Mechanisms, not morality, are driving interest rates to zero

“For low rates” is a bit strong, this is more “how low rates.” Show me how to push against this mechanism and I’ll shut up. So, this is my argument, once more:

  1. Saving is buying something durable now to sell in the future [1]
  2. Interest rates are just a way of expressing year by year the difference between current price and future price (plus some financial frictions)
  3. Currently lots of people want to buy durable assets
  4. In the future we don’t expect those durable assets to be worth much more than today
  5. This is the mechanism that drives interest to zero
  6. Only the existence of physical cash prevents interest rates going even lower

Ros Altmann kindly responds to my previous posts on savings, but I’m not sure I fully understand the critique. Ros is in favour of “responsibility, prudence, living for tomorrow as well as today” which are all noble intentions. But they don’t address the fundamental problem described above.

Saving is owning assets and then the liquidation of this position. Sometimes these assets are abstract rights: a state pension is ownership of a stake in the tax collecting power of the state, the liquidation the drawing of regular payments until death. A house is another more concrete example (haha). Depositing money in a bank and expecting it to be safe seriously limits the class of assets which can be owned and sold by the bank. The more people think about mechanism and the less they think about morality and models the better.

Ros concludes “If savers are all doomed and they just start taking risks and lose their savings (as many of them will because they are not equipped to take such risks and actually need their savings to live on) then everyone else is doomed too.” To which I reply, “welcome to the party, my friends and I have been here a while, pass the smartprice crisps.”


[1] Insert:
a) Putting money in a nice safe bank account is just a way of disintermediating this process to someone else
b) This is a form of financial opacity on behalf of banks to convince you they’re safe custodians of your cash
c) Likewise, the fact savers are lending money to someone to buy something on their behalf to later sell on their behalf is willfully denied by savers
d) All of these subclauses are probably regrettable but necessary