Dear readers,
You have certainly been annoyed for a few years about the low interest rate level with which your sour savings are being fobbed off (see Figure 1). You fondly remember the times when the yield on ten-year government bonds was around 6 percent or more. This was the case until the mid-1990s.
Taking into account the prevailing inflation rate, the long-term real interest rate, measured by the nominal interest rate on ten-year government bonds minus the rate of increase in consumer prices, was almost always above 2 percent until the financial crisis of 2008/2009 (see Figure 2).
But the current situation, in which not only the short-term but also the long-term nominal interest rate is below zero, is completely novel. Real interest rates already fell below zero about 8 years ago. At present they are around -2 per cent. This has never been the case for such a long period before.
What has led to this extraordinary constellation, what can we learn from it? Is it possible to return to the "normal" conditions as they were before?
Saving - a useful virtue?
First of all, negative interest rates contradict all the ideas about saving that have long been prevalent in the minds of many politicians, economists, journalists, (business) teachers and (consequently) many "normal" citizens: saving is seen as a virtue by most people. The saver renounces current consumption in favour of better future consumption possibilities. This renunciation, this ability to wait, this holding back in the present is interpreted as a difficult act of will that ought to be rewarded.
Among neoclassically arguing economists and those who draw on them, it is agreed that the renunciation of current consumption is beneficial not only to the individual but to society as a whole. On the level of the real economy, current consumption is seen as a hindrance to current investments in tangible assets, since it is assumed that there is a given total economic production quantity that can hardly be expanded in the short term.[1] This quantity must be divided between consumption and investment. Therefore, a renunciation of consumption in the present is beneficial for current investments, which in turn increase future consumption possibilities.
On the monetary level, the formation of savings by private households is considered a prerequisite for the provision of financing possibilities for investments[2] or at least thought of as helpful: If (more) savings are made, (more) financing means are available and therefore their price, i.e. the interest rate, falls. If financing becomes cheaper, this stimulates investment activity. Both together, i.e. the real economic as well as the monetary argumentation, provide the justification for classifying saving as a rewarding virtue. The reward consists in a positive interest rate. Many people believe that preventing this from happening through a monetary policy of nominal and real negative interest rates turns our economic system upside down: savers are driven away and the investments so urgently needed are stifled.
These views are at odds with empirical findings. First, on the monetary side: despite extremely low interest rates, there is no investment momentum - and there hasn't been any for years (the exception in the German construction sector has to do primarily with the desperation of many investors who see significant yield opportunities only in real estate, partly because a speculative price bubble is forming there). Contrary to what the neoclassical theory of interest rates assumes, the savings obviously do not find enough debtors, i.e. people who want to do something productive with the money not spent, even though it is so cheap to get.
From a real economy perspective, consumer restraint in the form of savings does not create any leeway for investment in tangible assets, but quite obviously prevents it, because the utilisation of existing capacities is not so high as to stimulate investment.
The idea of the economical Robinson...
The fairy tale of saving as a urgently needed virtue for an economy is based on the idea of a self-sufficient economic form of Robinson Crusoe, who - stranded on a desert island - catches two fish by hand and hard labour every day to sustain himself. This Robinson decides one day to eat only one of the two fish caught and, slightly hungry, to save the second fish for the next day so that he has time to start building a fishing rod on the next day. On the third day he fishes two fishes by hand again, saves one of them from his mouth again and dedicates day four again to building a fishing rod - his investment in future (increased) consumption. So Robinson starves and saves and tinkers with his fishing rod. When he has finished it, finally better days are dawning for him: He now catches at least three fish a day, eats two of them, puts the rest aside so that he can give up fishing every few days without going hungry. Robinson then invests the days off in making a fishing net that further increases his productivity - the amount of fish caught per day. Finally, he can stock up so that he can build a cabin and eventually a boat, etc. At some point, Robinson may even allow himself more free time. To sum up: Robinson's prosperity has increased thanks to his initial lack of fish.
This is the success story of the well-behaved saver who is prepared to put his current consumption needs aside for a while in order to make investments that will increase his future prosperity.
