Having noticed in my banking days that countries with 5 percent interest rates usually have 5 percent inflation rates and that countries with 25 percent interest rates usually have 25 percent inflation rates, I have from time to time wandered a library or two looking up interest rate and inflation rate statistics merely as a matter of curiosity. The conventional theology as reported in most newspapers, magazines and economics textbooks allows for no such observation, of course, as this would conflict with all the more popular notions of monetary theory, money supply and Nobel Prize winning theories. However the ongoing proclamations of the Bank of Canada and the Federal Reserve Board of the United States from time to time that central bank interest rates have leaped or fallen so many “basis points” accompanied as they usually are by explanations and invocations involving market forces, the need to alter the course of inflation or support the value of a currency, have triggered endless speculation somewhere in my brain, on the possibility that a central bank has the ability and the power to set interest rates wherever it pleases. As if this were not enough to cause apoplexy in any select circle of Mensan pub night dialogue artists, I stumbled onto a speculative essay somewhere on the possibility of a consistent and predictable relationship between interest rates and the foreign exchange values of the various currencies. Sure enough, after a few days at the reference library I had the foreign currency charts for the last day of each of 25 years entered into my Commodore 64 and was positioned to look out upon the world of currency values from Berne, Switzerland; Washington, D.C. or Tokyo, Japan; etc. Shortly, as I viewed the world’s foreign currency charts in the currency of Switzerland, I was able to see that countries with the lowest interest rates had the strongest currencies and those with the highest interest rates had the weakest currencies.
Extravagant as it may sound today, I wrote up my computer experiments such as they were, along with a few paragraphs of idle speculation, and after pestering Mensa's editors for only two years, found it reprinted as “Simplista Economica” in the International Journal of Mensa and included in the back of the 25th anniversary issue of the US Mensa Bulletin. Mary Jane was not amused when her variation of the same item appeared in MC2, two weeks later. Naturally this generated waves of media excitement consisting of two letters from fellow Mensans. One was an economics student at Oxford University in England and the other a professor of economics in Spain. Each lectured me for several pages on the conflict between my work and paragraphs in their favorite economics textbooks. I readily confessed that I was a complete and unaccomplished nobody with no academic standing whatsoever in my reply and heard no more.
During the quarter of a century that has elapsed since these momentous events, I have naturally devoted many an hour of recreational thinking time, to idle speculation on just exactly what is the cause of what. One aspect of all this that has provided endless hours of fascination is the possibility of “negative interest rates.” The logic runs something like this. If xyz percent interest rates is sure to get us xyz percent inflation and a currency that loses xyz percent of its purchasing power every year; then: setting interest rates at negative 10 percent would get us reverse inflation of 10 percent and a currency that gains 10 percent in purchasing power every year. In the early years, of course, I dismissed this absurd scenario out of hand, that is, until I came across a report of Swiss banks actually charging their depositors at some rate during a period of particularly low inflation.
We start this game therefore by imagining that banks will henceforth charge 11 percent per annum on deposits and pay borrowers at the rate of 9 percent per annum. I submit that this scenario will make for a lively argument or two at a pub night or two and after first locating a beat-up copy of “The Wealth of Nations” to use as a sort of “Mace of Office” we’ll invite one of our more accomplished “motor mouths” to define the word “define,” for ten minutes, select a piano player and begin.


This item by George Noviss was included in Montage, September, 2008, The Mensa Newsletter for Toronto, Hamilton, Kitchener/Waterloo, London, Windsor/Sarnia


HOME
http://www.gnoviss.com/