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Digital Subscriptions > Prospect Magazine > February 2017 > The point of no return

The point of no return

Zero interest rates have slowly become the new normal. But in 5,000 years of data they stand out as an aberration—and now the saving classes are out for revenge

Paul Wallace is the former European Economics Editor of the Economist. He is the author of “The Euro Experiment” (Cambridge University Press)

Interest rates have ebbed in Britain for a decade. In Japan the tide has been going out for a quarter of a century. In the United States, the official cost of borrowing inched up at the end of last year, but only to around two-thirds of a single percentage point. Rates sometimes used to move a whole point or even two at a time; these days 1 per cent or 2 per cent sounds more like a ceiling. Across the rich world, low rates have slowly become the new normal.

Yet the low-interest era is anything but normal. Low rates are supposed to boost growth, and very low rates are supposed to be for emergency use—for pulling depressed economies back from the deflationary brink. But in the light of 5,000 years of historical records, we can see that the rates of the last several straight years are by some way the lowest ever seen. Critics worry that we’ve become addicted to the emergency medicine, and that today’s ultra-low rates are no longer working as intended. Populist politicians like Donald Trump and even mainstream leaders such as Theresa May have been pointing the finger at central bankers for the low-rate regime which—some suggest— is exacerbating social divisions and fuelling inequality. The zero interest rate world, then, is playing its part in our politically exceptional times. Things could get ugly.

For low rates to be the focus of populist wrath is a startling development. In the long history of credit, while it is debtors who have stood in the dock—facing enslavement or prison—in the court of public opinion, it has been the lenders charging excessive interest who have been condemned. In The Clouds, produced by Aristophanes in 423 BC, old Strepsiades tells Socrates that “by debts and interest payments and rapacious creditors I’m assailed and assaulted.”

That lament echoes down the ages. Medieval churchmen deplored gain from moneylending and usury laws were imposed. In late-19th-century America, self-styled tribunes of the people such as William Jennings Bryan demanded reforms which aimed at cheaper money, to aid the plight of indebted farmers. Our historical filter, then, is formed by the anguish of debtors. Viewed through it, today’s low-interest world is a paradise gained rather than lost.

Creditors are now the victims feeling assailed and assaulted. If Aristophanes were writing a play today—iClouds?—he might cast Strepsiades as a disgruntled elderly German saver, bemoaning the exiguous interest on his account at the local Sparkasse. For these days Trump roughs up the cheap money Fed in his presidential campaign, and May suggests to the Tory conference that the Bank of England ought not to ignore the “bad side effects” of its monetary medicine. Meanwhile Germany’s finance minister, Wolfgang Schäuble, has publicly blamed Mario Draghi, President of the European Central Bank (ECB), for the rise of Germany’s right-wing insurgent party, Alternative für Deutschland (AfD).

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In Prospect’s February issue: Tom Clark and Luke Harding examine the attacks facing democracy. Clark reviews two books on democracy and suggests a new intellectual assault may be on the horizon. Harding looks at Russia’s attempts to derail the democratic process by focussing on its technical frailty. Melissa Deckman asks why women voted for Trump, while Duncan Bell charts the story of the Anglosphere and suggests Brexiteers are indulging in an old fantasy. Also in this issue: Matthew Harries asks if it’s time to ban the nuclear bomb, Adam Mars-Jones looks at the way we perceive aliens in films and Elizabeth Pisani explores the role of activists in changing the perception of Aids and its pushing for treatment.