torsdag 12 februari 2015

Negative Interest Rate: Interesting Experiment!

Switching the interest rate from positive to negative makes a stable system unstable and vice versa.

The Swedish State Bank decided yesterday to set the so-called repo interest rate to - 0.1%, thus a negative interest rate between the State Bank and commercial banks. Nobody knows how a monetary system with negative interest rate really works, and so it is an interesting experiment. It is also being tried in e.g. Switzerland, the land of banks, and by ECB.

A negative interest rate is like a negative friction or dissipation mechanism in a physical system, which is an unknown phenomenon: frictional and dissipative losses are positive or zero, but never negative!

So what does then negative dissipation mean in a mechanical system? Well, it changes the direction of time and thus switches the cause-effect relation. This means that a stable system becomes unstable and that conversely an unstable system may become stable.

Suppose now that our capitalistic system in its standard form with positive interest rate is unstable, which we all fear and which according to experience may well be an actual possibility. By switching the interest rate to be negative, we could then hope to stabilize this potentially unstable system and the negative aspects of the capitalistic system could be eliminated, right?

This must be the idea of Stefan Ingves as the boss of the State Bank, when he decides to set a negative interest rate. Ingves is a smart guy but the question is if the switch also turns stable systems into unstable systems, and if so what negative effects that could have on our economical system.

This connects to an earlier post on the relation between interest rate and inflation, where it seems that in the standard system, it is the inflation that sets the interest rate (to be essentially equal), and not the other way around, as is the mantra of Stefan Ingves. But with a switch to negative interest rate, the cause-effect relation would switch and thus Ingves dream of controling inflation by interest rate would come true. The only drawback would possibly be negative inflation...

2 kommentarer:

  1. Hi Claes you might be interested in Steve Keens Minsky model which has modelled Minsky's instability hypothesis. Endegonous money creation effectively guarantees the periodic crises in Capitalism.Neo Classical economic models ignore money. What the Swedish Government needs to do if it wishes to prevent debt deflation is institute a citizens income and prevent the Private Banking system from creating money as debt. QE does not work 375 billion wasted in the UK proves that pretty conclusively. Heres the source files for Minsky and the Kickstarter page with some interesting explainations from Steve Keen.

  2. Negative Interest rate
    Central banks use interest rates to control economic activity – they raise interest rates during times of high growth and inflation and lower them during times of recession and deflation to avoid serious economic fluctuations.