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Zero interest rate policies definitely make it more difficult for central banks to use interest rates as a tool to stimulate aggregate demand. Sure, the massiv

Zero interest rate policies definitely make it more difficult for central banks to use interest rates as a tool to stimulate aggregate demand. Sure, the massive bond-buying program of the Fed did actively push interest rates close to zero. But, in the process, it decreased long-term interest rates too, in particular, treasuries and T-bills. This decrease allowed the government to borrow more money during auctions. Isn't this a case for QE enhancing the government's ability to borrow? Or is my crude understanding of monetary policy all wrong?

hga 12y ago
I'm pretty sure everyone's understanding of monetary policy is "crude". What you say appears to be right, but it's also rare if not unheard of. As I understand it, normally, as the US (and I and my family) experienced in the '70s, these policies would be viewed by borrowers in such a way they'd demand more interest for lending their money to the government, through combinations of perhaps rising inflation and perceived regime risk (which rising inflation is an example of, by eventually liquidating debts for less real value). "This Time It's Different!", which they always say (and is the title of a recommended book on the subject, an 800 or so year study of this game). The theory I hold to as of now is that the world-wide nature of the Great Recession and other factors like the artificiality of the Euro have made the US dollar, and US government debt, the "least worst" place to put your money. Well, in any quantity at least, e.g. I remember tiny Switzerland (GDP ~1/32nd of the US) getting very concerned about "hot money" inflows into their franc and maybe taking some actions WRT to them. The PRC is also something of a wild card: they watched the debacle of Indonesia, where a short term liquidity crisis was treated by the IMO as a typical 3rd World unsustainable government debt crisis, resulting in needless hardship and the ousting of its long term strongman. The CCP decided to make sure that didn't happen to them and have as a result acquired vast foreign wealth/debt holdings, including plenty of US government debt.
- deleted 12y ago
  [deleted]
- vishakad 12y ago
  You've got some sound logic there, particularly on why the US is a popular place for investment. That is definitely a factor as to why T-bond yields have stayed low over the last few years. But, is inflation really that big a factor in determining bond yields during auctions? With regards the '70s, you emphasized "normally" in your reply. Why was that? Weren't the '70s a time of unusually high inflation and unemployment in the US? And thank you for the book recommendation! It looks really nifty!
  - hga 12y ago
    It's my understanding that perception of future inflation is very important in determining bond yields. At the extreme, you want to get paid back in real terms, not "NuDollars" (hmmm, Heinlein assumed inflation of at least 3 orders of magnitude in the time Citizen of the Galaxy was set). Or why we talk about "real" interest rates, subtracting inflation. Of course, let's not get into how the government is scoring inflation nowadays, or how everyone admits that the cost of education and medicine don't track official inflation at all.... As I understand it, the '70s were "normal" in that that sort of response is what you really should expect from such policies. Check out the book, which I bought but have only glanced at. The smashing of the Phillips Curve, the official, written into law as I recall, relationship between inflation and unemployment, wasn't considered normal at the time, e.g. the word "stagflation" was coined to describe it. But skimming the Wikipedia article on it suggests that it was never true, or at least not for more than the short term. And the "'70s" economic agony was rather long term. E.g. you won't read it in Wikipedia, but LBJ closed the gold window to all but central banks in 1968, i.e. moving it much more to the political arena by cutting out "speculators" like George Soros. That was a near catastrophe of the "black swan" type ... at least to them, who thought we could afford both "guns and butter". With a slow end in the early '80s, delayed in part by the phasing-in of Reagan's tax rate cuts required by the Democratic House, conveniently providing an "It's Morning in America" 1984 campaign theme as "Reaganomics" vanished from the vocabulary ^_^.
    - vishakad 12y ago
      Your inflationary expectations point makes sense. Considering the US economy is in a period of low to zero inflation at this point, it is fair for bond yields to be low for 3-year terms and so. I completely forgot about NuDollars, hehe. The bit I know about the '70s is also the US going off the gold standard, with Nixon putting the then Fed Governor, Burns, under immense pressure to keep interest rates low in the face of high inflation. Not to mention going off the gold standard altogether. Much of my reading on economic growth has been rather lopsided on the side of monetary economics. I'm looking to pick up more on the influence of government policy such as tax cuts, etc.

