Negative interest rates and the redistribution of…

The background

Negative interest rates are currently a hot topic. Mainstream economists consider them necessary since

    • overall public debt levels are at historic highs (as a result, monetary policy has continuously adopted the goals of fiscal policy),
    • the stability of the financial system is fragile due to high-risk assets in the balance sheets of banks (over- and mal-investments), and
    • the «monetary guardians» at the central banks (who does watch them btw?!) are the only people that have enough leverage to «inflate» away the ubiquitous problems!

The rationale behind such a monetary policy goes as follows: Negative interest rates pressure people to spend money, aiming at cranking up the economy. Doing so, central banks discourage savings and thus long-term investments. However, as long as there is cash money, people have means for avoiding the consequences of such a policy by withdrawing all funds deposited at the bank (the «zero lower bound» problem).

Redistributive effects

Without entering into the details here, this short article seeks to explain the most common redistributive effects attributed to policies introducing low or even negative interest rates:

Redistribution from poor to rich

Low and negative interest rates disproportionately affect poor people because they are not able to diversify in assets that are less prone to inflation; in other words, poor people are more subject to the effects of financial repression than the rich.

Redistribution from the manufacturing sector to the banking system

The «Cantillon Effect» implies that people «closer to the money» disproportionately benefit from cheap money. By being able to buy assets (estate, stocks etc.) earlier than others, they can buy in at low prices. Employees in banks and corporations as well as politicians are favored by the Cantillon Effect.

Redistribution from the private sector to the public sector

Governments can refinance their debts at artificially low prices. Many investors, such as pension funds, are legally obliged to hold government bonds; their legitimate earnings are de facto confiscated.

Redistribution from small and mid-size companies to big corporations

Big corporations disproportionately benefit from lower refinancing costs on financial markets (instead of bank borrowing); also, they are economically incentivized to engage in «empire-building», mainly through mergers and acquisitions.

Redistribution from young people to old people

As a consequence of the redistributive effects mentioned above, younger people earn less (in real terms) and can save less than previous generations (assets are more expensive in both relative and absolute figures).

Redistribution from the periphery to the center

Since banks, big corporations, and politics are usually located in specific urban areas, people move there, which eventually causes wages and rents to increase even more.

In sum, even if the redistributive effects are smaller than expected, monetary policies of such kinds are highly antisocial. The worst part is, however, that the negative consequences do not materialize immediately but only after some time. Tragically, they often go unnoticed by the people most concerned.