The horizon is not so far as we can see, but as far as we can imagine

A negative interest rate world? Why?

Umair Haque writes:

Why are we approaching the new normal of a negative interest rate world? Simple. There’s nowhere good left to put all the money.

Umair is referring to all the countries who are now offering bonds with negative real interest rates.  You get back less money than you put into the bond.  People are buying these because they have nowhere better to put their money.

Now this isn’t entirely accurate.  There are still some better places to put money, but there aren’t enough of them.  And there is a ton of money out there chasing returns.

Why there is too much money chasing returns is important, however, so I’m going to tease apart some of the reasons.

Central Bank Policy

Look, the ECB is buying bonds.  The BOJ is buying bonds.  The US was doing so.  This is demand.  It pushes the yield of bonds down.

China is printing piles of money, Japan is printing it, etc…  That money isn’t staying in those economies, it is hunting through the world for returns or even just security.  Federal Reserve policy has put a floor under losses from various securities by accepting that at near par, and Fed policy of free money has underwritten an epic bull market in securities.

No cleanup of the banking or shadow banking systems.

Most money is created by private actors.  Banks, shadow banks (brokerages, etc…)  There is no effective oversight of these organizations, still (you’d think after 2007, but you’d be wrong.)  In fact, not only is there not enough oversight, but in most cases they’ve been effectively encourages to create more money.  We have another derivatives bubble underway, we have housing bubbles in multiple countries (e.g. Canada and the UK), and while the US doesn’t have one, parts of the US, like Manhattan, do.

Oligopolistic profits.

US broadband profits are almost 100%-annualized.  Every app store takes a 30% cut (a level which would have been shut down by regulators of the post-war liberal period.)  Copyright law makes it difficult to impossible to create generic alternatives to common items.  These have all led to very high profit levels, and those profits have largely been plowed back into stock buy backs (most corporate borrow is matched by stock buy backs).  But much of the economy is not available to be bought on the stock market, many large investors can’t invest on the stock market by law (they have to invest in high-grade bonds), and much of those profits are now priced into stock prices anyway.

(I am fundraising to determine how much I’ll write this year.  If you value my writing, and want more of it, please consider donating.)


In the United States more than all the gains of the last “recovery” have gone to the top 10% (really the top 3% or so.)  There has limited broad based demand for new goods.  Luxury goods, investment art, and London and Manhattan real-estate do not scale.  Without widespread demand, opportunities for new businesses, with new employers, are limited.

Barriers to Entry

Much of this came under oligoplistic profits. Draconic “intellectual property” laws make it difficult to compete, bringing prices down and increasing volumes while freeing up money for people to spend on other things.  30% cuts from app stores and other virtual marketplaces make many businesses simply unprofitable—first they must make 30% for Apple or whoever, then they get to make a profit for themselves.  But if you aren’t on those virtual marketplaces (and there is usually one which controls most of the business) you will not make enough sales to be viable.  This sort of “you make no money without us, so we’ll take all the profits” behavior is little different from what the railroads did to farmers in the late nineteenth and early 20th centuries.

And while there’s tons of credit for big business and people who are already rich, a new business trying to get funding faces huge barriers to getting money. It’s boutique investment, it requires a lot of time, and most investors would rather just buy bonds, structured securities, or play the stock market.  Money may be cheap, but not for you.

Supply Bottlenecks

In a larger sense the issue is that we still haven’t dealt with supply bottlenecks like oil. Get a roaring economy going again, oil will spike to $150/barrel and the economy will crash.  The solar roll-out is underway, along with the wind one, but it hasn’t (yet) changed that reality.  The same is true of many other commodities.  If we want distributed growth in a world with constrained commodities, well, we can’t have it.  We have to remove or avoid those bottlenecks.  This requires deliberate government policy, but we have dodged the issue since the 70s (solar should have been where it is today 15 years ago, but Reagan chose an oil play, not a solar play, and chose to crush wages to crush demand.)

The absolute obsession with inflation is really about wage inflation, and the obsession with wage inflation is about widespread consumer demand causing commodity inflation.  We’re moving towards a deflationary world (for ordinary people, there is vast inflation in goods and services the rich consume), but our policy makers are still in asuterity “crush employment and wages” mode.

No Future Till The Current Rich Can Monetize It

We could have had a lot of what we have today many years ago.  But the rich control the politicians, and the politicians won’t allow it to occur.  There was great squealing for years about subsidies for solar, and corruption in how they were given out, but they were always a rounding error compared to subsidies for oil, let along the military-industrial complex, big agriculture, pharma, health insurance, and so on.  All of those industries were powerful enough to strangle subsidies to competitors (solar, generic drugs, whatever) and strong enough to insist on new laws which strangled startups and competition (every copyright extension is nothing but an anti-competitive measure intended to keep profits coming to incumbents.)

Bottom Line

We have too much money chasing too few returns because we’ve spent 40 odd years making sure that ordinary people get less and less money; the rich get more; and that oligopolies are nurtured and protected.  The rich control government, and they intend to make sure that all the money goes to them.  Unfortunately, in a mass market economy, that means the economy becomes lousier and lousier.  This doesn’t matter to the rich because they are comparatively better off. Better a Czar amidst serfs than the CEO of General Motors in 1955.



The Right Thing to Do: Homeless edition


How We Can Change Our Destiny As A Society


  1. Gee

    Um, buying bonds pushes the price higher, and the yield or return lower. So, yes, you are making the right point in that the return is lower, but also using some iffy language.

  2. Ian Welsh

    Yes, I meant yield. Thanks Gee.

  3. Also your last sentence would have more punch were it edited…

  4. EGrise

    @Mandos, I agree, perhaps change that last “and” to a “than”?

  5. Ian Welsh

    Crowd sourced editing. Thanks! (woops)

  6. Greg T

    This encapsulates the current state of play in western economies. It is, however, highly unstable. The means to maintain this oligarchy will require greater repressive measures with each new crisis event.

    People are becoming aware in greater numbers of what western oligarchs plan for them. Permanent serfdom. The super rich will seek to make permanent their too-big-to-fail status. This must be done at increasing cost to the rest of us.

    When a system becomes manifestly unchangeable through normal channels, extra normal channels will be used. We’re seeing resistance globally. Russia and China are leading a faction of nations opposed to Western spread of corporate feudalism. Movements in Europe, beginning in the southern rim have risen in reaction to the savage feudal measures imposed by the north. Even populations in the northern core nations are restive. People know that the same draconian methods will be used on them.

    Change is coming. The only question is how violent or destructive it will be.

  7. Zozimus

    The Archdruid’s last 2 blog posts provide a compelling explanation for this and it’s quite profound.


    He basically argues that the system is beginning to collapse – something I think most IW readers understand, but JMG provides a clear glimpse into the underlying mechanism. Negative interest rates would be a symptom.

  8. Ian Welsh

    Yes, the issue of externalities is one I’ve discussed in the past, as well, but his explanation is very clear.

  9. Pelham

    Developed economies appear to be on a steady downward track, but two essential elements for fundamental change appear to be missing:

    1) Revolutions generally occur when the masses are doing a bit better materially, perhaps because they feel momentarily secure enough to rise up in anger. But the vise grip on the middle and working classes is only getting tighter, so there’s little likelihood of this;

    2) Revolutions generally succeed when the rulers lose faith in their own class or system, but that’s very, very far from the case now. Our elites can’t even imagine an alternative.

    So I suppose we’re headed for a de facto return to, not feudalism, but something a good deal worse, like the early days of industrialization.

Powered by WordPress & Theme by Anders Norén