EconoMatters

Why Negative Interest Rates Are So Pernicious

Interest rates are the mechanism by which risk links the world of economics and society.

Takeaways


  • Low interest rates mean that low-quality, low-risk projects receive capital.
  • From a humanist perspective there is a serious and unexplored ethical dimension to artificially repressed interest rates.
  • Today’s unnatural, subsidized, repressed low interest rates extinguish the desire for risk, and not just in the economy.

Low interest rates mean that low-quality, low-risk projects receive capital. This is capital that under normal circumstances would flow to riskier, higher return projects.

To illustrate, in a healthy 3% risk-free interest-rate economy, a project or a government bond yielding 0.5% could not dream of being eligible for funding.

In a sub-zero rate regime, on the other hand, very low-quality projects with close to zero returns (with barely any risk-taking involved), do obtain financing.

Economies with unnaturally low interest rates, the result of loose monetary policies rather than market equilibria determined by the demand and supply of money, will allocate capital (= society’s collective savings and resources) neither productively nor fairly.

Unsurprisingly, 13% of companies in advanced economies are already deemed to be zombies.

What is even more worrisome is that our basic instincts to adventure and take prudent and not-so-prudent risks in pursuit of better futures are rewired in Zombieland. In short, from a humanist perspective there is a serious and unexplored ethical dimension to artificially repressed interest rates.

Interest rates is the mechanism by which risk links the world of economics and society. Interest rates determined naturally are related to healthy risk cultures and appetites.

On the other hand, today’s unnatural, subsidized, repressed low interest rates extinguish the desire for risk, and not just in the economy.

The effect is society-wide and – as Japan’s hikikomori or soshoku-kei danshi show – it touches our most private spheres too.

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About Tomas Casas i Klett

Tomas Casas i Klett is Assistant Professor at the University of St. Gallen’s Research Institute for International Management (FIM-HSG) and the Director of the China Competence Center (CCC-HSG).

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