General outlines of the NIRP world

МОСКВА, 09 июня 2021, Институт РУССТРАТ.

The modern economy is currently faced with the problem of a genie released from a bottle called “negative interest rate policy” (NIRP). It was launched by the Central Bank of Sweden for the first time as a “very temporary” anti-crisis measure to overcome the consequences of the mortgage crisis in the United States in 2007-2008, which threatened to collapse the entire Western, and then global economy.

For deposits lasting one week, Riksbank set the discount rate at -0.25%. This was supposed to force banks and financial institutions to invest more actively in the real economy, instead of keeping money in their accounts in anticipation of “better times”.

At first, this had the expected effect, thereby prompting the monetary authorities of Denmark and Switzerland to take a similar step. In the next five years, NIRP was tested by Japan and then by the ECB, which set a negative rate of 0.1% for commercial banks that wanted to temporarily deposit their currently unclaimed assets in the accounts of the central bank.

But as often happens, everything temporary often becomes permanent. By June 2019, NIRP had spread from commercial banks to government bonds. In Switzerland, six-month treasury bills went to -0.75%, three-year ones generally reached -0.91%, and even 30-year ones fell to -0.01%.

German government bonds remained in positive territory (+ 0.27%) only for a thirty-year borrowing period, all others, from six-month to fifteen-year, are firmly in the red, from 0.1% for “longest” to 0.76-0.58% for the “shortest”. Danish, Japanese, Austrian, Finnish and Swedish government bonds have negative yields up to a ten-year borrowing period, French and Belgian ones – up to a nine-year period.

It was believed that this was a consequence of the Fed’s strategy of chaoticising the financial world, so that the only island of stable profitability was the US economy, which allowed for positive investment income and thus attracted international investors to voluntarily bring their money to America. I must admit that at first it really worked, but then, in just a year and a half, it was pulled into NIRP and the United States.

As a result, the current situation has developed, when a temporary measure to quickly stop the global crisis of the global economy has turned into a permanent threat, leading the capitalist model of the economy to total collapse. And no one currently understands what to do with it.

It became clear that the Keynesian system of centralised management of the economy through balancing the size of the money supply with the help of the discount rate works only in a very narrow range of external conditions, beyond which the monetary authorities finally jumped out and are forced to try to figure out how to live in the new reality further.

In the theory invented by the English economist John Maynard Keynes, everything looked logical. If the right to print money is granted only to the central bank, it will be able to ensure that the money supply in circulation at any given time is not too small (the risk of deflation) and not too much (the risk of inflation). When there is a deficit, the central bank lowers the discount rate, thereby reducing the cost of borrowing capital “from the money producer” in the person of the central bank, and when there is a surplus, it increases the cost of borrowing through an increase in the rate.

All of this absolutely worked until the United States first pushed through the Bretton Woods system with the binding of world currencies to the US dollar, and then abandoned the gold security of the dollar – transferring world finance to Jamaican in January 1976. So money lost an important function – the accumulation of wealth. It can now be printed in absolutely any quantity. And the world, especially the Fed, actively used it. For example, during 2020 alone, the United States printed more than $9 trillion out of thin air, which was 42.8% of the size of American GDP for 2019. In fact, this is half of the American economy.

But the final nail in the coffin was the so-called “quantitative easing” policy in essence, in simple words, meaning a targeted purchase of “bad assets” of the private sector with the “air money” of the central bank (in the US – with the money of the Fed, in Europe – with the money of the ECB, and so on).

From that moment on, classical capitalism stopped working normally, requiring an urgent search for “crutches”, the role of which is performed by NIRP. To be honest, the “toxic papers” on the balance sheet of the Federal Reserve are deliberately unprofitable, but important, because systemically important private enterprises worth more than $4.5 trillion mean that at least a quarter of the American economy should have gone bankrupt.

In reality, it is about twice as much, due to the close relationship of the largest financial organisations with other, including profitable, businesses. When a bank goes bust, the wreckage from its collapse buries both insolvent borrowers and quite normal ones who just kept their money in its accounts. And then the process takes on the effect of falling dominoes.

Do not think that only the United States has faced such a problem. The ECB has accumulated $3 trillion in bad assets, and the Bank of Japan has $5.2 trillion in bad assets.

In other words, if we return to the management rules of classical capitalism, a catastrophe of the scale of the one in which “all the dinosaurs died out” will happen. Theoretically, this is a good thing, as a result, as it freed up space for the development of mammals, which ended with the appearance of man.

But in practice, this means the complete destruction of the entire world we are familiar with and the inevitable rejection of the absolute majority of social gains, starting with medical care and education, and continuing with the elimination of the sufficiency of food production and the destruction of the usual infrastructure, from the supply of electricity and water to basic civil security.

The ruling elites of the world categorically do not want to allow such a thing, because they are afraid of the unpredictability of the scale of the destructive consequences, which they can not hide from either in the most reliable and equipped bunker, or on the most remote island in the ocean.

