by Will Schreiber

Will negative interest rates lead to Marxism?

I got into an email exchange with TP from Shit I Didn’t Know about declining interest rates.

I’ve recently been thinking about this chart of declining interest rates over time:

Chart by Paul Schmelzing at the Bank Of England

  1. Why is it consistently declining? Probably a combination of better technology and increasingly more wealth/capital in the world…
  2. So, now what? Hmmm…

TP sent me this provocative Peter Thiel quote:

There is a Marxist theory that the time for Communism would come when interest rates went to zero because the zero percent interest rate was a sign that capitalists no longer had any idea what to do with their money. And there were no good investments left, which is why the interest rates went to zero, and therefore the only thing to do at that point was re-distribute the capital. It doesn’t mean that zero-percent rates lead us to socialism, but I find it alarming that rates are as low as they are.

Eh, I think that’s over-narrating the fact that there’s just a ton of capital out there in the world. Wealth has increased tremendously over the last 100 and 500 years, but all our scarce resources have stayed about the same.

Capitalism has become a “victim of its very success.” Yet I don’t know who the victims are. Let’s say interest rates go negative. Who’s the loser?

Low interest rates are good for poor people and bad for rich people. Low interest rates should theoretically shift power back toward labor, entrepreneurs, and engineers because more capital is being pumped into companies, boosting wages while simultaneously diminishing returns on investment.

I do agree with Thiel’s “Where are all the good ideas?” worldview. We’re less bold and less energetic and less full of dreams as compared to 50 or 100 years ago. I often think about what it was like in the 1950’s when everything seemed possible, when every new invention was cheered and welcomed, when we thought that curing cancer was not only achievable but was an eventuality within the living’s lifetimes. Now, nobody thinks cancer is even completely curable. It is an absurdity to think.

A few predictions for a low or negative interest rate world:

  1. Investors will be ridiculed

Determining where to allocate capital gets a lot harder. People rip on startups and VC funds for pouring money into stupid shit like Brandless. But when all investments promise the same meager returns, how do you determine what’s worthy and what’s not? Nobody sane would give Brandless $250 million when you could put $250 million into safe corporate bonds earning 8% APR.

  1. Resource allocation will become more political and more controversial

How long can the system sustain investment stupidity? Managing funds used to be easy: put money where returns are the highest. Now, there are no returns except for outliers. Everybody is chasing the next Facebook. Power laws have never been so extreme.

The market used to guide where to put money: companies and governments with certain risk profiles needed bonds and offered certain rates. Investments could flow through these different tranches and the market dictated money needs.

Now, everybody “needs” money and all the returns look the same.

Thus resource allocation will become much more politically fraught, with investments needing moral justifications in addition to economic justifications.

  1. Social mobility will be narrower but more extreme

With fewer economic signals, the economy will become more stagnant. But the winners will be massive winners because valuations will be wild, and those at the top will struggle to grow wealth the way wealthy families grew wealth in the past.

There will be more Zuckerbergs and Bezoses who rose from relative obscurity to massive power overtaking the entrenched political families, yet the average mobility of the average citizen will probably be more static in the next 100 years than in the past 100 years.