What do negative interest rates mean?

A friend and colleague asked today for my thoughts on negative interest rates, why we are seeing them, what caused them, what do they imply?

"I’ve been thinking about this a bit but I can’t quite get my thoughts together. What do low or negative interest rates have to do with the long-term outlook for society? Do low rates imply we are putting more value on the future? I am pretty sure I am mixing up discount rates with interest rates but I still think there is something there to ponder. With high rates the outlook is robust and with low rates not so good. Are the markets pricing in some negative externalities? Perhaps I am way off the mark…"

My partial reply:

So, big topic; real big

Plenty of reading to do to truly try to get a handle on this

Plenty of important books have been written that relate to this issue, in either a core or tangential way; some I’ve read, many I haven’t

To properly understand all the elements and to get all the implications, we might have to read, among others, Piketty’s Capital; Graeber’s Debt; Polanyi’s Great Transformation; or Milanovic’s books on inequality; none of which I’ve read

And, also, books on ecology, and ecological economics, like Hall’s Energy and the Wealth of Nations; Harvey’s 17 Contradictions and the End of Capitalism; Latouche’s Farewell to Growth; Greer’s Wealth of Nature, Economics as if Survival Mattered; Catton’s Overshoot; Turchin’s Secular Cycles; Vaclav Smil’s Harvesting the Biosphere; Daly’s Ecological Economics; Schor’s Plenitude; James Gustave Speth’s The Bridge at the End of the World; Boyd’s Energy and the Financial System, What Every Economist and Investor Needs to Know; Galbraith’s The End of Normal; and a book I think you recommended to me, Streeck’s How Will Capitalism End?...., also, while all on my to-read list, none of which I’ve actually read yet

Though I haven’t yet read those, I have read a bunch along these same lines, such as Meadows’ Limits to Growth; Wright’s Short History of Progress; Maxton’s The End of Progress; and Koo’s Holy Grail of Macroeconomics, Lessons from Japan; Cowen’s The Great Stagnation; Rubin’s The End of Growth; Heinberg’s The End of Growth; Shilling’s The Age of Deleveraging; Homer-Dixon’s The Upside of Down; Diamond’s Collapse; Tainter’s Collapse of Complex Societies; Klein’s This Changes Everything, etc etc

I believe the issues covered in all of these books all inter-relate and all matter (to the subject of the inexorable decline of interest rates).

Plus there’s a ton of stuff on secular stagnation, the natural or neutral rate of interest, on modern monetary theory, etc, worth reading.


But at a good first approximation, Nate Hagen’s work, as well as Robert Gordon’s work, I think, adequately illuminates the crux of the issue.

For Gordon, see relevant papers in PDF here and here and here.

For Hagens, I HIGHLY recommend GDP, Jobs and Fossil Largesse, as well as his video series.


Plus plenty more stuff I’ve archived on this blog regarding sustainability issues and their implications for economic growth (which therefore have implications for rates), including the excellent work of Tim Garrett, e.g. here, and a variety of other writers, such as here. 

Or, if you prefer, for my quick summary:

( Gordon’s headwinds to growth plus Summers’ secular stagnation plus Fisher’s debt deflation / disinflationary forces ) + ( Hagens et al’s extracted all the cheap energy ) = Lower nominal growth and lower inflation

+ ( Meadows et al’s Limits to Growth ) + ( Czech’s steady state economy ) --> zero nominal growth and zero inflation

+ ( Daly's Degrowth ) + ( Catton’s Overshoot ) + ( Diamond’s Collapse ) --> negative growth

So, given that the average interest rate in the whole economy should approximate the average rate of nominal growth in the economy
(otherwise higher rates would repress growth, as there wouldn’t be sufficient productive uses of capital to provide profit with which to pay the interest)

And, given that the private sector pays some degree of credit spreads above and beyond what the govt’s risk-free rates are
(i.e. the govt’s rates have to be below the average rate in the whole economy, which is below the rates paid by private sector corporate and consumer sectors)

then, lower and lower growth imply lower and lower rates 

Sometimes things can go on longer than you'd think (stock market bubbles, the euro, Stairway to Heaven, Joe Biden's political career)...

But, ultimately, that which is unsustainable ... won't be sustained.

So, if you believe, as I do, that

infinite growth on a finite planet is impossible

then

negative rates are inevitable

or, in other words

if the economy is too big for the biosphere

which it is

(see the planetary boundaries research stuff I sent you in April, e.g. by each of Barnosky, Lenton, Rockstrom, Steffen (linked to at end of here).... not just climate change, nor peak oil, nor ocean acidification, nor deforestation, nor species mass extinction event, aquifer depletion, nor nitrogen cycle, nor etc etc etc, but all of them interwoven simultaneously together)

Then either we stop growing voluntarily
(unlikely)

or

Gaia’s fever will get worse until she gets rid of her virus
(us … and our livestock)

So, I'll put the question back to you: 

What interest rate is appropriate in an economy with zero nominal growth? How about with negative growth?

So, no, IMO, low rates do not imply we are putting more value on the future.

Low rates are because we put way too much value on the present and damn-it-all-forget about the future.


Are low rates pricing in negative externalities? You betcha!

Capitalist corporatocracy refused to price in those externalities appropriately to begin with (reflecting the usage of precious energy/natural resources/habitat/sinks for our waste, etc.), so we’ve collectively mis-allocated resources in the most extravagant fashion, (mostly to the benefit of ~5% of the global population), so we will pay in the future for that mis-pricing of the past

... and if we don't pay for it via degrowth (probably too late anyways), then we will pay for it via collapse

(I forgot to include in my list above, Geisel's The Lorax)