At some point we may not need more products and services, and even if we believe we do, we may not be able to go deeper into debt to buy everything we desire. As a consequence businesses will find it more difficult to make a profit. Perhaps enough is enough. The writing is on the wall. The financial crisis of 2008 was a warning sign.
The crisis happened because some people couldn’t pay the interest on their debts. This nearly brought down the entire world financial system as well as the world economy. If there had been fewer debts, and if interest rates had been negative, the financial system as well as the economy would have been safe.
Interest rates have gone down in recent decades. In wealthy countries they neared zero in the aftermath of the financial crisis. Most people think they will go up again. But what if the opposite happens? What if negative interest rates become the new normal? That will turn economics upside down. Scarcity is at the basis of economic thinking. It is the belief that we need more stuff and more businesses to make all that stuff available to us.
So what has this to do with interest rates? If we need more stuff, we need investments. To make these investments possible we need savings. And to have savings, we need interest. Consequently investments need to be profitable to pay for the interest. But if we don’t need more stuff, a lot of things change. There would be abundance instead of scarcity, and interest rates could go negative as many investments make no sense.
Negative interest rates may happen first in wealthy countries where people already have enough. Investment money will then look for more profitable alternatives and move into poorer regions so that poor countries can build their economy too. To make that happen, interest rates in wealthy countries must be allowed to go below zero, and people in wealthy countries should not be lured into taking on debt they can’t afford.
Not allowing for negative interest rates could be a mistake. The alternative may well be an economic crisis like the 1930s. Scarcity will then become a self fulfilling prophecy. The era of abundance could then be pushed a few decades further into the future. That is, if the economic crisis is not followed by another world war.
Featuring image: Slums built on swamp land near a garbage dump in East Cipinang, Jakarta Indonesia. Jonathan McIntosh (2004). Wikimedia Commons.