Monetary policy should not be confused with morality policy, but all too often it is.
On both sides of the Atlantic, the media portray our low-interest-rate policy as a morality tale that punishes virtuous savers and rewards profligate borrowers. Raise rates now, these pundits say, so savers can once again profit from their good behavior.
But lurking behind these pro-saver moralisms is a fundamental misunderstanding of how our economy – and the monetary system that undergirds it – actually works.
The job of the central bank is not to reward savers. The job of the central bank is to set interest rates so that employment is full while inflation remains low and steady.
Unfortunately, the interest rate that achieves this dual mandate is often very low. During financial panics and depressions, it can even turn negative. To ask the central bank to raise rates in our current environment is akin to condemning a larger portion of society to unemployment, which is patently cruel.
And in an ironic twist, the very savers such policy is supposed to reward might see their nest eggs shrinking as higher rates cause the economy to crash.
It’s time we conceded that it is not our God-given right to save at a profit. Saving does not, in fact, always provide a social benefit.
When the economy as a whole is considered, a reduction in spending leads to a fall in corporate sales and profits, which in turn causes corporations to cut production and fire workers.
In other words, we never want total spending to fall, because this leads to a rise in unemployment.
Saving on an individual level is only economically beneficial when someone else spends our money on our behalf.
- If Joe saves £1000 and Bob borrows and spends £1000, then overall spending doesn’t fall, and employment remains full.
- But when Joe saves £1000 and Bob borrows nothing, total spending falls, and unemployment rises.
In normal circumstances, the central bank would lower interest rates to discourage Joe from saving and incentivize Bob to borrow. But when interest rates are already at rock bottom, the central bank’s power of persuasion is exhausted. The central bank cannot target negative rates, because savers would simply hoard cash, which always pays 0%.
So in times like these – which is where we are today – we need to understand that our act of saving is not only not virtuous, but highly detrimental to our economic well-being.
The only fair solution to our ongoing savings glut is to adopt a monetary system where interest rates can turn negative. One-Month Money proposes such a system.
By introducing money expiration, interest rates can finally turn negative. Since money hoarding is impossible, investors can no longer take refuge in cash when rates dip below zero. They’ll either have to spend their savings themselves or lend it to someone who will.
All in all, this change would lead to a stable economy – one where employment is always full and inflation steady.
Negative rates are not as abhorrent as they seem. For those with more debt than savings, which is about half of America, negative interest rates would be a boon.
Mortgage costs, for instance, would fall or even turn negative. Imagine a bank paying you interest to purchase a house.
Likewise, negative rates would also help those with large accumulated savings. Since yields are inversely correlated to prices, negative interest rates would trigger a boom in asset prices – the price of a 30-year treasury bond yielding 4%, for instance, would rise sharply if interest rates fell from 0.5% to -2%
The only people to suffer from negative interest rates would be those planning to add to their savings. This group may, in fact, be deterred from saving as much as they did before.
But then again, this is the intention behind One-Month Money: to increase spending to the point where corporations are incentivized to hire all willing workers, so that everyone who wants a job can find one.
Oliver Davies blogs at All Things Secular Stagnation and is the author of One-Month Money: Why money ruins our economy – and how reinventing it could end unemployment and inflation forever. It is available now.