Negative interest rates – not an economic curiosity, an ominous pall of government control about to storm the US and an ill-prepared Canada
An apology is in order for the following subject matter. This is an energy-focused website, and energy alone is a fiendishly hard topic to explain properly to the general public. The energy world is complicated and frankly not that interesting to most, made up of pipes and tanks and tankers, all central to the industry known as “utilities”. Who in history was ever interested in the word “utilities”?
Unfortunately, the problem of disinterest is compounded by folding in an interest rate discussion. Negative interest rates, to be precise – a pairing of words that introduces a concept that is now both confusing and boring. As such, almost no one will care, but they should, because the phenomenon is at its heart as scary as a communist revolution. Or, to put it in a way that will resonate with energy folk, governments may soon be emboldened to pursue Green New Deal style energy insanity without understanding the mass grave they’re digging.
Negative interest rates are a new phenomenon, first appearing after 2008’s global financial crisis. The world’s central banks slashed interest rates in an attempt to foster growth (by encouraging borrowing and discouraging saving). Japan had previously been a pioneer in modern ultra-low interest rates as they tried to kickstart their economy, but European countries were first to push interest rates into negative territory in about 2012. Soon after all of Europe and Japan followed suit.
Central banks, in essence, do this by printing money on one hand and using it to buy up government debt at a voracious rate, thereby pushing interest rates towards zero. Then it is an easy step to issue government debt to institutions that have bags of cash that they want to/must place somewhere. The article linked above notes that amazing amounts of cash are piling up here and there – Facebook has $48 billion, Berkshire Hathaway $112 billion, and Apple a staggering $245 billion. Look fondly at that pile of obsolete 2-year-old Apple devices in your drawer and contemplate your contribution to that pile…
What matters to the general public is that central banks are doing this at the behest of governments that cannot afford their social programs, and negative interest rates provide a means to do so without raising taxes or pissing off consumers. Governments that issue negative interest rate debt don’t pay interest when they borrow, they receive it in this new wonderland – money for nothing.
As you can imagine, this practice is catching on rather rapidly. About two months ago there was $13 trillion of negative interest rate debt in the world; as of last week, there was $17 trillion. Governments are becoming addicted to the phenomenon, which they facilitate by creating more money and pumping it into the system.
Even Donald Trump, who displays a stunningly odd assessment of virtually every facet of civilization, grasps that the debt world is in chaos, which is understandable because his entire life has been about debt and leverage. The US is resisting negative interest rates, but, as Trump knows, is getting pulled into the game; leaving interest rates in “normal” territory acts as a magnet for the currency, which helps all the negative rate countries be competitive with the US.
Canada, of course, is in epic trouble, with interest rates more closely aligned with the US, and with a government that treats international relations with the oddity of Trump and the results of a cow making an omelette. Our homegrown Zoolander and his gasoline-fight crew are flouncing around sipping frappuccinos and asking “Well that’s all well and good, money people, but how many interest rates will it take to save the planet?”
So what, you might think. Well, here’s the scary part. Since governments have found a way to pay for social programs with no downside (central bank economists assure them), think of the consequences. When word gets out that governments are unencumbered to spend by pesky things like raising taxes, there will be lines around the block of various demanders. Powerful unions will demand wage increases from the government and threaten to strike if not sated. New infrastructure projects will be demanded also. Seniors will riot for better pensions (and will have a valid case, because their hard-earned savings in a negative interest rate world won’t buy them a can of beans, literally). In days gone by, governments have always been kept in check by some sort of budgetary restraint, but no more. So here you go, raises all around.
Any group that can exert influence on elected politicians is about to be showered with money if they can sway governments. The squeakiest wheels will get the grease.
No wheel is squeakier these days than the terrified climate change movement, demanding more wind and solar and an end to fossil fuel consumption. Should governments heed these calls, and they are lining up to do so, then critical industries will be sacrificed on this altar of expediency, with a government’s typical zeal for more votes trumping any thoughts of long term sanity.
As this happens, more power will flow to governments, because they will step in to do things that are too irrational for market-based businesses. Lobby hard enough, and a government with unlimited access to money will do anything it wants to ensure popularity.
Alan Greenspan told a joke in his autobiography that now seems prophetic. It’s a cold war joke in which (paraphrased and not exactly recalled but who cares) US president Reagan and Soviet leader Gorbachev are on a Moscow balcony watching one of those legendary bombastic Russian military parades through Red Square. Designed to impress and inspire the downtrodden citizens, these monstrous parades would start meekly, with soldiers on foot, then small artillery, and so on, in increasingly impressive waves of military might. The parade escalated to the climactic display of skyscraper-sized intercontinental ballistic missiles. Surprisingly though, the parade closed not with the massive missiles but with a gaggle of pale-faced, meek and frail gentlemen wearing ill-fitting tweedy clothing, wandering in a small self-conscious cluster in the middle of the vast avenue. Reagan looked quizzically at Gorbachev, who said, “Those are the economists. They can do more damage than all the rest put together.”
If this bonkers scheme of the central government does not work exactly as they envision, we will all nod in agreement, from whatever cave or bunker we ultimately find shelter in. It took a few centuries of progress, ingenuity and fossil fuels to create a system that can sustain 7 billion people; if this economic experiment goes wrong we might find ourselves racing to meet India’s standard of living as opposed to them achieving ours.
[Originally published at the BOE Report]
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