This leads to the unqualified conclusion that NIRP is not only for a long time, but it is actually a new reality in which we all have to live. At least for the entire Western economy exactly.

But the main problem is that NIRP doesn’t work. The medicine was worse than the disease it was intended to fight.

The economy we are used to is based on investing capital in profitable projects. At the dawn of capitalism, the total volume and variety of consumer demand was many times greater than the scale of existing production, creating a sense of the infinite possibility of economic growth. Whatever someone produces, consumers will buy it, paying for production costs and creating a profit.

Today, the world has reached the limit of consumption. For example, the average annual consumption of meat per person in the Western world is about 72 kg, and no matter how hard one tries, one just can’t eat more. The same applies to mobile phones. If in 2000–2004 the average consumer bought a new phone every 3-4 years, then in 2019 this figure has decreased to 11 months. Analysts of the clothing market state a decrease in the period of wearing one shirt from 3.5 years in 1999 to 5-6 months – in 2020, and the rate of complete renewal of the average consumer’s wardrobe has decreased from 11 to 1.5 years.

Hence the problem of the growing uselessness of the available money. In theory, NIRP should encourage not to keep money in bank accounts, investing it in immediate consumption or in investing in new types of production. But, as shown in the examples above, people can’t consume more, so they no longer need new production facilities.

There is some confusion between “people can’t” and “people don’t want to” consume more. The desire to have more is present among consumers, but scientific and technological progress and the growth of labor productivity have led to the fact that the incomes of consumers no longer allow this desire to pay.

As an example, China has doubled its steel production over the past 20 years, but it has created 5 times fewer new jobs than old factories. And this is a typical trend of scientific and technological progress. Within the framework of capitalist competition, it cannot be overcome. Not only in China, but all over the world as a whole.

The result is a paradox. To maintain the functioning of the current economy, it requires pouring more and more cheap, ideally even free, money into it. But the more they pour in, the faster they begin to destroy the foundation of the economy – its assets.

For example, Apple’s sales increased 1.9-fold from 2011 to 2016, while its capitalisation jumped 2.3-fold over the same period. It may seem that the difference is not particularly noticeable, but today the sales volume of Apple is only 20% higher than in 2016, while its capitalisation for the same period jumped from 535 billion to $2.2 trillion. Where did this money come from? It is the consequence of NIRP, because the capitalisation of almost all somehow noticeable exchange assets has grown at the same rate.

However, not the stock exchange ones either. It is believed that all the money in the world is in the hands of a tiny group of about 12,000 of the most rich people. This is only part of the truth. And the smallest part of it too. If we take into account not only corporate, but in general all assets, from bank deposits of individuals to owners of real estate, as well as other movable liquid property (after all, any, even a heavily used car can be sold, therefore, it also has some market value), it turns out that big owners own only 19% of the total value of “everything”. The rest is in the hands of the general population, and it is they who suffer most from NIRP.

Unable to keep money in bank deposits, consumers have been actively switching to investing in something tangible over the past three years. First and foremost- in real estate. Because of this, its value is experiencing rapid growth, causing three negative effects at once.

The first is that an owner is less and less able to profit from the increase in real estate prices. For the money earned for the existing asset, they can no longer buy something better. On the contrary, in view of the total rise in price of absolutely everything, they will only be able to buy something worse than what they had.

Second – because of the sharp and incessant rise in the price of housing, it is becoming less accessible to the average consumer, even if they have a good job and an income above the median level. Even a mortgage doesn’t save them. To date, more than 62% of housing is sold in the world on credit.

According to industry experts, in the next 10 to 15 years, the share of mortgages will rise to 75-78%, while simultaneously dramatically reducing the size of the total area of one property. If the area of a one-room “Khrushchev” was about 30-31 square meters, then today a “one-bedder studio” with a total area of 26 meters no longer surprises anyone. On the contrary, this sector is now the fastest growing in the housing industry.

The third is to accelerate the degradation of the rental market. Because of its rising cost, it is becoming less and less profitable to invest in residential real estate for the purpose of its subsequent rental. If in 2000-2005, the ratio of the average rent to the commercial value of the rental property gave the owner up to 12-14% annual yield, today this figure has decreased to 4-5% and continues to fall. Nevertheless, buyers continue to invest in real estate, as even plus 4% per annum is better than -0.75% when investing in a bank deposit due to NIRP.

Consequently, in the coming world of NIRP, housing will not only become smaller in area and unattainably more expensive in cost, but the process of “improving housing conditions” as a whole will slow down. I.e., the average area of housing per person, which was growing for almost a hundred years, in the near future, on the contrary, will begin to decline.

Corporations are beginning to calculate and feel this trend today, actively expanding the advertising of the idea of a new format of social welfare in the form of “you don’t need to own anything, because rent is cheaper”. Why do you need your own car if you have car-sharing? This is not because there is a new generation of freaks who do not want to live by outdated social rules.

