34 ms·

Why are interest rates so low?

158 points by forrest_t 12y ago

irickt 12y ago
By Ben S. Bernanke, former Fed Chairman
- tmcgoo 12y ago
  Bingo
jacquesm 12y ago
Because the economy stopped growing, which means there is little demand for money. If there is a large demand for capital then interest rates will rise. It's ordinary supply and demand only applied to money rather than some good or service.
- brador 12y ago
  > there is little demand for money. Wrong side of the equation. There is an oversupply of money, leading to low interest rates.
  - jacquesm 12y ago
    I guess it depends on which side you are thinking from in arguments like these. The interest rate a bank will give you depends on how much demand there is for the money that you are about to give that bank. If the bank has no way to make a profit on the money they give you because there is little demand then they will offer you a low interest percentage (or even none or a negative one). So yes, there is an oversupply, but that's the same as little demand on the other side of the bank, plus or minus some arbitrary skew in time. The bank simply tries to make money from being in the middle between supplier of capital (you and your savings) and the consumers of capital (the demand side, industry, mortgages and so on).
    - w0utert 12y ago
      The monetary system hasn't been about 'me and my savings', for at least 3 decades. Reasoning about banks, capital, supply/demand, return on investment, in terms of whether consumers spend their savings or leave it sitting on a bank account, will not make you any wiser about the state of the economy or our monetary system. Current rates are low because central banks everywhere are basically flooding the world with free money, throwing good money after bad money by monetizing poisonous debt, to prevent the financial system from imploding (which almost happened in 2008). Or at least postpone it for as long as possible. Ben Bernanke will be (almost) the last person on earth to say this out loud, which makes the value of this fluff piece on a site like this pretty dubious. There's a reason why his nickname is 'Helicopter Ben'.
      - jacquesm 12y ago
        That's definitely a good point, but even a madman with a printer counts as 'supply outweighing demand'. The principles don't really change. That's why printing all this money is going to catch up with us sooner or later.
        BenoitEssiambre 12y ago
        Maybe but it's central banks being to timid in printing money, making it too valuable and increasing the demand for it that ends up making them print much more just to barely keep the economy going. They are making fiat so valuable that it displaces private investment as a store of value and money accumulates in the economy as idle excess reserves. If central banks had printed sufficiently and promised to push inflation high enough early in the financial crisis, the market would have cleared and much less money would have accumulated idle in the system overall. Here are some of my musings on this: http://bessiambre.tumblr.com/ http://bessiambre.tumblr.com/
        mtviewdave 12y ago
        >That's why printing all this money is going to catch up with us sooner or later. In 2009, here on HN, people were warning that the first round of QE would lead to Weimar-style hyperinflation in fairly short order. Six years and two additional rounds of QE later, interest rates and inflation in the U.S. are still quite low. People tend to forget that the economy has done quite well even under inflation levels that we'd now consider high; during the Reagan boom, inflation fluctuated between 3-5%. Even if all this QE led to 5% inflation for a number of years, that's not really a serious problem (and certainly not hyperinflation). It starts to get painful when you get to 10%, 15%, 20%, but that's a fixable problem. Indeed, it was fixed at the end of the 1970s. It was painful, but it was fixed. So, yes, it might catch up with us. But when and how badly matter a lot. If the cost of all this QE is that average inflation in the 2020s is 5%, so what? That's hardly a disaster. Or let's say inflation creeps up to about 12%, and in 2025 the Fed takes strong action to get it under control, leading to a sharp painful recession in 2025-26. Should we have a decade or two's worth of stagnation to avoid this hypothetical? I personally don't think so.
  - cynicalkane 12y ago
    This is a false understanding of how the supply and demand for money works. For example, news about QE was positively correlated with long term interest rates. The expectation of an increased future money supply tilted the balance towards the demand side in the present. Money is fundamentally an intertemporal thing, and we've known since the 1930s that the cute little supply-demand time-slice diagrams in textbooks don't work on the money supply. Here we see the prices of 10-year bonds falling (=> interest rates rising) with each QE cycle: http://www.pragcap.com/wp-content/uploads/2013/11/arp1.png http://www.pragcap.com/wp-content/uploads/2013/11/arp1.png
    - abfan1127 12y ago
      I'm not sure I follow. The Federal Reserve has manipulated the interest rates and money supply since 1913. The money market demand can't help determine the supply of money since the cost of money is the interest rate. Consumers aren't allowed to see if its worth while to save their money and earn interest rather than spend their money. Businesses can't see if its worth it to focus on current production or invest in infrastructure for future production because of artificial rates.