... and its contrast to reality
But this story has nothing to do with the reality of a monetary, labour-dividing economy of the present. In anonymous markets, as automatically brought about by the high division of labour and specialisation of our economy, private saving always results in a lower demand compared to the case where the entire income is spent and nothing is saved. This demand signal is problematic for the economy as a whole. For even if each individual decides to use his or her savings for higher consumer spending in the future, today's producers cannot know this or be sure of it. Rather, they can interpret the signal of insufficient demand - compared to the income paid in production - as a warning sign that they have produced too much and are stockpiling (the dreaded inventory investment). This tends to lead them to limit their production, lowering overall incomes in the next period.
Robinson is a saver and investor in one person. For him there is no information problem, he knows why there is a fish left over on day one and day three and that this saved fish will be consumed the next day. And if another island inhabitant, say: Friday, shows up and works with Robinson, savings and investment plans can be discussed because there is no anonymity.
Furthermore, Robinson does not use money because he doesn't barter. Production, consumption, saving and investment only take place in real economic terms. The fish saved is not turned into a fishing rod - the consumer good does not become an investment good. The saved fish keeps Robinson alive for only one day, so that he has time to build his fishing rod, his investment. If there were a money cycle mirroring Robinson's real economy, the money for the saved fish would lie around for a day just like the fish itself. It would not be a prerequisite for the building of a fishing rod.
The microeconomic motive of saving for retirement ...
The alleged virtue of abstinence or sacrifice is the - quite understandable and rational - desire of an economic subject to provide for his own future. People want to reserve a part of the work done today and the income received for it for tomorrow and the day after tomorrow. In the event that tomorrow or the day after tomorrow it is no longer possible to work as much or at all and earn income - for example, because of unemployment, illness or old age - it seems sensible to build up "reserves" in the form of savings.
This need for security on the part of the individual is quite honourable, since it shows that in the future, the individual does not want to rely on the solidarity of other people who will take care of him or her if they should ever fall on hard times. But this precautionary motive is by no means sufficient to derive a kind of right to positive interest on savings. Money doesn't produce offspring by itself, i.e. it doesn't simply multiply by being carried by the saver to the bank and credited to a savings book.
... and its macroeconomic consequences
The macroeconomic context is in remarkable contrast to the individual saver's motive for retirement. For every euro earned through work but not spent again means a euro missing as income somewhere else in the economy. Everything that has been produced, among other things, with the work of the savers, will only be sold if this income is also spent again (with the exception of surplus demand from abroad; more on this later) - true to the old adage that one person's expenditure is another person's income. So if you save parts of your income, you reduce sales somewhere in the economy - and this is completely independent of the respective economic situation.
Anyone who, in return, has produced on stockpiles has become an "investor". Those who "invest" in their stocks to the extent that their production exceeds their sales. This automatically means that they have gone into debt, simply because the production costs of stockpiling, which have led to income for others, are not offset by sales revenue.
Saving is a manageable problem as long as other economic agents spend so much more than they earn, i.e. they get into debt to such an extent that the loss of demand caused by savers is compensated. But why should the same people who help to solve the savings problem through their borrowing and spending habits pay interest to the savers - mediated by the banks? It could actually be argued the other way round: those who, through their current going into debt agree to work more in the future than they will consume - thus enabling the future consumption of today's savers - should be rewarded.
No debtor is dependent on savers...
Regardless of how one approaches this question, it can be said that the level of interest rates cannot be justified by people's consumption and savings behaviour; to be precise: not even the algebraic sign preceding the interest rates, i.e. who should pay interest to whom: the (consumer) borrower to the saver as "thanks" for the possibility of early consumption or the saver to the (consumer) borrower as "thanks" for maintaining current demand and thus current total income.
The only thing that is clear is that all savers are dependent on debtors so that total income, which includes the income of savers, does not shrink. A debtor, on the other hand, is not dependent on savers because money in the form of bank loans can be created from scratch. This represents an important asymmetry in our economic system. Why there is any, when and to what amount interest on savings is generated and why, when and to what amount interest on loans has to be paid is not determined in a monetary market economy based on the division of labour by any normative or even moral ideas about economic behaviour, but is rooted in the way the economic system functions.
