Zero Interest

Standard

The European central bank just lowered the interest rate to 0%; Japan has been in negative interest rate territory for some time. Anyone who has a saving account knows that interest rates have been below 1% for quite some time. With inflation running at roughly 2%, this means your money loses value while you wait. It’s better than putting money in a sock but not much. If banks start passing on negative rates to customers (they haven’t yet, somewhat to the chagrin of central bankers) a sock will become a viable option.

The stock market isn’t doing much better. While you might be lucky or smart enough to pick winners, the overall returns from investing has barely done better than inflation this past year. Count in broker or mutual fund fees and even that advantage goes away. Someone may be getting rich (hint, it’s your investment banker) but it ain’t you.

There is lots of money around. Multinational corporations are sitting on trillions – holding for better times or, more likely to buy out their rivals during bad times. It’s not being spent on making jobs.

The economy is broken and no one, it seems, knows how to fix it. This is largely because in the 21st century capitalism has turned from a system designed to increase societal wealth and promote innovation and progress into a tool to funnel the wealth of a shrinking economy into fewer hands. And yet, people continue to hold onto the mistaken belief that the ‘free market’ is an impersonal and rational system to promote efficiency. But in fact it twitches and jerks to the strangest stimuli.

Take the price of iron in China. You may recall, that Mao said that democracy grows out of the barrel of a gun. Protestors in various countries riffed on that by putting flowers in those same barrels held by soldiers sent to ‘watch’ them. In China – where the economy is struggling – the price of iron suddenly jumped 10%. How could that happen? Apparently a massive international flower show was being held in a large iron smelting city. Local officials fretted about pollution levels. Iron company executives – suspecting a temporary shutdown – began hording their product. So the price went up. An ideologue might say it was a ‘rational decision’ but I would reply: You keep using that word; I don’t think it means what you think it means.

So if the market system is broken – what do we do? Especially if we are trying to buy a house, whose price will either spiral out of control (in part because of insider trading and speculators) or languish or even fall in many markets. What’s the point of pouring good money after bad? Why not rent and let someone else take the risk? And what about saving for the future when our savings are worth less every day? Maybe we should do what the central bankers want and spend, spend, spend. Or maybe we should give up on the idea that tomorrow will be richer than yesterday and learn to live with less. Easy enough to say when you are somewhat well off – but what if you are already living on less?

Or maybe we should start to reform the system by admitting nothing is too big to fail and that speculators don’t have a God-given right (let alone a legal one) to game the system. Maybe we could start by sending a few of the worst to jail.

But that’s ten minutes.

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