      - sxcurry 12y ago
        But the article states exactly the opposite. Rates are determined by the state of the economy, and hence there is no such thing as artificial rates.
        abfan1127 12y ago
        The article was written by Ben Bernanke, not exactly the person I'd expect to admit he's been meddling in the money market for years.
  - BenoitEssiambre 12y ago
    Although you got the sign right, that is the rising supply of money does lower interest rates, in most of the world there is certainly not an oversupply. Money at around -2% real return is still pricing private stores of value, read new investment, out of the market. Money needs a real return that is lower than that so that fiat is not over valued compared to market stores of value, and people, banks and businesses don't hold their savings in excess idle reserves instead of in things that have intrinsic value and that are backed by economic activity.
colund 12y ago
Why the obsession of economic growth? In Sweden we currently have negative prime interest rate and people have higher salaries than ever and housing prices are all time high. This greed doesn't lead to less global warming or happier people. I think politicians and economists should start thinking about what actually makes people happy. Economics is efficient management of resources nothing else. Giving the population ability to stay healthy with affordable health care, moderate taxes and stability should be a main priority.
- wvenable 12y ago
  In the US and many other places, economic growth is essentially the retirement plan.
- vasilipupkin 12y ago
  economic growth, albeit imperfect, is a measure of things getting better for society. So, we should worry about worldwide economic growth, but not necessarily Swedish economic growth. Another point is, lack of growth is a leading indicator of the situation getting worse in the future, even if it is pretty good now. So, yes, economic growth is an imperfect measure, but we have few if any alternatives to economic growth in terms of assessing how things are going in an objective way
  - TheOtherHobbes 12y ago
    Not so much imperfect as deceptively irrelevant. "Growth" has absolutely nothing useful to say about "things getting better for society." Things get better for society when jobs pay well, high quality education is freely accessible, talent and creativity are rewarded, cost of entry for entrepreneurship is low, and ecological support systems are stable. There's nothing even remotely difficult about measuring these factors. "Growth" is just a convenient way to disguise increasing inequality and decreasing economic freedom for the majority of the population. If the growth is never distributed it's a useless metric.
    - vasilipupkin 12y ago
vitriol83 12y ago
> The Fed does, of course, set the benchmark nominal short-term interest rate....The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. this would be a plausible argument if the us treasury weren't the biggest buyer of long-term government debt.
- o_nate 12y ago
  The Fed stopped buying Treasuries in November of last year and since that time long-term rates (both real and nominal) have fallen.
don_draper 12y ago
Another good question: Why are S&P500 stock dividends so low? The average S&P500 stock dividend yield is like 2%. In theory, you buy stocks to receive earnings. But if companies only give out a fraction of those earnings, you as an investor are not really getting much. So how can companies get away with a 2% dividend yield?
- patio11 12y ago
  To oversimplify, companies can distribute earnings as dividends or as capital gains. The US' tax regime strongly rewards the latter. Investors, particularly large investors, have both a) explicitly asked for and b) implicitly expressed their preference (via market mechanisms) for their earnings to be in the form of capital gains.
  - exelius 12y ago
    This is true, though tax reforms have made the distinction less relevant for the average investor (since dividends have been taxed at the capital gains rate for most long-term investments since 2003). Regardless, there is still a benefit to buybacks on the order of a percent or two for large institutional investors as they move in and out of positions, so there is still pressure to distribute profits via stock buybacks as opposed to issuing dividends (see Apple's recent buyback programs as an example).
- arielweisberg 12y ago
  Dividends are a tax inefficient way to compensate share holders because dividends are taxable. I hope dividends disappear. Share buybacks increase net asset value without any tax impact. There might be a downside, but I haven't heard it yet.
  - mauricemir 12y ago
    Having to pay the bankers 2% for arranging the loans to do the buy back. As mentioned in Todays Alex http://www.telegraph.co.uk/finance/alex/?cartoon=11503607&cc=11443625 http://www.telegraph.co.uk/finance/alex/?cartoon=11503607&cc...
jellicle 12y ago
It is worth also reading Paul Krugman's take on this blog post: http://krugman.blogs.nytimes.com/2015/03/30/ben-bernanke-blog-blogging/ http://krugman.blogs.nytimes.com/2015/03/30/ben-bernanke-blo... In particular Krugman notes that the average retiree has basically nothing in interest earnings. The median retiree has a bit more than $100K in total net worth (most of it in housing), and earns bupkis in interest.
