Thinking about negative interest rates

by Jehu

I have used this chart before. It shows that, presently, many of the most important economies of the world market have interest rates that have plunged below the zero lower bound.

This event is so unprecedented in economic history that no one knows what to make of it. Prior to a decade ago or so, no one even thought it possible that lenders would advance credit at a loss. But here we are.

Germany bond yield curve, September 6, 2019 (Source: Trading Economics)

If Marxist theorists need any further confirmation that fiat currency doesn’t behave like money, they need look no further than Germany bonds, where the yield curve out to 30 years is now negative. Just try explaining, on the basis of Marx’s labor theory of value, creditors who lend their capital to the German state with the firm expectation they will incur a loss.

The only explanation that makes sense to me is that they are trying to avoid bigger losses of capital elsewhere. They accept a loss on the capital they lend to the Germany state to avoid losing more, or even all, of their capital elsewhere. In a commodity money regime, this situation could not happen. Alongside interest rates falling to zero, gold would be withdrawn from circulation into hoards. The two movements are driven by the same phenomenon — the falling rate of profit, which produces an ever growing mass of superfluous capital.


States, however, have learned that they can artificially create new demand for the superfluous capital by running ever larger state deficits. The deficits attract the superfluous capital that is being withdrawn from circulation by capitals. Instead of disappearing into hoards, as occurred under the commodity money regime, the capital is lent to the state. The state can then spend the excess capital to absorb excess commodities and employ excess labor power.

Sometimes this Keynesian intervention is referred to as “money printing”. The term is not completely accurate. It is true that the state can create currency at a printing press or computer terminal and credit the account of its vendors or employees. Thus it can spend before it borrows the capital that completes the credit transaction. However, the illusion that the state is creating “money out of nothing” or “debt-money” rests entirely on the inversion of the two phases of the credit transaction, where the purchase by the state using its worthless fiat precedes the advance of superfluous credit money from capitals.

In a normal credit-financed transaction, the lending come first and then a purchase is made. This is what happens when you or I finance a car or a home mortgage. When a commodity money regime was in place, even nation states operated this way, except during times of war or national emergencies. Since at least 1971, however, the state, can reverse the normal process, because it legally controls the issuance of debased currency. It can issue the currency required to make a purchase first (i.e., credit the accounts of its vendors and employees), and then borrow the credit money to make good on what it has purchased later. The purchase comes before the credit is actually advanced, making it appear as if it is creating money out of nothing.

But this inversion, as illusory as it is, has real world implications: by this means the state effectively gains control of the superfluous capital that must be lent out if it is to function as capital.


Here we can follow Marx’s argument from chapter 15 of volume 3, section three to understand the dynamic of the competition to lend to the state. The competition begins with absolute overproduction (overaccumulation) of capital. According to Marx, any increase in the mass of capital for production of surplus value results in diminishing profits. An ever-increasing portion of the existing capital must be displaced to make room for newly created capital:

A portion of the old capital has to lie unused under all circumstances; it has to give up its characteristic quality as capital, so far as acting as such and producing value is concerned. The competitive struggle would decide what part of it would be particularly affected. So long as things go well, competition effects an operating fraternity of the capitalist class, as we have seen in the case of the equalisation of the general rate of profit, so that each shares in the common loot in proportion to the size of his respective investment. But as soon as it no longer is a question of sharing profits, but of sharing losses, everyone tries to reduce his own share to a minimum and to shove it off upon another. The class, as such, must inevitably lose. How much the individual capitalist must bear of the loss, i.e., to what extent he must share in it at all, is decided by strength and cunning, and competition then becomes a fight among hostile brothers. The antagonism between each individual capitalist’s interests and those of the capitalist class as a whole, then comes to the surface, just as previously the identity of these interests operated in practice through competition.

How is this conflict settled and the conditions restored which correspond to the “sound” operation of capitalist production? The mode of settlement is already indicated in the very emergence of the conflict whose settlement is under discussion. It implies the withdrawal and even the partial destruction of capital amounting to the full value of additional capital ΔC, or at least a part of it. Although, as the description of this conflict shows, the loss is by no means equally distributed among individual capitals, its distribution being rather decided through a competitive struggle in which the loss is distributed in very different proportions and forms, depending on special advantages or previously captured positions, so that one capital is left unused, another is destroyed, and a third suffers but a relative loss, or is just temporarily depreciated, etc.

These then are the stakes: under conditions of permanent absolute overproduction of capital, a considerable and growing mass of capital is always under pressure to give up its old place and withdraw to join completely or partially unemployed additional capital, facing depreciation and even wholesale destruction; “to lie unused under all circumstances; it has to give up its characteristic quality as capital, so far as acting as such and producing value is concerned.”

Marx argument suggests these capitals now have no choice but to compete to lend the state their excess capital and this competition grows increasingly frenzied as the masses of superfluous capital looking to be lent grows. It follows from this that the price of the bonds issued by the state are bid up by these capitals, or what is the same thing: their yields fall, even below the zero lower bound. The negative yields on these bonds likely express the [nominal?] devaluation of the underlying capital itself.


But why only now is the depreciating value of the underlying capital being expressed in negative yields on the bonds issued by the state? The answer is already hinted in the mechanism proposed here: the bonds issued by the state are being bid up above the face value of the bonds by the capitals. The owners of excess capital pile into bonds, (and in first place, the bonds of the richest countries, with the most stable economies), seeking to protect their capital from devaluation. The demand for these bonds far exceeds the supply on the market. To maintain the price of the bonds at a level consistent with positive interest rates, the supply of bonds has to be greatly increased, or hours of labor have to be reduced.

At the same time, the supply of bonds is limited by the sheer ability of countries to service the deficits required to finance Keynesian expansionary policies — just as the amount of debt you or I can carry is limited by our ability to repay what we have borrowed. The single notable exception to this limitation on the issuance of bonds, I believe, is the United States due to its control of the world reserve currency, the U.S. dollar.

In this way, Washington effectively comes to control the greater part of the excess capital of the entire world market; it will exploit this position to its advantage and to the disadvantage of its competitors.