Negative Interest Creates a Zombie Economy, Says Economist

A business that raises money with negative interest profits from increasing its debt, meaning there is no need to work, according to Ori Greenfeld, the chief economist of Israel-based Psagot Investment House Ltd. Speaking Tuesday at Calcalist’s Forecasts 2020 conference, held in Tel Aviv in collaboration with Bank Hapoalim and Psagot, Greenfeld called the phenomenon a zombie economy. “Companies do not need to generate operations, just continue their zombie activity and then we don’t see any growth,” he said.

Negative interest creates an unsolvable paradox because it transfers consumption from the future and present to the past, Greenfeld said. “The reality today is that Japan has negative interest, Switzerland and Denmark as well. Here we ask a simple question: is it working?” In Europe, Greenfeld said, when the central bank cut the interest rate to zero, we saw that the interest of businesses dropped. It may be some sort of success for businesses, but it isn’t for households, he said, because the interest rate determines the offering in the credit market.

Europe’s annual growth rate of 2.5% is lower than in the U.S., where the interest rate is positive, Greenfeld said. “Meaning, the attempt partly succeeded,” he added. “Maybe we didn’t make the interest negative enough? Well, we think you can’t cut the interest any more because the costs are higher than the benefit.”

Banks can’t pay a negative interested because a negative interest rate on deposits will cause people to pull their money from the banks, meaning banks are subsidizing that gap, costing them billions a year, especially in Germany and France, Greenfeld said. “Meaning, it hurts growth. There are businesses that receive negative interest, which means they have added costs, and maybe at some point they will just prefer to take their money out of the banks—and that could collapse the banking system.”

“We are used to the thought that the lower the interest, the less people are inclined to save money,” Greenfeld said. “But the world is seeing an opposite trend, because negative interest shrinks pension funds. People who planned to retire with a certain sum now understand they need more. Pension funds are also becoming more high risk because there is no interest provided by the banks. That means future pensioners are in trouble. German government bonds, for example, are now traded with a negative yield, meaning people are loaning the government money knowing they will receive a lower repayment in the future.”

Israel does not have negative interest and Psagot estimates the Bank of Israel will not make that decision either, instead choosing to act via the foreign currency exchange market, Greenfeld said. “That means the bank is basically between a rock and a hard place. In the world, the ball is back in the governments’ court. We are hearing more and more calls for governments to increase deficits, and the idea of increasing deficits will grow in strength and governments may choose to print money.”