This is because the rise in the cost of everything makes ownership available to an increasingly dwindling share of consumers. And to stop the risk of an increase in the probability of a total social explosion, corporate marketers are beginning to try to change the very social understanding of the natural level of material well-being to the format “pay only while you use it, and do not pay when you do not need it”.

For many, this sounds beautiful, fresh, innovative, progressive, but leaves out the fact that the classical model of the economy assumed a natural increase in consumer welfare over the course of life. In it, the young were always poor, but then, during their lives, they acquired their own housing and savings, which then provided a decent life in old age. The active development of the pension system since the mid-20th century has changed this model slightly.

One can argue about the degree of sufficiency of pensions and compare their level in different countries, but this in any case does not negate the main thing. Over the course of life, the level of material well-being of people normally increased. NIRP also destroys this mechanism.

Negative returns on the main financial instruments deprive the pension system of income, since the money accumulated by pension funds has nowhere to invest in order to receive income, and not a loss.

There is a vicious circle. To restore the effectiveness of the pension system, it is necessary to cancel NIRP, but this cannot be done, since the entire economy will collapse, burying all categories of the population, including pensioners, under its rubble.

This is where the roots of all modern global modernisation ideas come from, primarily in the direction of an early total transition to “green energy”. The money supply accumulated as a result of the monetary policy of the last quarter of a century in the economy literally burns the hands, threatening to simply evaporate over the next two or three decades. In the current external conditions, there is simply nowhere to invest it. While the “green energy transition” will require investments in volumes not only comparable to it, but even significantly exceeding it.

For example, if the existing fleet of such countries as Britain, Germany, France or the United States is completely converted to electric, it is necessary to quickly, literally one or two decades, increase the volume of electricity generation at least 5 times more than its current level. Plus, by almost an order of magnitude, increase the volume of infrastructure, from new electric charging stations instead of gas stations, to power substations and power lines.

The potential investment capacity of the idea is so large that it can absorb all the “extra money” and demand more, thus solving the problem with profitability. No, the gold backing of money will not return, money will continue to be printed out of thin air.

But investing in long-term infrastructure projects, in the face of a sharp increase in demand for results, and even with contractual guarantees of their return and profit over long time periods, calculated in decades, looks like a great alternative to the current state of affairs, because, instead of the current losses due to NIRP, it will make a profit.

Yes, everyone understands perfectly well that for the” green energy transition”, at least for the batteries necessary for it, there is simply not enough raw materials on the planet. First and foremost, non-ferrous and especially rare-earth metals. But at the same time, the growing demand for them promises to accelerate progress in space exploration.

Not just to fly to the Moon once again for the sake of ephemeral state prestige, but for the sake of gaining the opportunity to deploy mineral extraction in the asteroid belt, where their number exceeds all the earth’s reserves by orders of magnitude. This, in turn, is also a very, very promising and large-scale direction of investing “extra money”.

However, in the process of implementing these “revolutionary ideas”, as well as in view of the immediate obvious consequences of NIRP, especially in terms of destroying the existing model of social guarantees, primarily pension provision, in the coming new world, it will be necessary to somehow solve the problem of the population’s income.

Because in the context of NIRP, as was shown above in the example of the metallurgical industry in China, even taking into account the “green energy transition”, the number of jobs, especially high-paid ones, will begin to decline. And people need something to eat, something to live on, and something to support the scale of consumption, without which production itself and any trade loses its meaning.

Most likely, in this direction, we should expect an increase in the scope of the “basic unconditional income” mechanism. How exactly it will be arranged technically is still impossible to say clearly. But in any case, it will be tied to receiving money from the state, as the main and only one of the “producers”.

Thus, the volume of personal savings will decrease, as the size of the property owned by citizens will inevitably decrease. No one will give out to everyone an elite sports car. Rather, we should expect a trend towards rationing of all types of consumption.

This is both bad and good. It’s bad because the usual fat times will end now. There will be something like the “dark ages”, if we draw an analogy with the historical period of the collapse of Ancient Rome. But this is a good thing, because space exploration will require tens of millions of “colonists” who will not appear if people are asked to choose between risk and hardship or the already well-fed well-being.

In fact, the world is coming to a state similar to the era of the “discovery of America” and the mass colonisation that followed there, which promised a lot of buns, but also carried with it no less risks. In particular, for life literally. However, compared to what the Europeans at that time had at home, such a future seemed like a huge positive chance. In particular, due to the absolute absence of any other alternative.

And as can be seen from the above, there is no alternative to the advent of the world of NIRP, either. More precisely, formally, there is an alternative, of course, but its price and the inevitable consequences are even less acceptable. What such a world, the world of nanopunk, will represent is very well shown by the wonderful series “Altered Carbon”, and, well, if I may, “Westworld”.

Институт международных политических и экономических стратегий Русстрат

(@russtrat)