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When I read stuff like this I can’t help thinking something about the world economy and financial system has got to be horribly broken. How have we reached the

When I read stuff like this I can’t help thinking something about the world economy and financial system has got to be horribly broken. How have we reached the point that banning traditional currency so that we can drive interest rates negative can be seen as a rational response to our problems? At risk of stating the obvious, the entire point of such interest rates would be to strongly prod the market (mostly the very wealthy) to spend and/or invest their cash rather than sit on it. But the same thing could be accomplished by a much more conventional means: taxation and public spending. If you’re a government seeking to stimulate the economy, why wouldn’t that be a saner option?

projektfu 7y ago
Yes, you're right. There's been a real difficulty getting central governments to invest to turn around a recession, so the monetary angle is the main direction allowed.
ikeboy 7y ago
Because monetary policy is more effective than fiscal policy?
- nickles 7y ago
  > Because monetary policy is more effective than fiscal policy? It’s difficult to justify such a broad statement. Consider that the Fed likely deepened and lengthened the Great Recession by reducing the availability of liquid assets (QE) and simultaneously encouraging banks not to lend out the bank reserves they received in the process (IOER).
  - ikeboy 7y ago
    The Fed making mistakes doesn't mean the claim is wrong. My understanding was that QE helped, but IOER was a mistake.
    - nickles 7y ago
      > The Fed making mistakes doesn't mean the claim is wrong. I was trying to highlight that policy missteps are damaging and can occur with either monetary or fiscal policy. > My understanding was that QE helped, but IOER was a mistake. I’m familiar with an argument that QE1 was effective while QE2 and QE3 failed to provide the same degree of stimulus, but I can’t recall the substance at the moment. Comparing the QE responses of US, Eurozone, and Chinese central banks indicates QE did stabilize economies, but it also drained liquid, fungible assets from the market at a time where liquidity was most needed.
- klipt 7y ago
  Except it stops working when you can't go below 0?
  - gridlockd 7y ago
    That's not true, negative interest rates and QE are means of "going below zero". QE clearly has "worked" in that the markets were propped back up, for the time being.
  - nickles 7y ago
    > Except it stops working when you can't go below 0? Central banks are able to utilize other policies (e.g. helicopter money via TLTROs) to provide economic stimulus at this level.
    - ajross 7y ago
      How is helicopter money substantially different from fiscal policy though?
      - ikeboy 7y ago
        For one, it doesn't add to the debt.
        ajross 7y ago
        It does, though. Or neither does, maybe. "Debt" in macroeconomics isn't a zero sum thing. The central bank lifting in money creates inflationary pressure instead of a negative number in the general fund transaction log, so to counteract that the promise is always made via whatever mechanism is chosen ("helicopter money" is a bewildering variety of distinct tricks) to "buy back" the stuff you dropped later on, to prevent the runaway inflation scenario. So in practice, it's no different than spending with concomitant bond issue, which also promises to pay the money back. And is also an inflation pressure if the market decides the promise isn't worth the nominal interest rate.
- ajross 7y ago
  When interest rates are negative, monetary policy has literally zero effectiveness. That's the whole problem being discussed.
  - ikeboy 7y ago
    And the whole point of the comment I was responding to was that fiscal policy would be saner than a specific monetary policy. They don't claim the monetary policy wouldn't be effective or even that it would be less effective.
  - radford-neal 7y ago
    No. The central bank can stilll create money. Create enough money and inflation will result. There is no doubt about this. None at all.
    - ajross 7y ago
      Sort of misses the point. Despite the name, printing money isn't normally something one considers as "monentary policy", which is about interest rate setting and bank balance regulation. Yes, you can print your way out of a negative interest rate trap, because at its core printing money is exactly the same thing as deficit spending in the immediate term. So I don't see that's responsive: this is isomorphic to "just spend your way out".
      - radford-neal 7y ago
        I think common terminology would say that printing money is about as core a function of "monetary policy" as is imaginable. If the government has outstanding bonds, "printing money" by having the central bank buy them does not seem like "deficit spending". If the government has no outstanding bonds, and isn't running a deficit, it would be necessary to cut taxes to create a deficit (and hence bonds for the central bank to buy), or for the central bank to buy non-government assests. But this hypothetical is entirely unrealistic in present circumstances anyway. But what you call things doesn't really matter. You don't offer any argument for why printing money wouldn't solve the problem, assuming there is one.
