Negative interest rates have a pernicious effect on human beings. They corrode the structures of society, culture and people’s mindsets, triggering widespread resignation and even nihilism.
Imagine
an inverted universe – where the arrow of time is in reverse. As a result, the
present is richer than the future. The defining property of this universe is
negative interest rates.
In such
a universe, time and value flow backwards and downwards, meaning from more to
less.
Capital
is no longer allocated to the highest return projects or the projects that
create the most value. In such an environment, the financial system’s basic
operating principle becomes relative value destruction.
As we
are entering the netherworld, we need to recognize that this trap is not a
flight of fancy. We don’t need to unduly stretch our minds. Such a universe has
existed before. We have two recent historical examples that point to the
endgame awaiting us.
Historically,
the first of them is the case of the Soviet Union, which we will consider in
this article. There also is the case of Japan, with will we will deal in a
subsequent article.
Subzero
interest rates froze the Soviet Union
It was
not communism that caused the collapse of the Soviet Union. China proves the
case that communism, when allocating capital to high-return projects, can
succeed in growing its economy.
The
Soviet Union collapsed because of negative interest rates. Generating economic
waste wasn’t always the rule in the Soviet Union. The rapid and shockingly
brutal industrialization of the Soviet Union in the 1930’s raised eyebrows. Its
industrial output is also credited with an event of geo-historic proportions,
stopping Hitler’s tanks.
Obvious
to all by the 1970s, Brezhnev-era administrators were not able to discriminate
between high-return and subzero projects. The credit allocation system was
rendered useless with policies like uniformly set interest rates, de facto at
negative levels when bad loans were rolled over rather than repaid
Capital
was not allocated to the most promising projects and ideas, and failed to
generate positive cash flows. Countless state-owned Soviet enterprises could
not pay back their debts. Debt forgiveness also meant an unproductive,
zombielike economy.
More
broadly, the particularly pernicious effect of negative interest rates, with
its stench of death, reaches far beyond the corporate or finance spheres. It
creeps into all aspects of life.
Simply
giving up
Under
those circumstances, it wasn’t much of a surprise that the very nation that had
once heroically stopped the mighty German Wehrmacht with superior will and
hardware, simply conceded in 1989.
The economically
and financially uninitiated had always believed that the Soviet state would go
with a big military bang, but it just closed shop. Tragically so. Suffice to
mention that life expectancy in Russia collapsed from 69.5 years in 1988 to
under 65 years only half a decade later (now it is higher than ever at 71.6
years).
Conclusions
1. Low
interest rates do not just rob people’s future. What the advocates of such
policies neither properly comprehend nor articulate is their real-life effect:
The worrisome forms of resignation and nihilism that inevitably arise in the
wake of deflated money prices.
2. There
is no sugar-balling the fact that subzero interest rates transform society,
culture and mindsets.
3. The
wasteful, but economically predictable zombification of the Soviet economy
should serve all of us as a powerful reminder as to what is at stake – for the
entire West this time around.
Russia’s
current interest rates are truly not Soviet in character anymore. Ironically,
the usual distribution of rules for market laxity and discipline might have
reversed between East and West.
As
Christine Lagarde takes over her job at the European Central Bank (ECB) she
could take a leaf out of Elvira Nabiullina’s book. Her colleague at the Central
Bank of Russia (CBR) is admired for her integrity and as one of the toughest in
the world.
While
the ECB executed its race to the bottom, the CBR had no qualms raising interest
rates as needed – up to 17% in 2014 – for the sake of preserving long term
monetary stability, and much more.
****Tomas
Casas i Klett is Assistant Professor at the University of St. Gallen’s Research
Institute for International Management (FIM-HSG), Director of the China
Competence Center (CCC) and Director of the Competence Center of Top Teams
(CCTT).
Tomas is
visiting professor and member of the Academic Council and advisor to the Dean
at the Moscow School of Management SKOLKOVO. He is also visiting Professor at
Shanghai’s Jiaotong University (Antai) and Fudan University (FDSM).
His
research interests include free-trade agreements (FTAs), entrepreneurship and
digitalization, top performance teams, the Belt and Road Initiative (BRI),
behavioral economics, narrative economics, cross-cultural management and Asia
innovation models.
Tomas
was a “Salaryman” in a Japanese kaisha in Tokyo for 3 years, and an
entrepreneur in China for 15 years. He has developed a variety of high-impact
courses drawing from praxis, specializing in executive education. His approach
revolves around strategic transformation with value deliverable to participants
and their organizations. He was a member of the World Economic Forum’s Global
Future Councils (2016-2018) and is a WEF Expert Network member.
His
first published book was on Japan’s challenges and potential titled “Japan’s Open
Future: An Agenda for Global Citizenship” (co-authored with J.P. Lehmann and J.
Haffner). His latest work is an edited book titled “The Life of Russian
Business: (Re)cognizing, (Re)activating and (Re)configuring Institutions.”
Tomas holds a BSc from the Wharton School,
University of Pennsylvania, USA, a MSc from Fudan University, China and a PhD
in Economics from the University of St. Gallen, Sw