If negative interest rates are a tax then positive interest rates are a subsidy from the future

I find people’s instinctive negativity about about negative interest rates a little annoying. This post is particularly strange. I pick it out for no other reason than Frances Coppola tweeted it.

Interest rates are kind of a fiction. When we save we’re buying something now to sell later, that is what is actually happening and it is intermediated by finance. Islamic Finance has a much clearer mechanism to illustrate this. People do not expect the European economy to be much large in the medium term than it is now, this means that  durable assets, equity and other savings vehicles won’t be worth much more either this makes finding a positive return difficult.

This has nothing to do with Keynesian ideas of natural rates of interest or socially optimal policy. Transmitting purchasing power through time is just really difficult so periods of negative interest rates shouldn’t be seen as an aberrant tax but as a consequence of technological stagnation in finance or terrible macropolicy making.

I think you can make a very strong case for bot. Finance has grown faster than the rest of the economy since the 1940s but it hasn’t proven four times as effective at intermediating.


I’m on record calling the ECB insane and I’ll do it again. Bad policy making is an incredibly important reason for why interest rates might go south of zero. It’s difficult to be confident we’ll be richer in the future than the past when unemployment in Europe is doing this:


At the moment far too many people want to buy stuff now relative to the future. Ten percent of firms close each year. You need to spend one percent of your home’s value on upkeep each year. This is another way of saying that buying stuff now and then selling it for more in the future is a pretty amazing thing, low interest rates, even negative interest rates are nothing to be amazed by. They’re the only way to reconcile the present and the future.

6 thoughts on “If negative interest rates are a tax then positive interest rates are a subsidy from the future

  1. Positive rates are necessary so they can allow all people to save for the future (see retirement- deposit-emergencies fund).

    Negative rates while banks are spending vast amoust of money to support asset bubbles do not help the future but the present-past.

    1. You don’t need positive interest rates to save people can just pay a fee to move purchasing power to the future. There’s no discontinuity at zero that causes people to no longer want to save.

      They might want to save less, because they get a worse price, or they might want to save more, because they have a target future income they need to hit. Either way there’s nothing special about zero in general.

      Some of the operations of modern finance, money market funds in particular, have problems with zero interest rates. But there’s nothing fundamental here.

      I worry I haven’t been clear enough.

  2. That post is specifically about negative interest rates on reserves, which are a tax on the banking system that cannot be avoided. That alone makes them a bad tax, given that the effect of negative rates is supposed to be Pigouvian. Moreover, as with all taxes on corporations, the actual incidence falls somewhere else, resulting in perverse effects. For example, if banks feel they can’t cut deposit rates, they may pass the tax on to borrowers in the form of higher interest rates – in which case the effect of negative rates on reserves would be contractionary.

    FWIW, though, I agree with you about interest rates in general. Indeed I wrote about this here:


    Real interest rates persistently higher than the real growth rate of the economy require a sustained primary surplus. This is a wealth transfer from from income earners to asset holders, which impedes the desire of income earners to save (acquire assets) and results in widening inequality. As income earners tend to be young and asset holders old, it also impoverishes the young and enriches the old. If the asset holders lend their wealth to the young, it creates a growing debt burden which is ultimately unsustainable. And it is an open punt on the future growth rate of the economy – effectively it is saying that although we aren’t producing enough at the moment to pay those returns, we will do so in the future.

    Admittedly, if all the asset holders spent the returns into the economy, it would be a wash. But they never do.

    I suppose I should write about this, too, shouldn’t I?

    1. I dont disagree that savings should be linked with the growth rates however i question the stereotype that savers are only from older generations.
      There are many more young people who have savings than the young people who have property (Debt) assets. Therefore the low interest rates while the house prices keep rising do not actually help many young people since they tend to be savers (future FTBs/ CTF/Junior ISAS).

      The negative/low interest policy effects on savers are impacting the young people and perhaps fiscally the government should examine some transfer of wealth (through tax) from property owners (who benefit from the government subsidisation of high house prices through ZIRP/HTB/FLS) to non-property owners.

      So any economic policy who disadvantages savers (negative rates) and increases property prices do not really help the young.

      1. I think you should distinguish between micro and macro effects. “Many young people have savings” does not invalidate “generally the old are asset-rich and the young income-dependent”. It is a fact that people save and acquire assets during their lifetimes, so even though young people may have savings, old people in aggregate have more. That includes property, which is an illiquid asset purchased by deferring consumption (i.e. saving), usually by means of renting money.

Comments are closed.