chii 7y ago
> taxation and public spending the rich would bear the burden if taxation and public spending is used. They don't want that. And guess who has enough resources to lobby and PR it?
- dev_dull 7y ago
  The top 20% of earners pay 87% of the tax burden. Is there something unreasonable about that amount?
  - kalleboo 7y ago
    They also own around 85% of the wealth so that should be the bare minimum they pay. They should probably pay more since additional wealth has less value the richer you are (Someone earning $40,000/yr paying $10,000/yr more in tax is catastrophic, for someone earning $200,000/yr it's not)
nickles 7y ago
> But the same thing could be accomplished by a much more conventional means: taxation and public spending. * Such policy often comes with substantial lag times, as it is implemented via legislation. Monetary policy may be implemented more rapidly. * Governments are incentivized to provide stimulus during economic slowdowns, but reducing spending and increasing taxes during economic expansions is unpopular and leads to lost elections. * Public spending is frequently allocated for political purposes, absent consideration of economic impact, potentially leading to malinvestment. The great inflation of the 1960s to the 1980s was due to such Keynesian policies and was halted by implementation of contractionary monetary policy. Ideally, carefully considered monetary and fiscal policies are implemented and utilized to maximize potential for economic stability.
- candiodari 7y ago
  > Such policy often comes with substantial lag times, as it is implemented via legislation. Monetary policy may be implemented more rapidly. And because of this we should drop this whole democracy thing ? Parliaments have shown plenty that if the need is high enough, action can be very quick indeed.
  - nickles 7y ago
    > And because of this we should drop this whole democracy thing ? Parliaments have shown plenty that if the need is high enough, action can be very quick indeed. You've constructed a straw man argument. Instead of advocating for eliminating democracy, I highlighted some of the issues with relying exclusively on fiscal policy. An independent central bank can help resolve some of these concerns. Afterwards, I stated there was a need for both fiscal and monetary policy: "Ideally, carefully considered monetary and fiscal policies are implemented and utilized to maximize potential for economic stability."
gridlockd 7y ago
> At risk of stating the obvious, the entire point of such interest rates would be to strongly prod the market (mostly the very wealthy) to spend and/or invest their cash rather than sit on it. "The rich" aren't sitting on cash, they're sitting on assets. It's the banks that are supposed to be punished for "sitting on cash" instead of lending out every last nickel twenty times over. The entire economy runs on cheap credit and "the rich" benefit by buying up the assets whose prices inflate as a result of it. If that cheap credit dries up, the result will be a massive recession. Politically, interest rates must remain low at all costs. > But the same thing could be accomplished by a much more conventional means: taxation and public spending. No, it couldn't. The amount of money you can get from taxation is small compared to the money you can make appear magically in the economy through monetary policy. Almost the entire money supply is debt.
rkagerer 7y ago
I tend to agree. Here's my opinionated point of view: The reason governments get away with printing too much money is the negative effects are subtle. Under negative interest rates, people are going to see their bank account balance get smaller periodically. It doesn't matter if their purchasing power is identical to what it would be under a stable balance in a period of inflation. Yes, it would spur some more spending, but I think the cognitive impact of seeing your bank account bleed money will drive a behavioral shift away from traditional currencies to alternative stores of wealth. e.g. precious metals, crypto, real estate, etc. In other words, the farther you ratchet the wrench, the less effective it will be. I would think after a point, nobody wants your e-cash, and people just continue to use cash among themselves - indifferent to your imposed exchange rate - with secondary markets for wealth storage popping up. The article didn't really explore whether jurisdictions that introduced NIRP observed an uptick in "black market" currencies or untraditional stores of wealth.
- gridlockd 7y ago
  > Yes, it would spur some more spending, but I think the cognitive impact of seeing your bank account bleed money will drive a behavioral shift away from traditional currencies to alternative stores of wealth. e.g. precious metals, crypto, real estate, etc. If people end up buying more stock or real estate as a result of lower interest rates, that's "mission accomplished" from a policy point of view. That counts as economic stimulus. If people end up buying gold to fight inflation, they can just ban owning it (again). The same goes for crypto.

