The Bankers' Brilliant, Can't-Lose Business Model That's Totally Insane
By P.J. O'Rourke
Central banks are not where I usually go for comedy. But negative interest rates are hilarious.
Banks want to pay you to borrow money from them. Even Bernie Sanders hasn't come up with anything this ridiculous.
It's as if you're walking down a dark street and a mugger steps out of an alley, holds a gun to your head, and demands that you take his wallet, iPhone, and car keys.
Except you aren't laughing. Somebody's still holding a gun to your head – no matter what he's telling you to do. It must be some kind of rip-off. And it is.
Central banks don't really want to pay you to borrow their money. What they want is for you to pay a fee for lending your money to them.
You make a deposit in a bank. The deposit is a loan to the bank. Your deposit earns negative interest. When the bank repays your loan – that is, when you withdraw your deposit – you get back less than you put in.
We're all familiar with this business transaction. At my house, I call it "loaning money to my daughter."
It's a brilliant, can't-lose business model for banks. The only problem is, it's insane. No rational bank customer would willingly accept negative interest rates.
(Except, me, maybe, in the very unlikely case that my 16-year-old daughter becomes chair of the Federal Reserve.)
Whenever you encounter a business model that's insane, you can be sure that government is involved.
Government is the one part of existence that doesn't take place in real life. Government can do whatever it likes. Government can pass a law requiring every business to provide each of its employees with a unicorn, a flying pony, and a candy-flavored rainbow.
If you don't think so, you haven't read all 1,190 pages of the Affordable Care Act.
Negative interest rates are a political policy, of course. Who else but politicians would have an idea this crazy? The mugger who steps out of an alley, holds a gun to your head, and demands that you take his wallet – that mugger is government.
Why is government acting crazy?
Well, what makes insanity truly insane is that it always follows a certain comical logic. For example, let's say you get a crazy idea that the CIA is broadcasting brain-control waves from fire hydrants. If you're truly insane, you will drive around town smashing your car bumper into fire hydrants – it's only logical.
The crazy idea that government has is "debt is good." Debt will stimulate the economy. Debt will prod capital investment. Debt will spur productivity. Debt will fuel trade. Debt will increase consumer spending. Debt will raise the price of assets. Everything is possible with the miracle of debt.
Debt is good. Government should encourage good things. Debt is so good that government will subsidize it. Government will pay you to go into debt.
Like I said, there's a certain comical logic to it.
Negative interest rates also penalize you for having cash – that is, penalize you for not going into debt.
Negative interest rates are a way for central banks to suck cash out of an economy that has been swamped with cash by those same central banks.
This is like finding out that your Roto-Rooter man has a night job flooding your basement.
This is also where my head is about to explode.
Government has been printing cash with wild abandon since the 2008 fiscal crisis. And that cash is debt. Currency is nothing but a promissory note issued by government and backed by... um, government promises.
(Consult American Indians for a further discussion of government promises.)
The crazy idea that government used to have was "printing cash is good." Printing cash would stimulate the economy. Printing cash would prod capital investment. Printing cash would spur productivity. Printing cash would fuel trade. Printing cash would increase consumer spending. Printing cash would raise the price of assets. Everything was possible with the miracle of cash rolling off the printing presses.
This didn't work.
This didn't work for a simple reason. "Printing cash is good" was a crazy idea. Stimulating the economy by printing cash is as effective as stimulating new-car sales by printing pieces of paper saying, "Give me a new car."
But don't worry, negative interest rates will fix the problem. Negative interest rates will get rid of the government-issued promissory notes. Cash will go away and be replaced with subsidized central-bank debt, which won't be backed by empty government promises. It won't be backed by anything at all!
In a sane world, government would quit trying to stimulate the economy. Economies are stimulated by people, not political policies. Government is a henhouse, not a hen. The barn doesn't lay the eggs, the chickens do.
Government could start by cleaning out the barn. Shovel up all the government economic stimulus political policies and dump them on the politicians.
What government should be doing is protecting its citizens, defending individual liberties, guarding property rights, providing rule of law, and keeping taxes, regulatory burdens, and trade barriers low.
If that – and only that – were what governments were doing, the free market would take care of the rest. The economy would be so stimulated... So stimulated that I can't think of a PG-rated metaphor to do justice to the stimulation we would be experiencing.
And if we had a real free market in currencies and debt, government couldn't print cash with wild abandon and central banks wouldn't have any choice about what interest rates they charge.
In a sane world, the next time global central bankers got together for the Federal Reserve's annual August retreat in Jackson Hole, Wyoming, they'd have nothing to do.
Maybe, if it rained, they could go mud skiing.
Central bankers would be a joke. Which is what they are now. Except it's a bad joke.
Regards,
P.J. O'Rourke