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.