Wealth taxes are coming to Europe. This isn’t because of anything governments are doing. It’s because banks are imposing one. UBS has recently proposed charging customers for having big cash deposits. This is, in effect, a tax upon liquid wealth. Negative rates, then, are hitting savers, not just banks. And as it is possible the European Central Bank (ECB) will cut rates even more next month, the pain for savers could intensify.
For many of us, this turns our intuitions upside down. Surely, patience and prudence are virtues that should be rewarded, not punished.
Perhaps not. Maybe our intuitions are wrong.
The function of the price system – and interest rates are just prices – is not to reward virtue but to signal to us how we should behave. “Reward for merit and indicators of what a person should do,” said Friedrich Hayek (one of Lady Thatcher’s favourite economists) “are different things.”
Prices are now telling us that saving is a threat to economic health. Yes, before the financial crisis highish rates were necessary to stop people spending and so to curb inflation. But that was then. Inflation is no longer a danger in the eurozone, but weak growth is: last week’s figures showed that the German economy shrank last quarter. In much of the eurozone, desired savings are high – a fact which is depressing demand. If enough people want to do something, you don’t need to give them incentives and might need to disincentivise them. Returns on saving are negative in the eurozone for the same reason that car parking is expensive in central London – because too many people want to do it.
You might object to this that short-term interest rates are set not by the free market but by ECB intervention. This would be a fair point if the eurozone was seeing an inflationary boom because this would tell us that rates were artificially low. But, of course, this is not the case. Low inflation and a weak economy suggest that the 'natural' rate of interest is negative, and so the ECB is only mimicking what free markets would be doing anyway.
Alternatively, you might object to this that saving does in fact stimulate the economy by providing funds for investment. Not so. As the Bank of England says, “banks do not act simply as intermediaries, lending out deposits that savers place with them”. In considering whether to lend, banks don’t ask whether they have enough deposits. Instead, they consider – albeit imperfectly – whether it is a profitable prospect or not. If it is, they lend. And it is the lending that creates deposits, not vice versa.
Yes, there is a mechanism whereby savings might stimulate investment – but it is only that it cuts interest rates.
Some are now questioning whether having cash on deposit is a virtue at all. “No one should be rewarded for refusing to take risk,” says finance writer Frances Coppola. In fact, we can turn this presumption around. People who borrow or don’t save risk living in poverty in their old age. If people must be rewarded for taking on risks, why not reward them for taking this one, by having negative yields?
All this revives an old idea of Maynard Keynes. There are, he wrote in 1936, “no intrinsic reasons” for the scarcity of savings and therefore no necessary reason why savers should be rewarded if savings became abundant – as they are now in the eurozone. Keynes looked forward to “the euthanasia of the rentier” under which “the functionless investor will no longer receive a bonus.” The ECB is thus fulfilling Keynes’ dream.
We should, therefore, revise our intuitions. There’s nothing natural and right about positive interest rates. Saving is not a virtue in some circumstances. And, even if it were, it need not be rewarded. Virtue and self-interest are not the same thing. Of course, people have often convinced themselves that they are. But centuries of believing something does not make it so.
All this, however, runs into a delightful paradox. One of the oldest of human habits is to find morality in the existing order of things, even if it is egregiously unfair. This is the just world illusion, what New York University’s John Just calls system justification. From this perspective, defenders of negative rates might seem radical but in a sense they are doing the same thing that defenders of slavery or opponents of female suffrage did in previous centuries: they are finding moral justifications for the existing system.
But the inconsistency is not just theirs. There is in fact a very obvious way to raise interest rates and thus reward savers. All we need is for governments to borrow more – because if fiscal policy can stimulate the economy sufficiently, the ECB will be able to tighten monetary policy. Many of those older savers who would benefit from such a policy are, however, hostile to the left-wing parties that propose such a thing.
Negative interest rates, then, are scrambling everybody’s longstanding ideas.
