Real Reason For Japan’s Negative Interest Rates?
By Daily Bell Staff - January 29, 2016

Japan adopts negative interest rate … In a surprise move, the Bank of Japan has introduced a negative interest rate. The benchmark rate of -0.1% means that commercial banks will be charged by the central bank for some deposits. It hopes this will be a disincentive to banks to save and prompt them to lend in another attempt to counter the continuing economic slump in the world's third-largest economy. – BBC

Dominant Social Theme: Negative interest rates are necessary to increase the velocity of cash.

Free-Market Analysis: If someone gives you money for something, he is providing you with compensation that has value. Presumably if you hold this "money" it shouldn't depreciate because of this value. This is just common sense.

Wampum didn't devalue that we know of. Even the huge stone circles of the Polynesians that sometimes sank to the bottom of the sea didn't devalue. They held their value because people accepted the value and recalled it.

But increasingly around the world, as we can see from the BBC article excerpted above, central banks are considering or implementing negative interest rates. Switzerland, Denmark and Sweden are afflicted with negative-rate money now and these won't be the last countries, surely.

This is supposed to force money into circulation. The idea is that economies aren't growing quickly enough because money is not circulating fast enough. If money circulates, economies will grow.

This is a purely Keynesian way of looking at economic growth. Always, the theoretical approach of central banks is monetary. Enough money (notes, actually) cures any economic evil.

It is simply not so. Austrian economics explains this very well because Austrian economics is built around the primacy of human action. If people don't want to do something, then they won't, certainly not in aggregate.

In this case, people are not using money to buy and sell things. And they are not using money to build or expand businesses. They are not because the West and the world, in fact, are still mired in a Great Recession.

The Great Recession has been perpetuated by central bank loans to insolvent banks. At every level of the economy, people aren't sure of the solvency of counterparties. This has a retardant effect on commerce.

If the central banks had just left the economy alone, institutions large and small would have failed years ago and the recovery would have begun. Instead, central banks froze the Great Recession in a kind of amber, perpetuating it to the present day.

And now they are hoping a monetary cure will shatter the amber and loose economic spirits.

The putative model for this must in some sense be the Fabian, crackpot economist Silvio Gesell who wrote in the 1930s about depreciating money. He actually wanted the government to time-stamp money and give it away with the provision that it depreciated monthly.

We've written about Gesell before, whose theories were always considered on the fringe. But now central banks are bringing his logic to the fore.

Here's more from the BBC:

Why has Japan made this move? Japan is currently facing very low inflation, which means that people and companies tend to hold on to their money on the assumption that they can get more for it in future. So rather than spend or invest it, they keep it in the bank. Charging a percentage to keep money in the central bank might encourage commercial banks to lend that out. That would boost both domestic spending and BUSINESS investment.

We can see from the above excerpt that the idea is to enhance monetary momentum, just as we have explained. But people won't spend their money because it is depreciating. They will simply try to find another medium in which to store it, perhaps gold.

There is another element of fallaciousness in circulating this kind of money and that has to do with the real reason for imposing negative interest rates.

It has to do with the war on cash. We wrote about this in "Bamboozlement of Bank Runs as World Goes Cashless."

Over the next months we will be likely be bombarded with statements about the fragility of the banking system, worldwide. But it is the progress of the "cashless society" that you want to keep your eye on.

Our point was that the real goal of central bankers is to remove physical cash and non-precious metal specie from circulation. We are now being exposed to a series of virulent dominant social themes that will attempt to confuse the reality of what is actually going on.

Here, from Business Insider:

This is how a central bank could kill off cash with negative interest rates … Miles Kimball, professor of economics at the University of Michigan, explains that flight to cash could be prevented in the latest economic review from the National Institute of Economic and Social Research (NIESR), published Wednesday. Clearly, bringing in negative interest rates on electronic money isn't the problem, that's just a matter of setting them.

