A Frequently Asked Question

Q: Wouldn’t negative-interest currency make the present situation of commodity and equity speculation even worse?

Background: In the last few years, the Federal Reserve has attempted to increase the money supply through the policy of “quantitative easing”, which makes virtually limitless amounts of near-zero-interest money available to the financial industry. The Fed hopes that the banks will lend this money into the economy at low interest, spurring capital investment and hiring. Instead, the flood of money has poured into the stock market, commodities, and other speculative activities, driving up prices. All of these activities are much more attractive when interest rates are near zero, because investors are looking for some way to make their money grow. The above question asks, if interest rates were even lower (below zero), then wouldn’t there be even more incentive to speculate?

A: The reason for the equities and commodity speculation today is twofold. It isn’t only that interest rates are very low; it is also that the base money supply is too large — far larger than necessary to provide a sufficient reserve base for lending in the real economy. If there were some way to shrink the money supply, end quantitative easing, and still keep the base interest rate low, then there wouldn’t be a relative shortage of lending opportunities as there is today. The problem is that it is precisely by flooding the system with base money that the Fed drives down interest rates.

If bank reserves (and currency) were subject to a negative interest rate, and the base money supply kept small enough to correspond to the level of lending needed to support real economic activity, then there would be little incentive to engage in risky speculation because normal lending activities would offer an equivalent and presumably safer return. The problem today is that there is nowhere to lend. Borrowers are overleveraged already, and in a zero-growth environment, there are few capital investments offering a positive rate of return. Of course, an additional problem is that many risky, speculative investments have become much less risky, because the markets know that if the risks don’t pay off, the government will bail them out. That has to stop; otherwise regardless of the kind of money system we have, we will continue transferring wealth from society at large to the investing elite.

It is also true, however, that a negative-interest or “decaying” currency might, like inflation, push people to invest in other, non-decaying stores of value, especially if the negative interest rate (also known as the demurrage rate) were too high. In practice, however, most commodities have a carry cost of some sort: storage costs, insurance costs, theft and loss premium, decay and obsolescence, and so forth. Even gold, though it doesn’t oxidize, carries some of these costs. Therefore, underneath the short-term ups and downs, speculating in commodities as a way to preserve wealth is a losing bet.

The main exception to this principle is land, which is why the ideas of the 19th century economist Henry George are an important part of Sacred Economics. George argued that the land properly belongs to all humanity, and that private individuals should not be able to profit from merely owning it (it is fine for them to profit from productively using it though). He therefore proposed a tax on the value of land (as distinct from improvements made to the land) — in effect, a rental fee paid to society for the use of land, offsetting the “economic rent” that would otherwise enrich the landlord regardless of how well he took care of the land. This tax, or the equivalent measures I describe in the book, subject land to the same disadvantage as money as a store of value.

Decaying currency merely reflects the truth of nature: that all things decay, pass on, change form. Money has been made an exception to this law of nature; hence we have an economic system that is profoundly unnatural. One way it is unnatural is in its delusion of the possibility of eternal preservation and endless growth. This is a delusion that is coming to an end.


About Charles Eisenstein

I am the author of The Ascent of Humanity and Sacred Economics. I am also a public speaker and member of the faculty of Goddard College.
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2 Responses to A Frequently Asked Question

  1. Toby says:

    Frederick Soddy defines money as “the NOTHING you get for SOMETHING before you can get ANYTHING.” (The caps are his, not mine!)

    I like this definition very much, since it attacks the cultural sense we have of money storing value, being value, being wealth. We have put almost all our eggs in the money basket, and this is not wise.

    The idea that money might be a nothing is so contrary to how we feel about it, the definition is hard to take seriously at first. But upon deeper reflection it becomes obvious. Money can only be nothing — albeit a nothing with purchasing power — since all it is is an agreement that an item otherwise useless (a coin or a piece of paper or data on a computer disk) be used to purchase something desired or needed. The ‘thing’ embodying the money is not the money. The immaterial agreement is the money. Without the agreement all you have is a disk of metal, a piece of paper with ink on it, or unreadable data on computer storage, the nothingness of money having disappeared as easily as it came.

    Attaching negative interest to money is one mechanism for stripping it of its utopian urge to immortality. But demurrage cannot work absent profound change throughout culture. While we believe wealth is about differential advantage, accumulation of property in some pyramid of power, a demurrage money would simply force the game away from currency into other parts of the economy. It would change hardly anything, and perhaps make things worse by speeding economic activity up, something we really don’t need.

    There’s a chicken-and-egg problem here. We can’t change anything until we’ve changed everything. Money is an organic and emergent expression of our cultural relationship with value and wealth. Until we want to redefine wealth and value, until we are culturally focused on wealth as natural networks and “interbeingness”, no change to any component of the current set up will bring any lasting improvement. But after a cultural shift of sufficient depth is underway, then there’s no telling what might happen.

    And it’s you, Charles, via your work, who has gently led me to this position. But I believe more and more that money will become superfluous, because it is always and only debt, society’s obligation to itself to produce goods and services to trade. Money is a hungry nothing which, I suspect, cannot co-exist with a society focused on abundance and wise husbandry of ever-changing ecosystems. For organization of large projects we have language and a very capable communication infrastructure. Surely things like Linux demonstrate this, as did the construction of the pyramids, and other large commons efforts in areas like irrigation, all accomplished without money (though Linux required the existence of the Internet, and many pizza delivery companies, which required money).

    I’m looking forward to reading Sacred Economics, I still have so many questions on this most important topic. The Ascent of Humanity is a wonderful gift to us all which I enjoyed enormously, twice.

    • Jill Harrison says:

      Toby, I agree with your comments. The best response to these questions I’ve seen comes from Silvio Gesell’s book The Natural Economic Order (http://www.utopie.it/pubblicazioni/gesell.htm) from a century ago. He felt that land as well as currency needed to be ‘freed’ from its privileged position in the market. So, along with demurrage currency he proposed a return of property to the public commons which could then rented to people who are able to pay the cost of using it.

      The value in Charles Einstein’s writing is the recognition that we have evolved to the point where we must recognize our interdependence & structure our economy to reflect that. It will require a spiritual shift for us to invest in healthy living systems rather than piles of currency to meet our future needs.

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