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 much deeper into debt to buy everything we desire. As a consequence businesses find it more difficult to make a profit. Perhaps enough is enough. The writing is on the wall. The financial crisis of 2008 may have been a warning sign.
The crisis happened because some people couldn’t pay the interest on their debts. There is too much debt and too much interest needs to be paid. 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 some 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 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.
What has this to do with interest rates? If we need more stuff, we need more businesses so 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, things change. There would be abundance instead of scarcity and we do not need more savings. Yet people will save more because they don’t need more stuff, so interest rates need to go negative to make people save less.
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 areas 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, so that an era of unprecedented peace and prosperity may begin.
Featuring image: Slums built on swamp land near a garbage dump in East Cipinang, Jakarta Indonesia. Jonathan McIntosh (2004). Wikimedia Commons.