Ponying up on interest rates

So what’s the go with the 0% then?

The Reserve Bank’s rate cut to 0.75% has us heading towards 0% interest, and then into negative territory. Much of the advanced world is there now, and has been for some time. Yet for many the prospect of negative interest rates is some sort of through-the-looking-glass territory, world gone mad, etc. Jessica Irvine had a brave go at explaining it in the Nine news pages last week, but she is too embedded in bourgeois economics to get very far.

Let’s have a crack. Just my take. Happy to be argued with.

The first thing to say is that the amazement at negative interest rates is a testament to the success of naturalising capitalism. Interest rates are presented as if they were a biological process, the natural growth of money. Were it so, negative rates would be weird. Trees don’t become seeds.

But the thing is, in that sense, there’s no such thing as “interest”. There’s simply a price to lease money from the limited number of licensed suppliers, and it’s set as a function of time and amount. There’s no reason why a bank couldn’t charge that lease as a flat fee. Borrow a grand, borrow ten, it’s a hundred bucks. The interest rate is just a pricing mechanism.

A pricing mechanism based of course on there being demand for the lease. But what if there’s no demand? Then you’ve got to store it somewhere. You run a pony hire business and no one wants to pay to ride your pony; it must be stabled. There is negative interest in your sorry pony. Damn, now I feel sad for the pony I just imagined. Which is the 21st century economy in a nutshell.

That you should have to pay to store your money is hardly new. It is, after all, how banks came into business, offering notes to represent your gold that they held in their keep. The charge for keeping money is being applied by central banks to commercial banks, who have so far resisted the temptation to pay people to rent their money to reduce the stabling costs of the pony. Now that has started to break.

Denmark has had negative interest rates for longer than anyone, and is now offering a -1% rate mortgage. Take a 100% mortgage on a €200,000 flat, and you only pay back €198,000, which saves the bank the extra €2000-4000 it would pay to Danskpony. Part of that will then be made up with charges to high cash-holding accounts.

So why is your pony so not in demand that you can’t even give it away? Let’s face it, we’ve all asked ourselves that at some point.

Here we have to go back to money talking money, unless we suppose ponies become not just fun but fungible. The answer is currently being given in system terms: that there is no confidence in the returns available under particular conditions, and people are holding out until they become so. But this official position among economists is beginning to crack, simply because conditions are so unprecedented. Currently around $17 trillion of the $113 trillion global bond market is in negative yield territory — i.e. it will cost you just to hold bought bonds. That is such a serious level of under-confidence that it suggests something a bit more than mere wobbles.

Various reasons for these particular conditions have been offered: anticipation of a system-wrecking trade war; starving of demand by the relentless downward pressure on wages; skilled-labour shortages in the US; accumulated under-spending on infrastructure. But the particular explanations may mark a more general trend, which is the beginning of the end of general returns on private investment. This would be occurring because various socio-technical forces — exponentially expanding interconnection, rapid and mass automation — which are inherently post-capitalist, have developed within capitalism to the degree that they are undermining its dominant value form and mode of accumulation.

Large corporations are, to paraphrase economist Rudolf Hilferding, implicitly socialised. With corporations of the Uber generation, their socialised character — the company is a social network of drivers, whose coordination is charged a rent-fee by the company they work “for” — is so close to the surface as to be visible to the market. Uber’s recent announcement that it may never make a profit is an acknowledgement that the company, in some form, may outlast capitalism as we know it. And Uber looks like Standard Oil compared to what else has been on offer — from WeWork to Theranos.

With all this surplus liquidity around has come the answer: more quantitative easing! Now your pony is drowning.

The reason for all this must be political: the desperate need to preserve the value frame of accumulation unaltered, on the expectation that a positive investment era will return. A larger intervention — either green or non-green infrastructure investment on a grand scale, a universal basic income or universal basic services guarantee, mandated wage rises, matched by expanded services, compulsory share transfers to workers (and subcontractors, a la Uber) — would all work, but they all advance the cause of post-capitalist socialisation; the management of the economy as a series of overall inputs and outputs, private action a subset of public management.

What’s the go with the pony and the 0%? To hold real change off as long as possible, they will starve the pony. And despite being imaginary, it’s standing by the fence in the moonlight with a tear in its eye.