Synthetic Economy: Interest Rates

For as long as mankind has known money, we’ve known that a dollar (or pound, or shekel, or whatever) in hand today is worth more than a dollar in hand next month, or next year.  And if we want to borrow someone else’s dollar so that we can use it today, then it’s appropriate to pay him something—interest—for the temporary use of his asset.

Historically, interest rates varied with the state of the economy, and served to regulate economic activity.  If an economy gets ahead of itself, interest rates rise, borrowing becomes difficult, and the economy brings itself back into balance.  At least, that’s what happened in the past.

For almost the last decade, the Federal Reserve and the banking system have worked to keep interest rates low.  For the Big People economy overrun by debt that can never be legitimately paid off, it’s a survival mechanism.  By keeping the cost of debt service low, debts can be kept current, and life goes on.  And if there were a way to make interest rates negative, debt could be unwound.

Of course, the Synthetic Economy doesn’t share in the benefit.  For the little people, money has to remain scarce, and interest rates—at least for debts—have to remain positive.  So we still pay 20% on our credit cards.  And while rates for mortgages have remained low, they’ve become more difficult to get since the 2008 implosion.  The banks, we’re told, want to stay away from risky investments.

So, what happens as a result?

  • The big banks get bigger, and the little banks get bought out. It is very difficult for a bank to exist as a creature within the Synthetic Economy, because it can’t compete with the big banks that can freely synthesize money out of nothing.
  • Saving becomes pointless. When I was growing up, in the 1960s and 1970s, banks paid 5% on ordinary savings accounts, and higher rates for time deposits.  While, in most cases, that didn’t keep up with inflation, at least, you felt you were accomplishing something as you watched your savings increase.  But if the bank is paying 0.1%—a dime for $100 for a year—why bother?
  • The stock market becomes the only game in town. If you want to do better than a fraction of a percent, and remain liquid, your most practical choice is the stock market, outside the Synthetic Economy.  This is true not only for individuals, but for pension funds entrusted with securing retirement for the little people.  Yes: if you watch the market and are careful, you might be able to secure a decent return.  But the days when you could pick a solid corporation, buy its stock, and come back twenty years later expecting a meaningful return are long gone.  And the market could always burp and take half your investment with it.

At this point, the Federal Reserve has hit the wall.  For now, interest rates can’t really go negative, because even if the banks charged rather than paid interest on savings, one could simply hold cash.  But even that may change.  Chase has told its safe-deposit customers that they may not store cash in their safe-deposit boxes.  And now, technology has gotten to the point where electronic transfers are cost-competitive with cash for all but the very smallest businesses.  (We may not think of it that way, but processing cash costs money for businesses: it has to be counted, tracked, transported to and from the bank, and secured.)  In 1969, the Treasury stopped issuing US currency in denominations larger than $100, to discourage drug trafficking.  (Alas, we know how that turned out.)  It wouldn’t be much of a stretch, particularly in response to some real or imagined crisis, to go further.

3 thoughts on “Synthetic Economy: Interest Rates”

  1. Not everyone pays 20% on their credit cards. Even if I carried a balance, I have access to credit cards that charge interest in the 8-10% range, which is still ridiculously high.

    How can Chase check to see whether cash is being stored in the safe deposit boxes? They might not cover cash stored in the safe deposit box if the box is broken into. I doubt that they would want to pay the locksmith’s fees to cut an additional key, though there is no reason why extra keys can’t be made initially. It does give the lie to the idea that the key that is in your possession is necessary to open the safe deposit box.

    There is a breakeven point between the costs of handling cash and the fees charged for credit card use, but I don’t know how to formulate the equation. My guess is that handling cash is a relatively fixed cost (some amount of labor to close out cash registers and count the tills plus time to take the money to the bank and some fraction of the value of the cash as a risk premium for the chance of the courier being robbed) and credit card fees are a variable cost. If a bank is located in the store, as more and more grocery stores do, and the store banks with the bank whose branch is located in the grocery store, the risk of having the money stolen en route declines.

  2. Another factor in cash vs. credit card use is time. There are some fantastically busy lunch places near my office, and most people pay with cards or smartphone apps. If they had to make change for all their customers, they’d need more cashiers: not just the employees, but space in the store that would have to be taken away from something else.

    To be sure, paying by card or app is a convenience, but it also accustoms people to not using cash.

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