The negative-rates club is growing. But there is a limit to how low rates can go, according to the economist. But they do not define what that limit is.
The Economist suggests: Let’s take a different look at what negative interest rates mean from the point of view of supply and demand. The -1% deposit rate for Switzerland indicates the expectation that the Swiss franc will buy about 10% more than it will today in 10 years. (To be exact, the expectation is for 10.46% more value.) Why will it buy more? Well, for just the opposite reason that +1% interest rates indicate a 10% loss of value expectation over 10 years. With the loss of value the effect is known as inflation which is generally considered due to too much money chasing too few goods. The solution for inflation is to make money more expensive or less available. The opposite applies for monetary deflation implied by negative interest rates: There is not enough money available to buy the goods available. In the current environment the shortage results from an excess of “debt goods” to be bought. So the solution to deflation is either to make the goods more scarce (write off debt) or increase the amount of money available. QE is a process attempting to make debt instruments more scarce in the economy, although the scarcity may be temporary if the central bank later sells debt securities, as opposed to debt write-off which is forever permanent. (“Forever permanent ” is a deliberate redundancy, for emphasis.) See the preceding article for a view that rising wages and incomes are going to supply the money that will reduce deflation (or increase inflation).
But we ask the following question: Where will the money come from to pay the higher wages? The choices we suggest are (the third is not done today with the existing monetary system):
- Fewer people employed.
- More debt to create additional money.
- Infusion of money without the creation of debt.
