By Malcolm Henry, Author of Views From The Boatshed
There’s a debate going on in some nerdy corners of the internet about negative interest rates, which sounds like a desperately dull thing to be wasting time on, but it could be the spark that lights the lamp that leads us out of the economic gloom into a bright and prosperous future.
A negative interest rate is being considered by some as the only plausible way to stir the economy out of the doldrums into which it has settled over the last few years. Japan is the example that everyone likes to cite. The Japanese economy has been stagnating for two decades with no obvious signs of recovery. There are real fears the same fate will befall Europe, North America, and beyond.
The problem is that the people who have all the money – wealthy individuals and corporations – aren’t spending and investing it. They’re happy to sit on piles of cash or use it for financial gambling, neither of which are of any use to the productive economy (the bit that produces all of the stuff we need and employs most of us who have a job – the only bit that really matters).
A negative interest rate, it’s argued, will encourage people who are hoarding money to spend and invest it into the productive economy where it will boost business, create jobs, and allow us all to thrive. Some big guns have added their voices to the debate – Larry Summers and Paul Krugman for example – but, as yet, they’re paddling in the shallows, apparently unaware of the treasures that lie beneath the surface of the idea.
Instead of trying to tickle hoarders into making use of some of their stagnant money with a negative percentage point or two I reckon we should be giving them a good hard kicking. The assault on stagnant money should be brutal and relentless.
If the money that you had in the bank was guaranteed to disappear at a rate of 25% per annum would you be happy to leave it there? I thought not. Now imagine there’s nowhere else to hide it. Notes and coins have been abolished so the only options are to keep your money in the bank (where it disappears at a rate of 2.5% per month), or spend it, lend it, or invest it. The productive economy would never run short of money, ever again.
Spending and investing would happen very much as they do now but lending would be very different. Instead of expecting to get an income from lending our spare money we’d be happy for a guarantee that it wouldn’t lose any value while it was on loan.
Imagine two businesses. Both are thriving but one is temporarily cash rich and the other is temporarily cash poor. The first one lends spare cash to the second one at zero interest, thereby avoiding the negative interest rate at the bank. The second business gets the money it needs for immediate cashflow at near zero cost – losing only a little bit to the negative interest rate in the time between getting the loan and spending the money. Repayments can be made bit by bit over time or in a lump sum on an agreed date, whatever best suits both parties’ cashflows.
Now imagine using the same mechanism for funding government. A business with lots of spare cash lends it to the government at zero interest. The government spends the money into the economy where it’s captured, over time, as profits, by another business, which soon ends up with too much spare cash so it lends it to the government at zero interest. And so on. It’s hard to predict what proportion of government expenditure could be funded in this way but there’s a good chance that lots of unpopular taxes could be abolished.
So what happens to the money that’s trickling out of your bank account as negative interest? This is where it gets really interesting. Imagine if the money that’s continually getting siphoned out of everyone’s bank account is collected into a big pot from where is gets distributed in equal share to every citizen in the land on the first day of every month.
In the UK, if the monthly negative interest rate was 2.5% it would give each of us something like £1,000 a month to spend on whatever we like. The only condition being that we have to spend it within the month or it goes back in the pot. Use it or lose it.
A universal basic income of £1,000/month would transform our lives. No-one would have to live in poverty or the fear of it. No-one would have to be a wage slave. Each of us would be able to decide for ourselves whether or not a job was worth doing. Some of us would choose to work for free, others would be happy to earn a few pounds an hour to supplement our basic income. Hard, dirty work like cleaning might become very well paid. Lots of us would become self employed, starting small businesses or working as contractors. For the first time in the history capitalism we’d have a truly free market for labour, and I can guarantee that we would thrive on it.
Many of you reading this will be appalled at the idea of a negative interest rate despite all of the wonderful things that it offers. Our culture believes there is something deeply virtuous about saving, an ideal that the negative interest rate appears to obliterate. But it’s not as bad as it seems. If you’re able to live off your other earnings, so the £1,000/month UBI is surplus, then you can maintain a balance of around £44,000 in your bank account, which most people would consider to be big enough chunk of cash to cope with the rainiest of days.
So there you have it: zero cost cashflow funding for businesses and government, elimination of poverty and the entire welfare benefits system, massive tax cuts, a truly free labour market, and the virtue of saving remains intact. All this from the simple idea of a negative interest rate. Isn’t economics a wonderful thing?
