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How Central Banks have Stolen Your Freedom - and Killed Democracy

Jul 14, 2016

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I have often written about the problems of low and negative interest rates. We reckon that the perverse effects of modern monetary policy are now so extreme that they outweigh any of its perceived benefits.

We think rates should go up - soon and quite quickly. But a new commentary just out from Charles Gave of GavKal looks at the awfulness of negative/low rates in a different light. They are, he says, "a fundamental assault on freedom".

We have a limited time on earth, and figuring out how we allocate that time is a "right that we should be able to exercise unhindered". In a rational economic world, we would use the interest rate to help us do that rationally.

If rates are high, we might save more - particularly if we are young or have children to provide for. If they are low - and the magic of compounding won't work in the same way - we will save less. But if they are zero or negative, we are all "deprived of this freedom of choice". You can still put your money in the bank, of course, but it won't do you much good: you'll get no return on it. Negative rates effectively expropriate savers.

The result is that the future has been compressed into the present and we are all effectively forced to be grasshoppers - to fail to provide for our own futures.

By fiddling with monetary policy governments have "granted themselves the right to intervene in our time preferences." This "must mean the end of democracy".

You may think all this sounds a bit extreme, but stop to think about how super-low interest rates make you behave, and you will see Gave's point. The cost of free money is really getting very high.

I'm currently seeing some of my ex finance friends from my Japan days. We all got this report one way or another yesterday. However it didn't create a new conversation - it just added to the old: we have been discussing the evil effects of free money (falling productivity, asset bubbles, pension disasters, pensioner anxiety, a collapse in capital spending, fast rising inequality) since we met.

The consensus even before Gave's powerful intervention was this: if we want any kind of normality to return to capitalism our central banks have got to normalise interest rates. Fast.

Please note: This article was first published in Moneyweek on July 13, 2016.

Merryn Somerset Webb is the editor-in-chief of Moneyweek, the best-selling financial magazine in the UK, and is a director of two investment trusts - the Baillie Gifford Shin Nippon Trust and the Montanaro European Smaller Companies Trust. Before joining Moneyweek, she worked at the Japanese public broadcaster NHK, SBC, UBS, BNP Paribas, and The Week. Merryn has a weekly column in the FT and a monthly column in Saga. She is a regular TV/radio commentator and speaker on financial matters.

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