Kimball argues that the value of various units of cash is determined by the central bank: … If the Fed simply refuses to take cash at its printed value, that poses a major problem for ordinary banks … There'd be a reduction in the value of paper money over time.

… If you did want to practically abolish cash, you'd just need a small tweak. In fact, all you'd need to do is make that negative interest rate at the cash window more steeply negative than the one people were getting on their electronic money.

… Cash is valuable to some extent because it's fungible — exchangeable for an identical unit — and liquid. But this proposal would quickly end that, and split electronic money and paper money into two effectively different currencies. Paper money would be depreciating in value more quickly than electronic money. In effect, paper money would have higher inflation than electronic money.

You see? There's a lot that can be done with negative interest rates to make electronic money more attractive than cash. In fact, it doesn't make much sense that savvy central bankers really believe negative interest rates will radically increase the volume of circulating "money." There's got to be something more to it. There probably is.

What's going on with NIRP may be a kind of directed history that justifies other changes yet to come. The real target is a cashless society. This is the sudden and substantive goal that is being concealed by the "noise" of other issues. Let's watch what unfolds to see …

  • Webforager

    And the real reason for bitcoin becomes more apparent, no?

  • Bruce C.

    Negative CB fund’s rates in Europe and now Japan are still very low (i.e., not very negative) so it’s hard to tell what effect they are having. To me, it seems like another example of “pushing on a string” because every 100 units of currency loaned out by a bank only about 3 units of its reserves held at the CB get “spent”. An awful lot of “money” would have to be loaned/borrowed to decrease banks’ reserve levels significantly, and the only way to force that much lending/borrowing would be to lend to lower “quality” borrowers and/or to encourage “mal-investments,” both of which will come back to haunt them. The US is about to see a wave of sub-prime auto loan defaults, and China has trillions in mal-investment (e.g., un-needed/wanted infrastructure.) Nevertheless, the more I read the logic of central bankers and economists the less surprised I am by their stupidity, so I’m still not convinced that the abolishment of cash is their real goal, though they may eventually try that as an extension of their negative interest rate logic.

    In the meantime, it will be interesting to see how people/”consumers” respond to this. If bank savings interest rates become negative I think people will start to withdraw more cash just to not lose value. That may already be happening in Europe, though it may also be because of increased “grey market” activity to avoid taxes and to pay refugees who don’t have bank accounts.

  • md

    Does it occur to these morons that people haven’t suddenly experienced a religious conversion to the “let’s be frugal faith”? The man on the street is broke with no credit. Most people couldn’t spend as before if it were needed to save their very souls!!!!!

  • Bolt Upright

    I’m stocking up on toilet paper and cigarettes for bartering purposes

    • Bruce C.

      I hope everyone doesn’t do that ’cause then they may try to eliminate those things too.

  • concerndcitizen

    Once paper cash carries a negative interest rate to deposit in a bank, people will just hoard the paper money at home or their office. They won’t be missing out on any interest (negative). It’s a sign of the true economy cratering, not the fake one propped up with phony statistics. An old Soviet saying comes to mind (not exact):

    The present is fixed, it’s the past that always changes.

  • Injun Holbrook

    There is already hot money moving into the United States. With negative rates, more will simply flow into the country. Negative rates, immigration, political elections and social unrest, make tempting the U.S.Dollar as the haven. China’s ill managed real estate markets are basically an internal strife with Hong Kong being the numero uno up and coming problem, which, will be a global financial problem if and when it blows.

    The average American investor is basically a forced investor in their retirement funds. So there is no movement there, simply along for the ride. The U.S. real estate market in the Southwest is climbing with underlying underwater mortgages being properly managed although still present. All in all? If one does not love the dollar now, they will in the near future.

