driven by commodity exports to China, has tanked, a
lot of this debt is being turned into interest-only
loans, because Australians no longer have the money
to repay any of the principal. But what if they
can’t make the interest payments either? The obvious
solution is to refinance their mortgages as
interest-only at zero percent; problem solved! Of
course, as conditions deteriorate further, the
Australians will become unable to afford taxes and
utilities. Negative interest rates to the rescue!
Refinance them again at a negative rate of interest,
and now the banks will pay them to live in their
Another example: energy (oil and gas) companies in
the US have accumulated a fantastic pile of debt.
All of this money was sunk into developing marginal
and very expensive resources such as shale oil and
deep offshore. Since then, energy prices have
fallen, making all of these investments unprofitable
and dramatically reducing revenue. As a result,
energy companies in the US are a few months away
from having to spend their entire revenue on
interest payments. The solution, of course, is to
allow them to roll over their debt at zero percent,
and if you want them to ever start drilling again
(their production has been falling by around 10%
annualized) then please make that interest rate
3. Are you starting to see how this works? Whereas
before you had to be careful about taking on debt,
and had to have a plan for how you will repay it,
with negative interest rates that is simply not a
consideration. If your debt pays you, then more debt
is always better than less debt. It no longer
matters that the economy continuously shrinks
because now you can get paid just for twiddling your
But are there any unintended consequences of
negative interest rates? Unintended consequences are
hard to think about, and most people get a headache
even trying. How can it be that clean, plentiful
nuclear energy will eventually pollute the whole
planet with long-lived radionuclides, resulting
sky-high cancer rates? How can it be that wonderful
genetically modified seeds will render us sickly and
infertile in just a few generations? And how can it
be that ingenious mobile computing technology has
turned our children into zombies who are constantly
twiddling their smartphones as they sleepwalk
through life? It’s hard to think about any of this
without taking some happy pills; and how can it be
that taking those happy pills has… you get the idea.
The unintended consequence of negative interest
rates is that they destroy money. This is true in an
entirely trivial sense: if you deposit x
dollars at -ρ% annual, then a year later you will
only have x(1-ρ) dollars because xρ
dollars has been destroyed. (In case you prefer to
count on your fingers and toes, if you deposit $10
at -10% annual, then a year later you will only have
$9 because $1 has been destroyed.) But what I mean
is something slightly more profound: negative
interest rates erode the very concept of money.
To get at the reason for this, we have to ask a
slightly more profound question: What is money? I
think that money is the cult of the god Mammon. Look
at the following symbols:
€ $ ¥ £
Don’t they resemble religious symbols? In fact,
that’s what they are: they are symbols of faith in
money. They are also units—dimensionless units, of a
peculiar kind. There are quite a few dimensionless
units in math and science, such as π, e, %,
ppm, but they are all ratios that relate physical
quantities to other, identical, physical quantities.
They are dimensionless because the units cancel out.
For instance, π is the ratio between a circle’s
circumference and diameter; length over length gives
nothing. But monetary quantities do not directly
relate to any physical quantity at all. It can be
said that some number of monetary units (let's call
them "yarbles") is equivalent to some number of
turnips, but that, you see, is a matter of faith.
Should the turnip farmer turn out to be an
unbeliever, he would be within his rights to say, “I
am not taking any of your damn yarbles!” or, if he
were a polite turnip farmer, “Your money is no good
Of course, if our turnip farmer were to do that,
he’d land in quite a bit of trouble because, you
see, the cult of Mammon is a state cult. You have no
choice but to be a believer, because only by
worshiping Mammon can you earn the money to pay your
taxes, and if you don’t pay your taxes you get
jailed. Nor can you produce money on your own,
because that right is reserved for Mammon’s high
priests, the bankers. Making your own money makes
you a heretic, and gets you the modern equivalent of
being burned at the stake, which is a $250,000 fine
and a 20-year prison sentence.
