The second largest paper in Sweden published this article written by Patrick Sundqvist, a member of Positiva Pengar – our sister organisation in Sweden.
Here is the original in Swedish and here the translation:
For how long can we continue to go further into debt in order to maintain short term economic growth? “Will not the current system, based on exponential growth and ever-increasing debt, eventually crash?”, asks Patrik Sundqvist, from the campaign group Positiva Pengar, after the Swedish Riksbank cut the interest rate drastically on Thursday, 3 July.
The Riksbank shocked all analysts by lowering the official cash rate (OCR, the rate that banks pay for borrowing central bank reserves from the Riksbank in order to complete their overnight settlements with each other) from 0.75% down to 0.25%. At the same time, a negative deposit rate of minus 0.5% was introduced. It was, according to many analysts (and critics) about time for the Riksbank to take action against the low inflation (read: deflation). Over the past 15 years, inflation has been only 1.4% p.a. on average, whereas the inflation target has been 2.0% p.a. This has resulted in unnecessarily high unemployment during this time.
The Riksbank, and primarily its governor, Stefan Ingves, has previously justified its decisions [to not lower interest rates] by arguing that a lower interest rate risks increasing household indebtedness further, but after Finansinspektionen (the Swedish Financial Supervisory Authority) recently took over the responsibility for financial stability, the Riksbank can now focus on its main (read: only) objective, which is price stability.
But what effect does the OCR set by the Riksbank have for stimulation of the Swedish economy today? After this rate cut by 50 basis points or 0.5%, it seems that the commercial banks will only lower their interest rates marginally, by about 5 to 10 basis points, or 0.05% to 0.1%. The link between the policy rate and bank lending rate is simply not as direct as before.
Worth mentioning is that if this rate cut does not produce results, there is hardly any operating space left for stimulating the economy. And even if the interest rate is lowered further down towards zero (or below), there need to be borrowers. Today, when citizens in much of the Western world are struggling with record-high debt, is it really possible for us to go even deeper into debt? Or have we reached a point of debt saturation, where households have already taken on all the debt they can carry – mortgages to be able to afford somewhere to live? If that is the case, this, and any future interest rate cuts, will probably have rather limited effects.
The risk is that we will see a Japan scenario throughout the Western world, with low economic growth and deflation. How are we to tackle such a situation, if the policy rate is then already down to zero? And even if interest rate cuts may boost lending, inflation and the economy, this just means even more debt. For how long can we continue to go further into debt in order to maintain short term economic growth? Will not the current system, based on exponential growth and ever-increasing debt, eventually crash?
We need to get out of today’s catch 22, we need to get the economy going, increase employment and avoid deflation – but at the same time we do not want to increase debt further. We need new tools for stimulating the economy that are not based on increased borrowing and debt. This is where the Positive Money proposals come into the picture.
Today, the Riksbank is responsible for issuing banknotes and coins, while all electronic money is created by commercial banks when they make loans. As long as they have some capital, they can create as much new digital money as they please, so long as there is someone willing to go into debt to borrow it. In 1904, the Riksbank was given the exclusive right to issue banknotes and coins, but the law has not been updated to also cover the digital money today created by commercial banks, which makes up more than 95% of the money in circulation.
The solution to get out of today’s Catch-22 is, according to us in Positiva Pengar, that the Riksbank takes back from commercial banks the right to create digital money. For this to be possible, we must introduce something called “full reserve banking”, that is, banks can only lend money they actually have, they are not allowed to create new money through lending. Some researchers at the IMF (and others) have analysed this, and they concluded that such a system would be far more stable than the current system. It is also something that Martin Wolf, the Economics Editor of the UK’s Financial Times, recently clearly advocated.
If this system is implemented, the Riksbank can create debt-free digital money that the state can invest into the economy. All of a sudden, we get a tool for stimulating the economy without having to take on more debt, so we have escaped the catch 22!
The profits of creating money, the seigniorage, will then benefit the entire population. Creating digital money would be a profitable business for the state, since the cost of creating it is almost zero, so new money would be pure profit. This money could be used to repay existing debt; it could be invested in renewable energy; it could be used to reduce taxes, etc. What to do with this “free money” becomes a political decision. Obviously, the body that decides how much money to create must be independent in some way, to minimize the risk that the system is abused and that too much money is created.
So, we have found a way to free ourselves from the current unstable system that requires perpetual exponential growth, which is mathematically impossible and which threatens our planet. If we want the economy to grow, we can create new debt-free money, but it is no longer a necessity in the same way as in the current debt-based economy. How much the economy should be stimulated becomes a political question; right-wing parties will probably want more stimulus so that we have a growing economy where we can consume more and more, while left-wing parties and green parties might want less stimulation so that we can instead work fewer hours, for example.
No matter what the future looks like; how much more resources we can collect from nature, how much we want to work, how high unemployment we consider to be reasonable, if we want a growing economy or not, we have with this new system the power in our own hands! We have a weapon that we can use to stimulate the economy if we want, to make the necessary investments and to create new jobs – or, perhaps we choose not to do so and instead create a sustainable society. This is a political decision, but with this system we have at least escaped the current catch 22, we can stimulate the economy without increasing debt. We at Positiva Pengar think it’s time to begin discussing this proposal seriously!