Thought for this Day: Negative Interest

Thursday, 2 April 2015, 9:47 am
Column: Keith Rankin

For most of this year, Denmark and Switzerland have had negative interest rates. Sweden has since joined them. We might have thought that this revolution in finance would have been among the biggest news stories of the year.

Apparently it didn't take long after the central bank action before negative-interest lending to the public took place. This blog-post from zerohedge.com indicates that a few favoured customers in Denmark gained negative interest rate mortgages in January this year. It's now April, and if the world has fallen in, we haven't heard about it yet in New Zealand.

How does negative interest lending work? For a depositor lending to the bank, it means paying the bank a fee and receiving no interest. Nothing new about that. For a mortgagor, it means that total payments on a table mortgage will be slightly less than the amount borrowed.

in New Zealand we are told that one of the reasons Auckland house prices are so high is that money is too cheap. By this reasoning, house prices should be absolutely through the roof in Scandinavia and Switzerland. Financiers regard interest free loans as free money. Why would anyone not help themselves to free money, they wonder?

To the rest of us, debt is debt, and we are deeply conditioned to be debt-averse. Hence negative interest rates are required just to get enough of us (in some countries; more countries coming) to borrow sufficiently to stop the cash economy from seizing up. In Japan where rates have been near zero for 20 years, it just took a small rise in indirect taxes last April to stifle spending.

The blog author (Tyler Durden) thinks it will all end in tears. People such as him have built careers on the notion that borrowers must compensate savers. But it's not like that anymore. In a world where savers are abundant and borrowers are scarce, it is savers who must compensate borrowers. Interest is in essence a compensation price through which the activity that we need to promote (currently spending, at least in Denmark) is incentivised, while the activity that we are doing to excess (eg saving) is subject to disincentives.

Your spending is my income. I can only save if you spend. If I have to pay you interest to get you to spend, then so be it.

ENDS

© Scoop Media

Keith Rankin

Political Economist, Scoop Columnist

Keith Rankin taught economics at Unitec in Mt Albert since 1999. An economic historian by training, his research has included an analysis of labour supply in the Great Depression of the 1930s, and has included estimates of New Zealand's GNP going back to the 1850s.

Keith believes that many of the economic issues that beguile us cannot be understood by relying on the orthodox interpretations of our social science disciplines. Keith favours a critical approach that emphasises new perspectives rather than simply opposing those practices and policies that we don't like.

Keith retired in 2020 and lives with his family in Glen Eden, Auckland.

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