Andrew Fisher, author of The Failed Experiment, on how negative interest rates won't solve the crisis
The Eurozone economy is in a deep malaise - hit by austerity and the monetarist framework deemed necessary to keep separate political economies together in a structurally flawed currency union. So this week's announcement is designed to stimulate the economy by making it costly for banks to hoard money rather than lending it out to businesses and individuals .
This is based on the assumption that a) banks lend physical money they hold; and b) that the problem is primarily a lack of credit supply rather than demand. Both are mistaken, and so the headlines that this week marvelled at the curiousity will soon pass and be replaced with more agonising about the dire state of the Eurozone economy.
Assumption a) rests on a myth explained by Ann Pettifor in her excellent book Just Money,
"In this view money can represent a surplus to be set aside or saved, accumulated and then loaned out. In this story, savers lend to borrowers, and bankers are mere intermediaries between savers and borrowers"Money is not a commodity, but a construct - one based on trust, which incidentally why we had the 'credit crunch' when banks refused to lend to each other because each other's balance sheets were untrusted. Banks do not create credit directly from their deposits, and so taxing deposits (effectively what the ECB has imposed) will not solve a credit shortage ...
Assumption b) is that the problem of the Eurozone economy is a lack of lending from banks. The problem though is a lack of demand. Across the Eurozone people's wages aren't rising, unemployment is high, and many people are living in a precarious situation - worried out losing their job and/or their home.
In these circumstances, businesses are not confident of investing (and banks are worried that if they do lend the investment may go bad (the Swedish economist Wicksell was concerned about low interest rates leading to malinvestment that would be worse for the economy in the medium to long-term).
What further informs against negative interest rates being the solution is that we've had real terms negative interest rates for some time now. This means inflation is higher than interest rates. That has not sparked increased lending - which should be have been a warning that further lowering will not be the 'big bazooka' some think.
While the UK has yet to have nominal negative interest rates, we (like the Eurozone) have had real terms negative interest rates for some time. For the consumer this means the money in their current account is probably only attracting 0.5% interest, while inflation is 1.8% (CPI) or 2.6% (RPI) - and so you are better to spend than to save (unless you can find a much higher savings rate - and indeed, if you can afford to save at all).
This reflects the continuing weakness of the UK economy. In November 2011 George Osborne told MPs , "Low interest rates are helping to keep people in their homes, mortgage payments down and businesses going" - with the clear implication that raising them would do the reverse. And so it is telling that despite the proclaimed 'recovery', the UK economy still cannot risk raising interest rates even marginally.
Low interest rates are stabilising a very fragile economy - they are a sign of weakness not of strength.
But the continued use of monetary policy is a reflection of the impotence of governments to use fiscal policy to solve the crisis. The monetary policy solutions of interest rates and quantitative easing are at best mild ameliorations until incomes and investment levels are increased.
With governments across the Eurozone and in the UK unwilling to step outside the monetarist straitjacket, the economies of Europe will continue to be fragile and teetering on the edge of crisis.
Also worth reading on this subject: Paul Mason, Ed Conway and Andrea Terzi