  • It will soon be discovered that Silvio Gesell was a brilliant monetary economist, far ahead of his time. The problems we are facing are not easy to explain in a nutshell, but let’s try. Interest rates went down, basically for two reasons:
    – returns on capital have been higher than economic growth throughout history, and as wealth inequality increased, a larger portion of this income is reinvested, so that capital grew faster than the economy, so that profits and interest rates had to go down too.
    – banking, central banking, and the deregulation of the financial sector increased convenience and reduced risk (by making savings readily available and by providing a backstop during financial crises).

    This, of course, has some serious drawbacks, as everyone can see. For instance, the safety nets allowed banks to create more debt and to take on more risk. We could deal with that by setting a maximum interest rate on loans (another market control that might annoy libertarians). But it has two advantages:
    – risky loans are not feasible from a risk/reward perspective and will therefore not be made;
    – if the economy is booming, interest rates will rise so that credit will dry up because of the maximum interest rate, and the boom does not occur (it may end the credit induced boom bust cycle).

    The fact that QE doesn’t work implies that the interest rate at which savings and planned investments would be equal, could be negative. And it may remain that way for a very long period of time (if not indefinitely).

    So, my suggestion would be interest-free money with a holding tax. Interest-free means that the maximum interest rate on loans is zero. The holding tax is a tax of 0.5% to 1.0% per month on currency, which is money created by governments and central banks. This tax does not apply on bank deposits and loans so that it can be attractive to lend out money at zero or even negative interest rates.

    Introducing Natural Money can have the following effects:
    – the holding tax can balance the market for money and capital because there is no zero bound;
    – lower interest rates can make more investments profitable and this can help to improve the economy;
    – the maximum interest rate of zero can prevent the economy from overheating as there will be less credit when other investments are more attractive;
    – the maximum interest rate of zero can reduce reckless lending because there is no reward for taking excessive risk.

    Banks can lend out money at a maximum rate of zero so deposit accounts can have negative yields that might amount to -2% to -3% annually. There is a fixed amount of currency units so there probably is no price inflation. Economic growth can increase the value of the currency because economic growth means that more products and services become available. When the amount of money remains the same, prices can go down.

    You don’t need government spending to stimulate sluggish economy. You don’t need central banks to set interest rates. You don’t need central banks to manage the money supply or increase reserves (or QE for that matter). There is no excuse for central banks to aim for inflation as the economy can deal with deflation very well via the interest mechanism if rates can be negative.

    • The instinct to tell people what to do with money to make it “better” is lamentable one. If Gesell had suggested private, competitive money, he would have been “ahead of his time.” As it is, he’s just another conniving Fabian who wants government involved in monopoly money printing … under his terms.

      • Gesell was not a proponent of central planning. He thought that if there was a tax on money, markets could work better. I think that it possible to get rid of Keynesian deficit spending by governments and setting interest rates, manipulating money supply and targeting inflation by central banks.

    • Pater Tenebrarum

      Interest is a non-monetary phenomenon – it describes the discount of future goods against present goods. Since economic scarcity exists, life is finite and the time vector is moving in one direction – there is a “sooner” and a “later” – the originary, or natural interest rate can never become negative. It cannot even go to zero. If that were possible, all human efforts would be directed toward provisioning for the future and everyone would stop to consume; we’d all soon starve to death. Negative interest rates can only be imposed by coercive measures taken by central planners. The inevitable result will be capital consumption on a grand scale. If negative rates were to move beyond penalizing commercial bank reserve deposits with the central bank, civilization as we know it would soon crumble to dust; we’d return to a state of impoverishment, living from hand to mouth.

      • You say interest is a non-monetary phenomenon. That is true if the market can function to clear savings and investments, but this is only possible when interest rates can go negative. The current monetary system does not allow for negative interest rates, and this makes interest a monetary phenomenon to some extent. A maximum interest rate would do that too. You are mentioning the time preference. I have thought about that a lot, because it somehow doesn’t make sense that negative interest rates can exist if there is time preference.