... but in the long run every saver depends on successful debtors
This leads us to the root problem, which is reflected in the current negative interest rates. The assertion that negative interest rates are destroying the market economy flips the context and relationship of the two upside down. Negative interest rates are the consequence and not the cause of a disturbed market economy. The ECB is now only reacting to the fatal conditions, which it cannot alleviate on its own; but it is not responsible for them, although it can certainly be accused of not addressing the real causes properly and clearly enough for years.
Positive interest rates can only exist in the long term in a nascent economy, not in one that is at a standstill, only in an economy whose investment dynamism is sufficient to mask the efforts of economic actors to save money and, moreover, to increase the quantity of assets available in total.
Since most people today automatically associate the word "growth" with the idea of exploiting our planet with its limited resources, it makes sense to speak of development to avoid misunderstandings. It means an improvement in the supply and quality of "goods", which include not only goods and services, but also leisure time (synonymous with a reduction in working hours) and the "natural capital stock", i.e. the preservation and quality of natural resources such as water, air and soil. If, for example, air pollution decreases, this can be seen as an increase in the supply of "goods" that is balanced by the income of those who have managed to keep the air clean. If the air is cleaner only because less was produced, the "excess" clean air is matched by an increase in leisure time (whether it is involuntary unemployment or voluntary leisure is one of the central problems of the climate protection debate, but that is for another article).
If all sectors - from private households to companies and the state - save money, it will not even be possible to maintain the current level of goods or income achieved, let alone increase it.
Without this increase, interest payments on savings mean nothing but a redistribution in favour of savers. By contrast, interest payments on loans which have led to an expansion of production - these are usually loans for investments in tangible assets - do not constitute pure redistribution because they increase the quantity of available goods (depending on the type of produced asset of course) at the level of the real economy. (That interest on loans is paid to the lending banks and what can be deduced from this is discussed below).
In other words, interest on savings requires, in principle, successful investment in the capital stock of an economy, which naturally includes not only the private but also the public and natural capital stock. Savers are, so to speak, free riders of a reasonable investment development. Their savings are in no way a prerequisite for productively used credits. On the contrary, in a monetary market economy, savings are an obstacle to investment because of the loss of demand which they inevitably incur. Savers can only be "rewarded" without overburdening the economic system in the long run if total real income increases (including, as mentioned above, leisure time, air, water and soil quality).
An interest-based redistribution in favour of savers without a corresponding development of the capital stock can, however, take place for a while, but at some point it will run out. This is the case when labour incomes have lagged so far behind productivity development and no other demanders (namely the state or abroad) have jumped into the breach to the extent that capacity utilisation weakens noticeably. As soon as that happens, businesses are no longer willing to invest their profits in tangible assets.
Whether profits themselves weaken in parallel with the utilisation of existing capacities depends on how long and to what extent businesses have squeezed the increase in wages of dependent employees compared with the development of productivity. The more they have succeeded in doing so, for example thanks to a strong position in wage negotiations, the more quickly the economy will be in trouble and, ultimately, interest payments to savers come to a grinding halt.
But wasn't austerity in Germany successful?
It can be observed despite strong savings efforts by private households, companies and the state over the past 20 years, the German economy has not shrunk on a long-term average, but has actually grown slightly. Moreover, positive real interest rates were paid until about 8 years ago. At the same time, the development of investments was weak. How do these two seemingly contradicting observations apply?
The German economy owes its slight growth to years of surplus demand from abroad. This has made it possible to maintain sales of domestically produced goods despite net savings of the three domestic sectors (private, businesses and state). However, since this has driven up foreign debt to Germany by hundreds of billions of euros every year, this channel for averting a savings-related sales crisis in Germany is gradually coming to a standstill.
