The Path to the Final Crisis by Pater Tenebrarum

‘… negative interest rates could not exist in an unhampered free market. They are an entirely artificial result of central bank intervention. The so-called natural interest rate is actually a non-monetary phenomenon – it simply reflects time preferences. Time preferences are an inviolable category of human action and are always positive.

Market interest rates consist of the natural interest rate plus two additional components: a price (or inflation) premium that reflects the expected decline in money’s purchasing power, and a risk premium or entrepreneurial profit premium that reflects the perceptions of lenders of a borrower’s creditworthiness and generates an entrepreneurial profit for those engaged in lending.

One often reads that interest is the “price” of money, but that is actually not quite correct. It is really a price ratio, the difference between the valuation of present against that of future goods. An apple one can obtain today will always be worth more than a similar apple one can obtain at some point in the future. If time preferences were to decline to zero, people would stop consuming altogether. All efforts would be directed toward providing for the future, but they would never see that future, because they would starve to death before it arrives.

In theory, time preferences can rise almost to infinity: for instance, if an asteroid were to hit Earth in two week’s time and we knew for sure that it would destroy the planet, it would no longer make sense to provide for the future. Saving, investment and production would stop, and everybody would confine himself to consumption. But the opposite can never happen, since we cannot just stop consuming. As long as time passes and there is a “sooner” and a “later”, there simply cannot be zero or negative interest.

First of all,  we would note here that ever since negative interest rates on bank reserves have been imposed, there has been a concerted media campaign with assorted statist bien pensants  arguing in favor of a cash ban under a multitude of pretexts (apart from breathing air, criminals use cash, and we have to make central bank intervention more effective). These were the usual suspects, such as e.g. Mr. Summers and Mr. Rogoff in the US (representing the two main wings of establishment-approved statist economic thought, namely Keynesianism and Monetarism) and their counterparts in other countries.

Consider that in spite of having to pay penalty rates on reserves, commercial banks have as a rule not passed negative rates on to their customers, precisely because they fear that this could lead to a run on deposits. Obviously, if our vaunted central planners continue to try to force people to increase their spending and consumption (putting the cart before the horse is their idea of creating “economic growth”), the idea of simply making cash withdrawals impossible must seem tempting. For obvious reasons, banks would also not be averse to this. And lastly, a cash ban would utterly destroy financial privacy, installing a system of total control.

However, as we have previously discussed, extending negative interest rates beyond the realm of bank reserves would hasten the arrival of a profound crisis, as it would lead to widespread capital consumption. The complex latticework of the economy’s structure of production would become increasingly fragile as entrepreneurs would withdraw their capital to consume it or to render it inert (by e.g. buying gold) in order to wait for better times.

Apart from this campaign to either ban cash or make its use beyond certain amounts illegal (cash payments exceeding certain thresholds have already been banned in several European countries), we can be fairly certain that there are no limits to the creativity of central bankers when it comes to fighting a crisis of confidence. But there are other limits: whatever they decide to do will only work as long as confidence in state-issued fiat money itself doesn’t evaporate.

Negative interest rate policy is inherently self-defeating, as are more traditional forms of monetary pumping. The aim is to rescue a system that has been brought to the verge of implosion after too much unsound debt and too much malinvested capital have accumulated, by creating even more unsound debt and provoking even more capital misallocation. This, in a word, is insane. While debt continues to grow, the economy’s ability to create the wealth that will be required to repay it is concurrently undermined.

We cannot be sure what shape the next crisis will take, although it seems likely that it will be yet another “deflation scare”, mainly caused by falling asset prices. However, we do know what the last crisis of the current system will look like. It will entail a crumbling of the public’s faith in fiat money and the institutions that issue and administer it.

Ironically, repeated deflation scares are actually hastening the arrival of this long-term outcome, as they provoke ever more extreme policy responses, all of which tend to end up boosting the amount of outstanding money and credit.

The entire article can be read here.

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