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Liquidity has been anything but withheld in the western world. Look at the G4 balance sheets and interest rates in the past decade.

BenoitEssiambre 7y ago
What do you mean? Bernanke himself has estimated that interest rates should have been as low as -4% during the period from 2009 to 2015 (https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-taylor-rule-a-benchmark-for-monetary-policy/ https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-t... ). They kept them super high at 0%, up to 4% higher than the equilibrium estimate, which caused inflation to perpetually undershoot and people's careers to be stunted. On top of that, they started giving out interest on reserves which further contracted liquidity. The growth in excess reserves happened because money being made artificially too good at retaining value compared to private assets, caused people, businesses and banks to hoard it. If central banks would have been sufficiently aggressive at giving it out, they would ironically have given out a lot less because people would not have event wanted that much and instead would have continued keeping their savings in better functioning private markets.
- koheripbal 7y ago
  Negative interest rates have other major problems - that are worse than a liquidity shortage.
  - BenoitEssiambre 7y ago
    For a large part of history, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. The government creating paper assets that have an above market return, puts a gridlock in the private markets and destroys people's lives.
    - samsonradu 7y ago
      Can you elaborate a little on this? Investments having a negative return does not mean the market (reference) interest rate is negative. Take the gold standard, do you think anyone was able to borrow gold and pay less back? Isn’t that the actual interest rate we are discussing here?
      - BenoitEssiambre 7y ago
        The gold standard was a disaster that lead to the great depression, but that was government manipulated gold. Gold in a free market would tend to self adjust. Buying gold as an asset when there is a "flight to safety" and then selling it in better times when there are enough other good assets available such as stocks with good dividends would mean buying gold when gold prices are high and selling it when prices are low thus resulting in negative returns. Negative real returns happen in free markets. Blocking them causes huge problems.
        samsonradu 7y ago
        You’re right, negative real returns definitely happen - but that’s not the interest rate. Interest rates apply to loans, not assets.
        BenoitEssiambre 7y ago
        The real natural rate should be in line with the private markets with regards to safe, liquid short term assets. There is an issue when you hit 0% nominal, called the zero lower bound problem (https://en.wikipedia.org/wiki/Zero_lower_bound https://en.wikipedia.org/wiki/Zero_lower_bound). Mechanically you can solve that by keeping inflation high enough that you don't reach negative nominal rates even when you have negative real rates.
    - koheripbal 7y ago
      It's an invalid comparison to compare modern economics to pre-financial system trends, because the "system" was highly inefficient. It's sort of like saying "pre-modern medicine, therapeutic bleedings were common, and therefor we should consider them again".

BenoitEssiambre 7y ago

What do you mean? Bernanke himself has estimated that interest rates should have been as low as -4% during the period from 2009 to 2015 (https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-taylor-rule-a-benchmark-for-monetary-policy/ https://www.brookings.edu/blog/ben-bernanke/2015/04/28/the-t... ). They kept them super high at 0%, up to 4% higher than the equilibrium estimate, which caused inflation to perpetually undershoot and people's careers to be stunted. On top of that, they started giving out interest on reserves which further contracted liquidity. The growth in excess reserves happened because money being made artificially too good at retaining value compared to private assets, caused people, businesses and banks to hoard it. If central banks would have been sufficiently aggressive at giving it out, they would ironically have given out a lot less because people would not have event wanted that much and instead would have continued keeping their savings in better functioning private markets.

koheripbal 7y ago
Negative interest rates have other major problems - that are worse than a liquidity shortage.
- BenoitEssiambre 7y ago
  For a large part of history, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. The government creating paper assets that have an above market return, puts a gridlock in the private markets and destroys people's lives.
  - samsonradu 7y ago
    Can you elaborate a little on this? Investments having a negative return does not mean the market (reference) interest rate is negative. Take the gold standard, do you think anyone was able to borrow gold and pay less back? Isn’t that the actual interest rate we are discussing here?
    - BenoitEssiambre 7y ago
      The gold standard was a disaster that lead to the great depression, but that was government manipulated gold. Gold in a free market would tend to self adjust. Buying gold as an asset when there is a "flight to safety" and then selling it in better times when there are enough other good assets available such as stocks with good dividends would mean buying gold when gold prices are high and selling it when prices are low thus resulting in negative returns. Negative real returns happen in free markets. Blocking them causes huge problems.
      - samsonradu 7y ago
        You’re right, negative real returns definitely happen - but that’s not the interest rate. Interest rates apply to loans, not assets.
        BenoitEssiambre 7y ago
        The real natural rate should be in line with the private markets with regards to safe, liquid short term assets. There is an issue when you hit 0% nominal, called the zero lower bound problem (https://en.wikipedia.org/wiki/Zero_lower_bound https://en.wikipedia.org/wiki/Zero_lower_bound). Mechanically you can solve that by keeping inflation high enough that you don't reach negative nominal rates even when you have negative real rates.
  - koheripbal 7y ago
    It's an invalid comparison to compare modern economics to pre-financial system trends, because the "system" was highly inefficient. It's sort of like saying "pre-modern medicine, therapeutic bleedings were common, and therefor we should consider them again".