The pitcher will go to the well once too often
Now the grandiose error of assuming it to be possible to burden a system in favour of one side at will - namely in favour of the recipients of profits and interest - without its stability suffering finally comes to the fore. The well-known adage "cars don't buy cars" remains true even in the age of globalisation and digitalisation, even if many people try to wipe it off the table as Stone Age Keynesianism.
What has gone wrong in the last 20 years in Germany (and thereby in Europe) in macroeconomic terms? First and foremost, the German economy's comparative superiority was built on the bones of many poorly paid German workers, as measured by productivity trends, and used its cost advantages to generate excess demand from abroad. Commonly known as beggar-thy-neighbour policy, businesses used wage dumping with the additional protective layer against currency appreciation via the Economic and Monetary Union. This brought in domestic profits, cost jobs abroad and increased local income distribution inequality.
Then the euro crisis, which was largely caused by the aforementioned lopsided economic development, sprung neoclassical (mainly German) politicians to the scene, who waged war against the high debt levels of their euro partner countries and demanded fiscal restriction and deflationary wage policies from these very trading partners, in turn reducing their domestic demand once again and above all nipping any investment dynamic in the bud. The unemployment figures in Southern Europe speak volumes. The deviation of European inflation from the stipulated ECB inflation target is another inevitable consequence of this policy.
Non-European countries are now unwilling to take on the role of debtors as a counterweight to European austerity efforts, as Donald Trump has made clear with his threats of a trade war with Europe and his accusations of exchange rate manipulation against the European Central Bank (ECB). At the same time, German fiscal policy, by clinging to the "black zero" and the European fiscal pact, is refusing to provide any relief for the system. Without the willingness of a sector to take on new debt, the savings of all players as a whole will lead to macroeconomic crises, and due to the common currency it will do so throughout Europe.
The powerlessness of monetary policy
As if calling for help the ECB is responding to the deflationary tendencies by lowering interest rates into negative territory. However this is practically ineffective because people have begun to hoard their savings. The ECB has long since recognised its powerlessness to achieve the goal it has set itself of a stable inflation rate of just under 2%. Investments in tangible assets can no longer be sufficiently stimulated even by negative interest rates, because the demand side has been systematically ground into dust by years of redistribution from wages to profits, from bottom to top, from the real economy to (speculative) finance.
But even if the ECB revised its inflation target (as suggested by some experts, such as former ECB director Christian Thimann), what should it do? If the ECB were to raise the short-term interest rate to a level of, for example, 1 percent to reassure the German saver, it would not be able to solve the problem of the German saver.
After all, who should earn this one percent interest for the savers? The banks that cannot find a sufficient number of investors in real assets who would be willing to borrow for just over 1 percent interest? If not enough investors from the private sector believe that they can get something worthwhile up and running in the real economy that pays off at well over 1 percent, no one will be able to give the saving masses their 1%.
A return to "normal" interest rates is impossible without a return to "normal" investment conditions. And "normal" investment conditions cannot exist without "normal" demand conditions. And "normal" demand relations are impossible without "normal" wage relations. In this context, "normal" wage relations in Germany are not only to be understood as a wage dynamic that follows the golden rule of wages without any ifs and buts, but first of all an even stronger one that releases our European partners from their deflationary trap. Moreover, the wage spread that has been in operation since the 1990s must be significantly reduced, i.e. the lower wage groups must catch up with the upper ones.
To blame exogenous events such as the threat of Brexit, the US-Chinese trade dispute or oil price increases or drops due to political crises outside Europe for emerging problems in the German export sector is a cheap method used by our responsible economic policy-makers and their advisors to distract from their own failures. It only disguises the fact that even without all these global economic risks, the German austerity model is a dinosaur, the imitation of which by other European countries only exacerbates the economic disaster.
Shirking this realisation and failing to inform the public properly is only helping to further postpone urgently needed changes in German economic policy and to increase Germany's displeasure with the EU institutions, namely the ECB.
