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Isn't the primary tool to fight inflation with an increase in interest rates? And if interest rates are negative doesn't that mean that there is lots of room to

Isn't the primary tool to fight inflation with an increase in interest rates? And if interest rates are negative doesn't that mean that there is lots of room to adjust them? It strikes me that the problem is that the tools to fight deflation are inadequate. How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose?

gridlockd 7y ago
> And if interest rates are negative doesn't that mean that there is lots of room to adjust them? No, because the economy has already adapted to these low interest rates. All the money that was put into high-risk instruments at relatively low yields will be desperate to move into these "low risk" bonds, which causes a huge selloff, which will be especially disastrous to those who bought in on margin. Furthermore, those entities that have gotten used to financing old debt with ever cheaper new debt will have trouble finding new affordable debt. > It strikes me that the problem is that the tools to fight deflation are inadequate. What deflation? You mean the "deflation" of CPI staying below 2%? What about asset price inflation? > How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose? What real economic growth has been achieved by this unprecedented money-creation spree? Rising prices do not equal prosperity. What about Japan, or the Eurozone? They have even lower interest rates and they're once again stagnating. You really believe if money was even cheaper, even more growth could be achieved? We do have massive asset price inflation. We also have significant service-sector and rent price inflation. The CPI is only stable because productivity improvements have kept prices at bay for many consumer goods: https://perspectives.pictet.com/wp-content/uploads/2015/04/US_Inflation_21.04.2015_2.jpg https://perspectives.pictet.com/wp-content/uploads/2015/04/U... However, many of these consumer goods aren't made in the US. The dollar has been strong because, globally speaking, interest rates on it are high. If the US went back to QE and zero-interest, you could easily see a 25% drop in the value of the dollar, which immediately shows up as inflation for imported goods.
- JamisonM 7y ago
  The argument that the central banks couldn't fight inflation by raising rates is sort of undermined by the fact that central banks have raised rates in very recent history and there was no catastrophe, in 2011 the ECB raised rates 1/2% and all the Eurozone got was a stunted recovery. The US Fed had been steadily raising rates since 2016 and has since admitted that it was a mistake and reversed course. The tools to fight deflation/low-inflation are mostly left in the hands of government spending, which unfortunately governments refuse to do for political reasons, the central bank's tools are limited. What about Japan, or the Eurozone? What about them? The story you are telling is the some one from the 90's about Japan and it has been wrong so far, at what point is there enough evidence to prove that Japan was right to keep interest rates low? Furthermore Abenomics has been largely a success, which is doubling-down on those policies plus being willing to pile on even more debt, raising an expectation of future inflation to create investment (not quite exactly but more or less as Krugman encouraged them to in the 90's). The Eurozone's problem is clearly austerity in the face of the structural issues that the single currency creates, as long as the wealthy members are unwilling to spend and the rules prevent the poorer members from spending they are caught in a low-demand trap of their own creation. https://www.jstor.org/stable/24385696 https://www.jstor.org/stable/24385696 They have even lower interest rates and they're once again stagnating. You really believe if money was even cheaper, even more growth could be achieved? I believe that higher rates will hurt them (supported by the evidence from the 2011 ECB & 2015 Fed rate increases and the study of their consequences) and, as I stated in my original post they, like the Danish, should be spending money on things they need to stimulate their economy and invest in the future. If you can borrow money at negative interest rates and build assets of any future value then you should do it and make citizens' lives better now and in the future.
  - gridlockd 7y ago
    > The argument that the central banks couldn't fight inflation by raising rates is sort of undermined by the fact that central banks have raised rates in very recent history and there was no catastrophe, in 2011 the ECB raised rates 1/2% and all the Eurozone got was a stunted recovery. They raised them very briefly for a couple of months. And half a percent? That's basically background noise. In the past, to fight inflation, rates went up as high as fifteen percent. > The US Fed had been steadily raising rates since 2016 and has since admitted that it was a mistake and reversed course. They've reversed course in 2018 because the markets were tanking in 2018. The Fed never admitted making any mistakes, as far as I know. > "Keynesianism totally works!" (paraphrased) Remember, Keynesianism says you boost the economy short term to get it up to speed, then throttle it when times are good. Keynesianism is about pulling future demand into the present. Except times never get good enough for politicians to put in the throttle. So you end up with a pile of debt that can't be serviced in any other way than inflation, and we haven't seen the end of that yet. Do you believe that situation is better for the owning class, who bought up all the assets in exchange for cheap debt, or the serving class, who have to rent those assets, whose wages are losing more and more purchasing power? > If you can borrow money at negative interest rates and build assets of any future value then you should do it and make citizens' lives better now and in the future. That's not what's happening. You borrow money so you can own more of the future, and charge citizens for it.