projektfu 7y ago

Yes, you're right. There's been a real difficulty getting central governments to invest to turn around a recession, so the monetary angle is the main direction allowed.

ikeboy 7y ago

Because monetary policy is more effective than fiscal policy?

nickles 7y ago
> Because monetary policy is more effective than fiscal policy? It’s difficult to justify such a broad statement. Consider that the Fed likely deepened and lengthened the Great Recession by reducing the availability of liquid assets (QE) and simultaneously encouraging banks not to lend out the bank reserves they received in the process (IOER).
- ikeboy 7y ago
  The Fed making mistakes doesn't mean the claim is wrong. My understanding was that QE helped, but IOER was a mistake.
  - nickles 7y ago
    > The Fed making mistakes doesn't mean the claim is wrong. I was trying to highlight that policy missteps are damaging and can occur with either monetary or fiscal policy. > My understanding was that QE helped, but IOER was a mistake. I’m familiar with an argument that QE1 was effective while QE2 and QE3 failed to provide the same degree of stimulus, but I can’t recall the substance at the moment. Comparing the QE responses of US, Eurozone, and Chinese central banks indicates QE did stabilize economies, but it also drained liquid, fungible assets from the market at a time where liquidity was most needed.
klipt 7y ago
Except it stops working when you can't go below 0?
- gridlockd 7y ago
  That's not true, negative interest rates and QE are means of "going below zero". QE clearly has "worked" in that the markets were propped back up, for the time being.
- nickles 7y ago
  > Except it stops working when you can't go below 0? Central banks are able to utilize other policies (e.g. helicopter money via TLTROs) to provide economic stimulus at this level.
  - ajross 7y ago
    How is helicopter money substantially different from fiscal policy though?
    - ikeboy 7y ago
      For one, it doesn't add to the debt.
      - ajross 7y ago
        It does, though. Or neither does, maybe. "Debt" in macroeconomics isn't a zero sum thing. The central bank lifting in money creates inflationary pressure instead of a negative number in the general fund transaction log, so to counteract that the promise is always made via whatever mechanism is chosen ("helicopter money" is a bewildering variety of distinct tricks) to "buy back" the stuff you dropped later on, to prevent the runaway inflation scenario. So in practice, it's no different than spending with concomitant bond issue, which also promises to pay the money back. And is also an inflation pressure if the market decides the promise isn't worth the nominal interest rate.
ajross 7y ago
When interest rates are negative, monetary policy has literally zero effectiveness. That's the whole problem being discussed.
- ikeboy 7y ago
  And the whole point of the comment I was responding to was that fiscal policy would be saner than a specific monetary policy. They don't claim the monetary policy wouldn't be effective or even that it would be less effective.
- radford-neal 7y ago
  No. The central bank can stilll create money. Create enough money and inflation will result. There is no doubt about this. None at all.
  - ajross 7y ago
    Sort of misses the point. Despite the name, printing money isn't normally something one considers as "monentary policy", which is about interest rate setting and bank balance regulation. Yes, you can print your way out of a negative interest rate trap, because at its core printing money is exactly the same thing as deficit spending in the immediate term. So I don't see that's responsive: this is isomorphic to "just spend your way out".
    - radford-neal 7y ago
      I think common terminology would say that printing money is about as core a function of "monetary policy" as is imaginable. If the government has outstanding bonds, "printing money" by having the central bank buy them does not seem like "deficit spending". If the government has no outstanding bonds, and isn't running a deficit, it would be necessary to cut taxes to create a deficit (and hence bonds for the central bank to buy), or for the central bank to buy non-government assests. But this hypothetical is entirely unrealistic in present circumstances anyway. But what you call things doesn't really matter. You don't offer any argument for why printing money wouldn't solve the problem, assuming there is one.

