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Deconstructing dollars

5 March 2015 By Edward Hadas

Negative interest rates show finance has gone postmodern. The system has become self-referential and value-free, in a way that might please cultural theorists. That’s supposed to help the real economy run more smoothly. But it’s risky, high-handed and not fair to savers.

It is hard to get used to the idea of paying governments to take money, for as long as five years in the case of Germany. Even yields on some corporate bonds have turned negative in the secondary market. Of course, explanations exist: ultra-loose monetary policy in a time of disinflation; a surfeit of funds versus available safe investments; and the noble goals of encouraging banks to lend and potential investors and consumers to spend.

Still, the experiment is disquieting to anyone with traditional ideas about interest rates. Savers’ thrift deserves a positive return and it is fair to share the wealth that invested savings help produce. If the value of money is reasonably constant, as seems appropriate for a tool which is supposed to allow costs to be compared over time, then the positive return will take the form of a positive interest rate, on even the least risky investments.

Each of those notions is fading in the contemporary financial arrangement, where old-fashioned concepts have been replaced by what might be called postmodern finance. Money need not have a consistent value and interest rates can cause collateral damage. Flexibility and expediency are the norm. In this topsy-turvy world, negative rates can be as useful as positive rates. If central banks think minus signs are good for the economy, so be it.

That goes with the flow of financial history – the switch from gold to paper currencies and the move to floating exchange rates, is all about taking a less absolute, more utilitarian approach to value.

After negative rates, the next natural step is to eliminate notes and coins. Of course, their real value can already be eroded with inflation or increased with deflation, but their constant nominal value remains a reminder of the days when money stood for something clear and constant. Harvard economist Kenneth Rogoff has an answer. He wants an all-electronic system, where the value stored in bank accounts and debit cards would go up and down as the authorities think best.

There is certainly something tempting about treating money as a flexible tool whose quantity, value and return can be adjusted at the will of wise men and women for the sake of the common good.

Still, postmodern money might not work. Central bankers have a poor record, contributing to both the Great Depression and the 2008 financial crisis. The imbalances they are creating now might create future problems. Besides, shifting-value money and negative rates may not be able to provide a sufficiently solid support for the complicated real economy.

The paternalistic tone is also disconcerting, even if central bankers are wise and want to do the right thing. Indeed, the whole arrangement feels unfair. The manipulation of the financial system by a technocratic priesthood does not fit well with an economy of mass production and consumption. Unexpected changes in the inflation rates are hard on people who did nothing to deserve their losses. Negative real interest rates are hard on savers, who deserve a better return.

For now, though, postmodern finance is in the ascendant, and its proponents reject these objections. So the experiment will continue. But fashions change in finance, just as in cultural theory.


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