gridlockd 7y ago

> And if interest rates are negative doesn't that mean that there is lots of room to adjust them? No, because the economy has already adapted to these low interest rates. All the money that was put into high-risk instruments at relatively low yields will be desperate to move into these "low risk" bonds, which causes a huge selloff, which will be especially disastrous to those who bought in on margin. Furthermore, those entities that have gotten used to financing old debt with ever cheaper new debt will have trouble finding new affordable debt. > It strikes me that the problem is that the tools to fight deflation are inadequate. What deflation? You mean the "deflation" of CPI staying below 2%? What about asset price inflation? > How much growth and prosperity has been sacrificed to avoid the threat of inflation that never arose? What real economic growth has been achieved by this unprecedented money-creation spree? Rising prices do not equal prosperity. What about Japan, or the Eurozone? They have even lower interest rates and they're once again stagnating. You really believe if money was even cheaper, even more growth could be achieved? We do have massive asset price inflation. We also have significant service-sector and rent price inflation. The CPI is only stable because productivity improvements have kept prices at bay for many consumer goods: https://perspectives.pictet.com/wp-content/uploads/2015/04/US_Inflation_21.04.2015_2.jpg https://perspectives.pictet.com/wp-content/uploads/2015/04/U... However, many of these consumer goods aren't made in the US. The dollar has been strong because, globally speaking, interest rates on it are high. If the US went back to QE and zero-interest, you could easily see a 25% drop in the value of the dollar, which immediately shows up as inflation for imported goods.

JamisonM 7y ago
The argument that the central banks couldn't fight inflation by raising rates is sort of undermined by the fact that central banks have raised rates in very recent history and there was no catastrophe, in 2011 the ECB raised rates 1/2% and all the Eurozone got was a stunted recovery. The US Fed had been steadily raising rates since 2016 and has since admitted that it was a mistake and reversed course. The tools to fight deflation/low-inflation are mostly left in the hands of government spending, which unfortunately governments refuse to do for political reasons, the central bank's tools are limited. What about Japan, or the Eurozone? What about them? The story you are telling is the some one from the 90's about Japan and it has been wrong so far, at what point is there enough evidence to prove that Japan was right to keep interest rates low? Furthermore Abenomics has been largely a success, which is doubling-down on those policies plus being willing to pile on even more debt, raising an expectation of future inflation to create investment (not quite exactly but more or less as Krugman encouraged them to in the 90's). The Eurozone's problem is clearly austerity in the face of the structural issues that the single currency creates, as long as the wealthy members are unwilling to spend and the rules prevent the poorer members from spending they are caught in a low-demand trap of their own creation. https://www.jstor.org/stable/24385696 https://www.jstor.org/stable/24385696 They have even lower interest rates and they're once again stagnating. You really believe if money was even cheaper, even more growth could be achieved? I believe that higher rates will hurt them (supported by the evidence from the 2011 ECB & 2015 Fed rate increases and the study of their consequences) and, as I stated in my original post they, like the Danish, should be spending money on things they need to stimulate their economy and invest in the future. If you can borrow money at negative interest rates and build assets of any future value then you should do it and make citizens' lives better now and in the future.
- gridlockd 7y ago
  > The argument that the central banks couldn't fight inflation by raising rates is sort of undermined by the fact that central banks have raised rates in very recent history and there was no catastrophe, in 2011 the ECB raised rates 1/2% and all the Eurozone got was a stunted recovery. They raised them very briefly for a couple of months. And half a percent? That's basically background noise. In the past, to fight inflation, rates went up as high as fifteen percent. > The US Fed had been steadily raising rates since 2016 and has since admitted that it was a mistake and reversed course. They've reversed course in 2018 because the markets were tanking in 2018. The Fed never admitted making any mistakes, as far as I know. > "Keynesianism totally works!" (paraphrased) Remember, Keynesianism says you boost the economy short term to get it up to speed, then throttle it when times are good. Keynesianism is about pulling future demand into the present. Except times never get good enough for politicians to put in the throttle. So you end up with a pile of debt that can't be serviced in any other way than inflation, and we haven't seen the end of that yet. Do you believe that situation is better for the owning class, who bought up all the assets in exchange for cheap debt, or the serving class, who have to rent those assets, whose wages are losing more and more purchasing power? > If you can borrow money at negative interest rates and build assets of any future value then you should do it and make citizens' lives better now and in the future. That's not what's happening. You borrow money so you can own more of the future, and charge citizens for it.