This makes the mountain of changes we have to cope with, which is already increasing enormously due to the consequences of climate change, even steeper and thus politically even more difficult to overcome. How is it possible to convince a population that it must prepare itself for a continuation of the period of low interest rates and, at the same time, trust the Central Bank in its own best interests, if at the same time the main cause of negative interest rates is not identified, thereby standing in the way of their elimination? It is, of course, difficult to explain this when it becomes clear that the profiteers of yesteryear have caused the disaster of today. In any case, it is difficult for the profiteers and for those who have been taking the mickey out of them for years.
Cui bono?
Why is this not understood by so many? This is an important question because it would be easier to achieve a fundamental correction in the primary remuneration of work in our society if the majority of the population knew that this did not contradict a positive dynamic development of the economy and therefore did not contradict a reasonable return on their savings.
It is quite understandable that you, dear German (small) savers, are annoyed: Following the expansion of the low-wage sector, the cutting back of unemployment insurance by the Agenda2010 policy and the lowering of pension levels, for many people the income from work or the pension entitlements earned from it no longer provide an adequate and, compared to the upper class, fair basis for their livelihood. Speculative price bubbles in the real estate sector of many agglomerations are driving up rents there, while at the same time your home in a structurally weak area is losing value because hardly anyone wants to settle there. Now you are also deprived of your second, rather modest source of income, the interest income on your hard-earned (if any at all) savings. On top of that, the real value of your savings is reduced due to negative interest rates and slight inflation.
But nobody will explain to you that both the weak development of many labour incomes via the resulting weakness in demand and therefore in capacity utilisation, and the resulting weakness in investment are causally connected with the poor return on savings, because then you would no longer let yourself be follow the words of those who, out of patronage interests, stir up anger at monetary policy. You would no longer simply accept the accusation that Mario Draghi is deliberately pushing the short-term interest rate below zero.
A glance at the media shows that most people lack factual information about fundamental interrelationships in our economic system. From school onwards, people are taught that debt is bad and credit is good, and therefore the latter should be "rewarded" with interest. And to the extent that people consider the central bank to be responsible for interest rates, they are correspondingly angry with the ECB today.
Or it is taught that interest is a price that matches the supply of capital by savers with the demand for capital by investors; the interest rate only has to fall low enough to stimulate investment in fixed assets at exactly the level of savings. However, since this explanation does not currently fit the empirical findings (investment simply does not jump-start), fundamental "market failures" are rambled about, for which reasons are sought and found: obviously the classic talk of taxation of companies that is hostile to high performers, of excessive social insurance contributions and excessive bureaucracy that hinders investment.
If you, dear (small) savers, had more factual information and on top of that the time to deal with this topic, you would consider which people exactly are the ones who provide these "explanations". They are above all those who have directly benefited from the redistribution from the bottom to the top and the myth of saving as a virtue for decades or whose network does so. In other words, above all those who "manage" and invest the money saved by others in particularly profitable investments and are generously remunerated for this in the form of commissions and fees. For them, negative interest rates mean that their whole business model breaks down.
Because if you pay interest for your hoarded money - that's another name for saving - at a bank instead of receiving some or if you have to accept a negative return when buying securities, then consider keeping the money yourself, for example in a safe at home. You do not need a bank employee, investment advisor, fund manager, insurance agent and risk analyst, just a safe salesman.
The bombastic term "investment", which is often heard in financial circles, often serves to throw sand into the eyes of savers. It gives the impression that every "investment" (i.e. every financial investment) is associated with an additional productive investment in tangible assets, which is not the case with many "investments". Often money is only put into the purchase of already existing tangible assets in order to profitably participate in a speculation based on price bubbles.
If you, dear saver, are actually risk-averse, but now want to avoid speculative transactions, for example with shares or real estate, because of the negative interest rates, you may want to turn to expensive advisors. In the event of a crisis in the form of a collapse of speculative price bubbles, they will explain to you in many words that there is no magic bullet against such unforeseeable macro events.
You should therefore be concerned about those who are so vehemently committed to your interests as a (small) saver. The same vociferous commitment of these people to you, who are possibly also employees with a possibly not exactly high hourly wage, is not heard when collective bargaining is about supporting your interests to receive an appropriate remuneration for your work performance, which would go much further in terms of useful support and restoring balance to our market economy.
