Stephen Poloz Considers Negative Interest Rates

Stephen Poloz Considers Negative Interest Rates
Profile photo of Caleb McMillan

boc_chiefPrice controls on interest rates are the latest fad.

A 100-year-trend that’s picked up steam in the last 15 years, where central banks have been confident enough to blatantly ignore the supply and demand for loans and keep rates as low as possible.

How low can you go?

For Bank of Canada Governor Stephen Poloz, it’s below zero.

In a four-page pamphlet, the BoC makes its case for negative interest rates because, “the nominal return for holding currency is negative, due to storage, transportation, insurance and other costs associated with securing and storing bank notes, particularly in large quantities. These costs make it possible for nominal interest rates to fall somewhat below zero.”

Poloz makes it sound inevitable.

In his worldview, interest rates are like playing with the shower faucet. Sometimes too much water is coming out, sometimes it’s not enough. Sometimes the water is too hot, sometimes it’s too cold.

It is the Bank of Canada’s job, so goes the thinking, to regulate this flow of water as to “promote the economic and financial well-being of Canada,” or even more hilarious, “to preserve the value of money by keeping inflation low and stable.”

That’s not what interest rates are for.

Interest rates coordinate production and consumption decisions over time. Some sectors are more sensitive to rates than others.

If interest rates rise, people won’t spend less in general. They will spend less on particular things, most likely real estate.

Low oil prices and a “weak” loonie (73 cents to the American dollar at the time of this writing) are not the fault of some mysterious force in capitalism.

It is the belief of central banks and governments that cutting rates is a fine way to get oneself out of an economic recession.

Because when the Bank of Canada lowers interest rates, we’re supposed to accept that they’re not actually interfering with a complex capital structure that was already leading to an unsustainable outcome due to the Bank’s prior interference with interest rates.

We’re not supposed to view a boom period as wasteful and unsustainable, and the bust as a “hang-over” where we must bite the bullet and salvage what’s left of our economy.

It must be an old 19th century idea that capitalism requires actual capital, that production comes before consumption, that savings and investment come before production.

It’s 2015! We’ll just fire up the printing presses, if need be.

Nevermind that making new digits on a computer screen doesn’t actually create additional resources.

And definitely ignore the fact that creating new money puts the big banks first in line at the auction for these scarce resources.

If Stephen Poloz got out of the way and let the supply and demand schedules of individuals in a market economy set interest rates, we’d clear this house of cards and begin the process of allocating resources according to consumer wishes and not the arbitrary decisions of Canada’s central bank.

That is, we’d soon discover what a malinvestment means.

Better late than never.

But wait, I never got to negative interest rates….

In a nutshell, Stephen Poloz wants to destroy the currency in order to fix the economy. It may seem like that’s what he’s already doing, but going into negative interest rate territory is a key sign that Poloz doesn’t know when to stop.

The basic idea is to charge customers for deposits, discourage savings and encourage endless spending.

That is, continue ignoring basic economics.

Mish has a great post on this. And Robert P Murphy summed up one of the consequences of negative interest rates quite nicely:

“[I]f actually implemented, [it] would spawn new markets in derivatives that would allow currency users to hedge against this new (and completely arbitrary) risk. In fact, the government-run AIG would probably make a small fortune selling credit-default swaps that would make whole anyone stuck holding the bag of the neutered bills.”

Hey, here’s an idea.

Maybe Stephen Poloz is working for the big banks and doesn’t care about the average Canadian.

Indeed, the idea that the rate of discount of future goods compared to present goods could ever be negative defies all economic sense.

Profile photo of Caleb McMillan

Caleb McMillan is a writer that lives in Vancouver, British Columbia.

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