An argument for keeping interest rates low

I blogged recently about Ann Pettifor’s book Just Money which explains what money is and how understanding money and our monetary system can help us build more productive and less environmentally damaging economies. It’s this latter point from Ann’s book that I want to quote now. There is quite a lot of debate about interest rates at the moment. On the one hand, we have those who want rates to stay low to prevent indebted homeowners and businesses from getting into trouble, and on the other, there are those who express concern for savers and want rates to go up. This is generally the argument – between borrowers and savers, but Ann raises another issue that should also be considered:

“But high rates have implications for the ecosystem too. First, ‘easy credit’ leads to an expansion of consumption. Shopping malls become the temples of the High Street. In order to pay for credit-financed consumption, seas have to be fished out; forests have to be stripped; and the ‘productivity’ of the land intensified – at the same exponential rate as interest rates rise. High-yield crops, the use of fertilisers and pesticides; the containing of animals indoors; increases in food production, not just for the world’s growing population, but to make food production more profitable then debt – all this must be done in order to repay debt. The effects are well known: soil degradation, salination of irrigated areas, over-extraction and pollution of groundwater, resistance to pesticides, erosion of biodiversity, etc.

In other words, the earth’s limited resources have to effectively be cannibalised to repay the world’s creditors.”

This is an argument I haven’t really heard before with reference to interest rates, but it seems quite a strong argument for keeping rates low to me, although I suppose it would depend on how strong an impact on the economy the interest rate set by the central bank has.  It seems to me that managing interest rates are quite a blunt tool for controlling economies, and raising them to ‘help savers’, or too try to cool down a boom could have quite serious unforeseen consequences.

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Money as a tool for human progress

I’m about halfway through reading “Just Money” by Ann Pettifor at the moment. It’s only a short book, but it covers a lot of ground in terms of what money is, where it comes from, how it is being used now, and how it could be used to better achieve some of the progressive human goals we all want to see. Early on in the book, Ann explains the potential implications of the monetary system that has been developed over the centuries. She provides a pretty good description of what our monetary system could or should be used for (building a ‘just and productive economy’) rather than what it is currently being used for (largely financing speculative asset bubbles):

“Monetary systems are one of human society’s greatest achievements. The creation of money by a well-developed monetary and banking system was a great civilizational advance. As a result there need never be a shortage of finance for private enterprise or the public good. There need never be a shortage of money to invest in and create economic activity and full employment. There need never be insufficient money to tackle energy insecurity and climate change. There need never be a shortage of money to solve the great scourges of humanity: poverty, disease and inequality, to ensure humanity’s prosperity and wellbeing; and the ecosystem’s stability.

The real shortages we face are first, humanity’s capacity: the limits of our individual, social and collective corruptibility, integrity, imagination, intelligence, organisation and muscle. Second, the physical limits of the ecosystem. These are real limitations. However, the social relationships which create money, and sustain trust, need not be in short supply in a well regulated and managed monetary system.

Within a sound monetary system we can afford what we can do. Money enables us to do what we can do within our limited natural and human resources.”

The last point there is a key one – we can afford to do what we can do (within the limits of natural and human resources). Money is not a resource that is scarce like oil or coal. You or I can run out of money, but the economy as a whole cannot. This is why the infamous Liam Byrne note saying “there’s no money left” was so imbecilic. In a properly-managed system, there would always be enough money to ensure what we can do is done.