chii 7y ago

> taxation and public spending the rich would bear the burden if taxation and public spending is used. They don't want that. And guess who has enough resources to lobby and PR it?

dev_dull 7y ago
The top 20% of earners pay 87% of the tax burden. Is there something unreasonable about that amount?
- kalleboo 7y ago
  They also own around 85% of the wealth so that should be the bare minimum they pay. They should probably pay more since additional wealth has less value the richer you are (Someone earning $40,000/yr paying $10,000/yr more in tax is catastrophic, for someone earning $200,000/yr it's not)

nickles 7y ago

> But the same thing could be accomplished by a much more conventional means: taxation and public spending. * Such policy often comes with substantial lag times, as it is implemented via legislation. Monetary policy may be implemented more rapidly. * Governments are incentivized to provide stimulus during economic slowdowns, but reducing spending and increasing taxes during economic expansions is unpopular and leads to lost elections. * Public spending is frequently allocated for political purposes, absent consideration of economic impact, potentially leading to malinvestment. The great inflation of the 1960s to the 1980s was due to such Keynesian policies and was halted by implementation of contractionary monetary policy. Ideally, carefully considered monetary and fiscal policies are implemented and utilized to maximize potential for economic stability.

candiodari 7y ago
> Such policy often comes with substantial lag times, as it is implemented via legislation. Monetary policy may be implemented more rapidly. And because of this we should drop this whole democracy thing ? Parliaments have shown plenty that if the need is high enough, action can be very quick indeed.
- nickles 7y ago
  > And because of this we should drop this whole democracy thing ? Parliaments have shown plenty that if the need is high enough, action can be very quick indeed. You've constructed a straw man argument. Instead of advocating for eliminating democracy, I highlighted some of the issues with relying exclusively on fiscal policy. An independent central bank can help resolve some of these concerns. Afterwards, I stated there was a need for both fiscal and monetary policy: "Ideally, carefully considered monetary and fiscal policies are implemented and utilized to maximize potential for economic stability."

gridlockd 7y ago

> At risk of stating the obvious, the entire point of such interest rates would be to strongly prod the market (mostly the very wealthy) to spend and/or invest their cash rather than sit on it. "The rich" aren't sitting on cash, they're sitting on assets. It's the banks that are supposed to be punished for "sitting on cash" instead of lending out every last nickel twenty times over. The entire economy runs on cheap credit and "the rich" benefit by buying up the assets whose prices inflate as a result of it. If that cheap credit dries up, the result will be a massive recession. Politically, interest rates must remain low at all costs. > But the same thing could be accomplished by a much more conventional means: taxation and public spending. No, it couldn't. The amount of money you can get from taxation is small compared to the money you can make appear magically in the economy through monetary policy. Almost the entire money supply is debt.

rkagerer 7y ago

I tend to agree. Here's my opinionated point of view: The reason governments get away with printing too much money is the negative effects are subtle. Under negative interest rates, people are going to see their bank account balance get smaller periodically. It doesn't matter if their purchasing power is identical to what it would be under a stable balance in a period of inflation. Yes, it would spur some more spending, but I think the cognitive impact of seeing your bank account bleed money will drive a behavioral shift away from traditional currencies to alternative stores of wealth. e.g. precious metals, crypto, real estate, etc. In other words, the farther you ratchet the wrench, the less effective it will be. I would think after a point, nobody wants your e-cash, and people just continue to use cash among themselves - indifferent to your imposed exchange rate - with secondary markets for wealth storage popping up. The article didn't really explore whether jurisdictions that introduced NIRP observed an uptick in "black market" currencies or untraditional stores of wealth.

gridlockd 7y ago
> Yes, it would spur some more spending, but I think the cognitive impact of seeing your bank account bleed money will drive a behavioral shift away from traditional currencies to alternative stores of wealth. e.g. precious metals, crypto, real estate, etc. If people end up buying more stock or real estate as a result of lower interest rates, that's "mission accomplished" from a policy point of view. That counts as economic stimulus. If people end up buying gold to fight inflation, they can just ban owning it (again). The same goes for crypto.