hga 12y ago

I'm pretty sure everyone's understanding of monetary policy is "crude". What you say appears to be right, but it's also rare if not unheard of. As I understand it, normally, as the US (and I and my family) experienced in the '70s, these policies would be viewed by borrowers in such a way they'd demand more interest for lending their money to the government, through combinations of perhaps rising inflation and perceived regime risk (which rising inflation is an example of, by eventually liquidating debts for less real value). "This Time It's Different!", which they always say (and is the title of a recommended book on the subject, an 800 or so year study of this game). The theory I hold to as of now is that the world-wide nature of the Great Recession and other factors like the artificiality of the Euro have made the US dollar, and US government debt, the "least worst" place to put your money. Well, in any quantity at least, e.g. I remember tiny Switzerland (GDP ~1/32nd of the US) getting very concerned about "hot money" inflows into their franc and maybe taking some actions WRT to them. The PRC is also something of a wild card: they watched the debacle of Indonesia, where a short term liquidity crisis was treated by the IMO as a typical 3rd World unsustainable government debt crisis, resulting in needless hardship and the ousting of its long term strongman. The CCP decided to make sure that didn't happen to them and have as a result acquired vast foreign wealth/debt holdings, including plenty of US government debt.

deleted 12y ago
[deleted]
vishakad 12y ago
You've got some sound logic there, particularly on why the US is a popular place for investment. That is definitely a factor as to why T-bond yields have stayed low over the last few years. But, is inflation really that big a factor in determining bond yields during auctions? With regards the '70s, you emphasized "normally" in your reply. Why was that? Weren't the '70s a time of unusually high inflation and unemployment in the US? And thank you for the book recommendation! It looks really nifty!
- hga 12y ago
  It's my understanding that perception of future inflation is very important in determining bond yields. At the extreme, you want to get paid back in real terms, not "NuDollars" (hmmm, Heinlein assumed inflation of at least 3 orders of magnitude in the time Citizen of the Galaxy was set). Or why we talk about "real" interest rates, subtracting inflation. Of course, let's not get into how the government is scoring inflation nowadays, or how everyone admits that the cost of education and medicine don't track official inflation at all.... As I understand it, the '70s were "normal" in that that sort of response is what you really should expect from such policies. Check out the book, which I bought but have only glanced at. The smashing of the Phillips Curve, the official, written into law as I recall, relationship between inflation and unemployment, wasn't considered normal at the time, e.g. the word "stagflation" was coined to describe it. But skimming the Wikipedia article on it suggests that it was never true, or at least not for more than the short term. And the "'70s" economic agony was rather long term. E.g. you won't read it in Wikipedia, but LBJ closed the gold window to all but central banks in 1968, i.e. moving it much more to the political arena by cutting out "speculators" like George Soros. That was a near catastrophe of the "black swan" type ... at least to them, who thought we could afford both "guns and butter". With a slow end in the early '80s, delayed in part by the phasing-in of Reagan's tax rate cuts required by the Democratic House, conveniently providing an "It's Morning in America" 1984 campaign theme as "Reaganomics" vanished from the vocabulary ^_^.
  - vishakad 12y ago
    Your inflationary expectations point makes sense. Considering the US economy is in a period of low to zero inflation at this point, it is fair for bond yields to be low for 3-year terms and so. I completely forgot about NuDollars, hehe. The bit I know about the '70s is also the US going off the gold standard, with Nixon putting the then Fed Governor, Burns, under immense pressure to keep interest rates low in the face of high inflation. Not to mention going off the gold standard altogether. Much of my reading on economic growth has been rather lopsided on the side of monetary economics. I'm looking to pick up more on the influence of government policy such as tax cuts, etc.