Negative Interest Rates

Published in Barron’s.

In “The World Created by Upside-Down Interest Rates” (Current Yield, May 24), Jim Grant rightly observes how remarkable it is that the world’s monetary system has produced more than $10 trillion in debt with negative nominal interest rates. That would have been judged simply impossible by virtually everybody until it happened.

To understand this curious outcome, I believe we have to see it as deriving from a previous monetary event that also had no historical precedent: the world-turning-upside-down arrival of the whole global monetary system becoming based on pure fiat currencies—on the mere paper or accounting creations of central banks.

This system appeared in 1971—quite recently, historically speaking. About its prospects, Milton Friedman later wrote, “The ultimate consequences of this development are shrouded in uncertainty.” The consequences so far have included making central banks so powerful that they can render a huge swath of interest rates negative, a result certainly not foreseen.

How has the fiat system otherwise performed? Well, we have had financial crises in the 1970s, 1980s, 1990s, 2000s, and 2010s. Quite a record. The pure fiat currency, central-bank-trusting system might possibly be the least bad monetary system, but it is evidently far from perfect. Its further long-term consequences still remain “shrouded in uncertainty.”