But it goes beyond that, because the state insists
that just about everything there is must be valued
in units of its money. And the way everything must
be valued is through a mystical legitimizing process
that is central to the cult of money: Mammon’s
“invisible hand” makes itself apparent within the
“free market,” which is Mammon's virtual temple. The
“invisible hand” sets the price of everything as a
mystical revelation and, as with any revelation, it
is beyond criticism. It is a redemptive ritual, in
which people acting out of their basest, most
antisocial instincts—greed and fear—manage, through
Mammon's divine intervention, to serve the common
good. The “free market” is also believed to have all
sorts of miraculous properties, and as with all
miracles it is all a matter of smoke and mirrors and
suspension of disbelief. For example, the “free
market” is said to be “efficient.” But it sets the
price of turnips, and the result is that fully 40%
of the food in the US ends up being wasted. That’s
definitely not efficient.
This sort of inefficiency can be tolerated while
resources are plentiful. Should throwing away 40% of
the turnips cause a shortage of turnips develop,
turnip producers can grow more turnips and sell them
at prices that turnip consumers can still afford.
But when resources are no longer plentiful, this
trick stops working, and what you end up with is
something called market failure. The current
state of the global oil industry is a good example:
either the price is so high that marginal consumers
cannot afford it (as was the case until quite
recently), or the price is so low that the marginal
producers can’t break even (as is the case now).
And so a bout of supply destruction follows a bout
of demand destruction, and then the pattern repeats.
Everybody loses, plus this is terribly inefficient.
It would be far more efficient to appoint some
central planner to calculate the optimum price of
oil once a month. Then all the marginal producers
would jump out the window, all the marginal
consumers would slit their wrists, and equilibrium
conditions would prevail. As the oil supply dwindled
(it is depleting at around 5% per year), some
additional number of producers and consumers would
need to sacrifice themselves for the greater good,
and so on until the last barrel is produced and
burned, leaving whatever producers and consumers
still remained lying in pools of their own blood.
As natural resources dwindle, our faith in the cult
of Mammon is being sorely tested. But what
alternatives are there? Well, there is an even
older, ancient cult that’s based on idolatry: the
worship of precious metals. Gold has some industrial
and aesthetic uses, but it is primarily useful for
making a golden calf for you to worship (or, if you
are former Ukrainian president Viktor Yanukovich, a
golden toilet). Economists tell us that gold is a
“pet rock” or a “barbarous relic,” and they are
right, but what is one to do when there is a
Götterdämmerung (twilight of the gods) going on?
Nature abhors a vacuum, and in a Götterdämmerung
older pagan deities sometimes emerge and demand
virgin sacrifices—such as poisoning entire river
ecosystems by mining gold using mercury, or
squandering prodigious amounts of fossil fuels in
mining, crushing and sifting through millions of
tons of hard rock to get at just 3 parts per million
Negative interest rates are Mammon’s
Götterdämmerung. The money cult is bolstered by
the idea that its huge and all-powerful deity will
be even more huge and all-powerful tomorrow; if the
opposite is demonstrably the case, then people’s
faith in it begins to falter and fade. Negative
interest rates are like an icy-cold bath for Mammon,
causing its godhead to shrink a little more with
every dip. People see that, and think, “I don’t want
to worship his shrinking yarbles.” Then they go and
spend their own yarbles on anything they can
find—fallow land, vacant houses, golden calves,
boxes of brass knobs... They don’t bother investing
their yarbles in growing turnips, because what’s the
use of turnips if all you can do with them is sell
them for even more shrinking yarbles?
Negative interest rates are an excellent idea—and
perhaps the only way to keep the financial game
going a bit longer—but, given these unintended
consequences, they are also a terrible idea. The
bankers know that. They want to preserve their
cult’s status, and constantly talk about raising
interest rates. But they haven’t yet, because they
also know that just a small increase will result in
trillions of dollars of losses, triggering
widespread business failures and ushering in the
Greatest Great Depression Ever. This is not a
problem for them to solve; this is a predicament.
They will delay and pray, and make pronouncements
loaded with keywords designed to please the
high-frequency trading algorithms that are in charge
of artificially levitating the “free market” with
judiciously timed injections of “free money.” But in
the end all they can do is act brave, wait for a
distraction and then… run for the exits!
And your job is to make it to the exits before they
was born in Leningrad and immigrated to the United
States in the 1970’s. He is the author of
Reinventing Collapse, Hold Your Applause! and
Absolutely Positive, and publishes weekly at the
phenomenally popular blog
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