In the Bizarro World of Negative Interest Rates, Saving Will Cost You - The New York Times
Is it possible we’ve created more money than we know what to do with?
If we did, we’d expect the price of money to plummet. Since prices are denominated in terms of money, the notion of the “price of money” seems circular: a dollar is worth a dollar. But we can also value a good by looking at rental prices. An expensive rental apartment would probably cost a fair bit to purchase as well. If we were to rent money (by borrowing it) the cost to do so (the interest rate) similarly reflects the price of money. So while the “purchase” price of a dollar is fixed, the rental price of a dollar is always changing. And change it has.
If you need patio chairs for a party you can pay to rent them. But if you have a few chairs you want to leave with a self-storage company, you nevertheless have to pay them too. This is because the chairs you rent are useful to you, but the chairs you leave with the storage company are not just useless to them but actually a burden. Put differently, the storage company is in fact renting your chairs from you but for a negative rental fee, accurately reflecting the negative utility they derive from them.
The rental fee for money (interest rates) is now negative. What you are really doing is renting “space” at a bank to store your money. As with your chairs, your money is worse than useless. It is in fact a burden.
How did we get here? Land and human labor were the primary inputs to an agrarian economy for most of our history. You might accumulate wealth by stockpiling grain, but there were few productive capital assets other than farms and serfs, and those could be stolen through warfare. Industrialization changed this: it now became possible to own a wide variety of assets that themselves produced more assets. These included mechanized farming implements, transport vehicles and infrastructure, assembly lines, factories, the ideas of how to build them, and the sources of energy to power them. Suddenly money (sometimes referred to as capital) became the arbiter of wealth and power: you couldn’t have enough of it and if you wanted to borrow someone else’s, you paid a hefty price.
The backlash rocked the economies of multiple major nations and came to define the political debate for most of the 20th century. “Workers of the world, unite” was a cry to take back the “means of production,” often thought of as the factories and machines that made the economy go. But it was really attempting to lay claim to what must have seemed at the time the only thing worth having which was control over large stockpiles of money. Countries that gave in to this sentiment over-corrected, destabilizing necessary financial infrastructure and incentives. But the subsequent reassertion of the power of capital during the 80s and 90s (through deregulation and increasing financial intermediation) propelled us into a future in which we might discover just how much money is too much.
And it is a bleak future. Government bonds remain at zero and negative yields, corporate bonds are still flirting with fractional percentage points, and central banks are now acting like warehouses charging fees to hold banks’ reserves. The opportunities for productive investment are fewer and smaller than the capital chasing it, bringing us part way back to the agrarian economy with little hope for growth except through conquest. There simply isn’t some machine or factory or railway you can buy with your overflowing savings that would produce any meaningful return.
This time it was capital that over-corrected. Where the Trotskyites discovered they might need a few hungry money-changers, properly restrained, the capitalists discovered their aedifice of productive assets depended on a certain broad-based capacity and willingness to spend among the citizenry without which their assets, indeed their very money itself, has become a growing burden.
Markets have a way of telling you things even when you aren’t listening.