        I have three possible answers (they are very much related):
        – To some extent, people save regardless of interest rates, for example for retirement. People want to have some income when they are retired. If interest rates are higher, you need less savings for retirement, so lower interest rates will make you save more. This is at odds with the time preference.
        – Second, marginal utility is at odds with time preference. They negate each other somehow. For example, when there is a choice between 10,000 loaves of bread now or one loaf of bread each day for the next 10,000 days, most people prefer one loaf of bread every day for the next 10,000 days. Most people will even prefer one loaf of bread each day for the next 1,000 days above 10,000 loaves of bread now, which implies a steep negative real interest rate.
        – Third, time preference applies most notably to ordinary people, but less to rich people. For them time preference is not that relevant because they can buy everything they want. They have excess capital and want to invest it but lack investment opportunities. That pushes down interest rates.

        There might be a contradiction in your reasoning. It is the following. If [interest rates could go negative] all human efforts would be directed toward provisioning for the future, and the inevitable result will be capital consumption on a grand scale. The idea that people would stop to consume is unfounded. If you put money in a bank account, and you get a negative rate, you are more likely to consume. Provisioning for the future implies savings. What you are hinting at, is that long term investments make more sense when interest rates are low or negative.

        For example, suppose that a cheap house will last 33 years and costs € 200,000 to build. The yearly cost of the house will be € 6,060 (€ 200,000 divided by 33). A more expensive house costs € 400,000 but will last a hundred years. This house will cost only € 4,000 per year if the interest rate is zero. If the interest rate on mortgages is 10% then the expensive house will not only cost € 4,000 per year on write-offs, but during the first year there will be an additional interest charge of € 40,000 (10% of € 400,000).

        In this sense people will provision for the future by building better houses because it is economically feasible.

        Last, but not least, it is unfounded to suggest that low or negative interest rates will lead to capital destruction. It is at odds with the Austrian theory of malinvestments, to say the least, which states that lower interest rates allow for more capital to exist. So, if interest rates can be lower, there could be more capital, and we could have more prosperity. You may not agree that this is possible, but if interest rates can be negative, there can be more capital.

        In fact, a state of impoverishment, and living from hand to mouth, is something that is associated with high interest rates, for example the Middle Ages when interest rates were 30%. After money and capital markets became more efficient, and interest rates went down, the Industrial Revolution took off. But at the interest rate of the Middle Ages, nearly every investment made since the Industrial Revolution, would have been a malinvestment.

  • Praetor

    Inverted way of thinking. Marketers understand. Consumerism like Pac man eats everything in sight, using credit cards and second mortgages. For the Keynesians, economic growth is the answer to everything, given them escapism over reality. Consumerism is dying a slow death and this is their way of inverted thinking, to stimulate the consumer, good luck with that! The day that consumerism dies, the freer the world will be. Who really needs the products of these Keynesian savages. Free the people from their Asia sweetshops!!!

  • Bruce C.

    Here’s a laughable article to add to the confusion: http://www.reuters.com/article/us-japan-economy-boj-move-idUSKCN0V71OF

  • DB: “Wampum didn’t devalue that we know of. Even the huge stone circles of the Polynesians that sometimes sank to the bottom of the sea didn’t devalue. They held their value because people accepted the value and recalled it.”

    BISCHOFF: The “value” aspect of Wampum has nothing to do with the “value” aspect connected to the Yapese stone disks.

    Wampum was a “currency”. Wampum served as a means of exchange. Its value was based on utility and its price was determined by arbitrage.

    In contrast, the Yapese stone disks were “real money”. The Yapese stone disks served as a standard to measure value created through human exertion. The stones were carved surreptitiously by Yapese in a dangerous environment on Palau Island requiring great physical exertion while under threat of being killed, if discovered. The stone disks were then transported to the Yap Island (Polynesia) where they served as “money” for the Yapese in transactions. There was no need to carry “money”. Claim to the amount of “money” was accomplished by marking sections of the stone disks. Ownership changed with agreements arrived in transactions, and ownership was on public view.