Dual Interest Rates: The Most Radical Monetary Policy Innovation since Keynes

The Case for Dual Interest Rates

There is a growing recognition that things would be much better with higher interest rates and a real cost of money.

This is not just about tackling inflation. As many commentators have explained, prolonged ultra-low rates create far more problems than they solve. Including excessive debt, rising inequality, misallocation of capital, government waste, moral hazard and asset price bubbles.

In particular, without a unit of account to keep governments honest, governmental over-reach (and even tyranny) inevitably occurs; as there is no need to weigh costs against benefits. This also creates moral hazard in and of itself: the more a government mismanages its economy, the more the central bank supports it!

In a damning report, The House of Lords Economic Affairs Committee has called this ‘A Dangerous Addiction’ that is doing far more harm than good. All these problems are not only hurting the economy and our quality of life, but setting us up for more financial crises in the years to come.

House of Lords - Quantitative easing: a dangerous addiction? - Economic Affairs Committee (

Thus, all the arrows point to the long-term societal benefits of sharp interest rates rises and sustained positive real interest rates. Not least to regain central bank credibility.

The trouble is, with so much debt now in the economy, sharp interest rates prises are likely to cause a major short-circuit in one of the myriad areas with excessive leverage. That could trigger another financial crisis.

One answer to this problem might be Dual Interest Rates.

This would involve allowing legacy borrowers (i.e. those who borrowed before a specific cut-off date) to refinance their debts at a very low rate (perhaps even a negative interest rate) via the banking system. This would include Pandemic debts, over-indebted students, mortgagees, over-indebted companies, Private Equity and even local government.

Simultaneously, we would raise the interest rates on new borrowing to a positive real rate – i.e. 5% or more.

If this caused deflation, we could use Reflationary Deleveraging to keep rates at responsible levels while maintaining some inflation. I have written about this here:

ValueWalk — A Surprising And Totally Counterintuitive Way For... (

Such a policy would restrain inflation, reassert the value of money as a unit of account, and rein in dangerous excess, BUT without crashing the economy by hitting legacy borrowers.

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