On interest rates

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(Yes, we will be using the ‘blivet’ to highlight today’s discussion on interest rates, inspired by Dmitry Orlov’s post “The Future is Blivets”.)

Many gigabytes have been spilled on the bizarro world that is upon us in the economic realm, that of interest rates – and more specifically, negative interest rates.   In this economic situation you actually lose money when you put it in a bank.   As mentioned in this short article (which uses the term bizarro as well):

In short, negative rates can make saving money seem foolish, while borrowing can become epically attractive.

This interest rate, by the way, is something that a central bank comes up with – it isn’t something that appears due to the ‘invisible hand of the market’.

The entire situation is a bit odd, for two reasons. One, it highlights the fact, that in our “capitalistic” system, the most important number for business decisions and investments (the risk free interest rate) is set by a central authority (very much like the central planners in the old USSR).   Not very capitalistic.

The second is that the quote highlights (and does so numerically!) that “saving money will be foolish… and borrowing [would be] attractive.”

If there was ever an indication that this culture has gone off the rails, it is this.  Saving, prudence, conservation, long-term thinking – is being run out of town, squashed, and otherwise banished to the far corners.   It is one thing to ignore climate data, or other indications that our world is decaying.   Somehow, I can almost accept the idea that people can ignore data, and state that the information they are getting is fudged, inaccurate, or rigged.  It is part of our nature, to ignore bad data, and things we don’t like.   But it is another to mathematically declare that no, we won’t be planning for the future, and to set in stone (at least in Europe, and soon to be in the US) that yes, down is up, black is white, and yes, you have to run as fast as you can to stay in one place.

In any economics course, one of the most basic things you assume in all of your modeling (like gravity, or that you can’t go faster than the speed of light), is that there is a non-negative risk-free interest rate, because it would be insane to pay people who you are loaning money to, and it would be crazy to put your hard-earned resources and work (money) in a bank and expect to pay for the privilege.  Obviously, this insanity is on the verge of becoming real policy  throughout the world.  Is it no wonder that people think the world is headed for a crackup?

Questions:

  • How does stuff like this even happen?
  • At what point does the system go off the rails, given this kind of thinking?
  • If interest rates were truly negative, say, -5%, how would you react?  What would you do with your cash?

 

 

 

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