At the onset of the financial crisis Central Banks around the world reduced interest rates to spur growth and inflation. When neither arrived as predicted, they took rates even lower, sometimes all the way to zero. When that didn’t produce the expected outcome, they took even more drastic measures.
If an alien who knew nothing about economic theory descended down to earth today and was presented with only the facts and asked for its opinion, it would probably conclude that low interest rates only hurt the economy. After all, almost a decade of some of the lowest rates in history has left most people behind when it comes to things that matter, like decent wage growth. If the alien was told that he was wrong, based on today’s economic theories which were developed during the Great Depression, the alien would probably point out that the Great Depression was almost a century ago, and that what we know happened in 2015 should matter more than what we think happened in 1932.
Unfortunately for us humans aliens are not in charge. Instead we have economists. So what do economists think we should do after 8 years of zero rates failing to do as they expected? They think we should have negative rates.
What that means is your government would now punish you for saving money.
Want to put some money away safely to save for retirement or pay for your kids college education? Too bad. Your government would rather you gamble that money on risky investments or buy stuff you don’t need. Whatever the obvious lessons the rest of us learned from the financial crisis, economists learned the opposite.
Negative rates are already in place in Europe and Japan, and as you could probably guess they aren’t working. Growth and inflation are faltering in both places, and financial markets have become unstable, not surprising considering how preposterous the idea that banks will now punish people for saving their money is. To an alien this latest failed experiment would be the final proof that it’s time for new economic thinking.
There is a long history of widely accepted economic theories being proven wrong by reality. During the 1990s, while college textbooks were still teaching kids that it was impossible to have low unemployment and low inflation at the same time, we experienced a blissful period of both. In the 2000s most economists held on to the idea that house prices could never fall nationally until the bitter end, when it was obvious they had crashed. Pick a major economic development of the past 20 years, like the financial crisis or the recent collapse in oil prices, and odds are economists didn’t see it coming or told us the opposite would happen.
Janet Yellen, the current Chair of the Federal Reserve, recently told Congress that the Fed would also consider inflicting low interest rates on the public if we were to have another recession. The idea was backed by her predecessor Ben Bernanke. Mr. Bernanke is one of the chief architects of modern economic theory when it comes to low or zero rates. His theories are based on his research on the Great Depression, because apparently what happened before World War 2 in a time most humans didn’t have electricity applies to the digital economy of today. Ironically while promoting negative rates Mr. Bernanke also admitted back when he took rates to zero in 2008 he never thought they would have to stay so low for so long. In other words, he’s been wrong, but we should keep listening to him.
The idea of negative interest rates is so wacky that some economists, including former Treasury Secretary Larry Summers, have suggested we do away with large denomination bills or paper money altogether so people wouldn’t be able to prevent the erosion of their savings by holding unto cash. It’s never the economists that are wrong, but rather us lowly humans who refuse to behave in a manner that they predicted.
The title to Mr. Bernanke’s recently published memoir is “The Courage to Act.” Real courage would be for economists to admit that they’ve been wrong all along, and that they don’t know what’s going to happen next.
But don’t hold your breath. You are more likely to run into an alien.