- cylinder 12y ago
  Raising interest rates will actually improve the economy for this reason, but policy makers don't understand this. Read more here http://www.amazon.com/The-Great-Rebalancing-Conflict-Perilous/dp/1491531339 http://www.amazon.com/The-Great-Rebalancing-Conflict-Perilou...
- Balgair 12y ago
  I mean, if that isn't the scariest thing out there in the US, then I really don't know what is (excepting nukes, MRSA, and the like). That aging population is going to wreak havoc on the economy, with the exception of elder care. Oh, and when is that all supposed to be timed to go off? About 2030, just in time for 9 billion other humans to go about their lives too, water wars really starting to heat up, etc. The 2028 and 2032 elections are going to be a hell of a thing as REAL politics and compromise get going.
- nwah1 12y ago
  Inequality is also explained, to a shocking extent, by housing. And housing is a euphemism for land. http://www.washingtonpost.com/blogs/wonkblog/wp/2015/03/19/meet-the-26-year-old-whos-taking-on-thomas-pikettys-ominous-warnings-about-inequality/ http://www.washingtonpost.com/blogs/wonkblog/wp/2015/03/19/m... Rent rises whenever things improve, but those returns don't help everyone, nor do they help the people responsible for the improvements. Rather, they help the select fortunate landholders who are profiting by owning prime locations, particularly urban locations.
joshfraser 12y ago
CPI is a horrible way to measure inflation. This is a pretty biased piece coming from the former chairman of the Fed. It takes for granted that we need centralized organizations to control the supply of money and that our only option is never-ending inflation. There are many who believe we'd be better off it we ended the Fed and the tax of inflation that devalues our money and punishes savers.
- guelo 12y ago
  Is there an example of a successful economy that ran without a central bank?
  - Mikeb85 12y ago
    Well, the main purpose of a central bank is to issue currency, so an economy without a central bank would need to use something else as currency (either a foreign currency, or some sort of commodity like gold or grain).
    - antientropic 12y ago
      The US had its own currency long before it had a central bank.
  - ArkyBeagle 12y ago
    You can look up the Free Scots Banks. Successful? Hard to say.
  - mkempe 12y ago
    The USA before 1913. See [1] for a detailed treatment of economies that thrived without central banking. [1] http://www.amazon.com/dp/B004VMUL6G http://www.amazon.com/dp/B004VMUL6G
    - dap 12y ago
      What about an example of a major economy without a central bank that survived a major depression (say, the size of the Great Depression)? Or counterexamples? (I believe there are counter-examples -- nations with no central bank that took a worse beating than other nations that had a central bank during a major recession -- but I cannot remember them. Sorry.)
roymurdock 12y ago
Consider the simple aggregate production function: Q = zF(L,K) where Q is output, z is the level of technology, known as Total Factor Productivity (TFP), L is labor, and K is capital. Sustainable economic growth is driven by increases in z, TFP which drives the production function. Government investment in education, R&D, healthcare, and infrastructure increase TFP. There is a serious lack of gov't investment in these areas. In my opinion the share of capital (K) in the equation has grown far beyond what is healthy. Solow posits that capital attracts capital [0]. We have not done enough to offset this natural tendency, and we are seeing the result - huge and constantly growing wealth & income inequality. The economy is growing in an unsustainable fashion. There is a serious lack of "good", sustainable investments in the global economy. One example of this is investor's willingness to pay the Swiss central bank to hold their money for them. Investors are scared - they know a serious revision in value is bound to occur. Many parts of the EU are beginning to flirt with deflation. The top comment mentions negative prime interest rates in Sweden that have not affected the standard of living. This is very interesting given the traditional viewpoint that any form of deflation, however minor, is an economic calamity. Maybe for the central banks it is, as they lose control of one their control over the setting of short term interest which has been their prime monetary policy weapon over choice over the past 30 years. Whatever happens, this is an interesting situation that I'm sure will inform generations to come. [0] http://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model http://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model
upofadown 12y ago
In the absence of some technological breakthrough that would allow new capital investment to pay for itself, interest rates just can't be that high. We can lend each other money to buy stuff (ex. mortgages) but there are strong limits to the value of that sort of activity (as has recently been demonstrated).
saosebastiao 12y ago
Interest rates are low because inflation is low and central banks are irrationally terrified of even mild deflation, fearing some sort of hypothetical deflationary spiral (despite a complete lack of precedent). And since the rate of technological progress is increasing, and technological progress creates deflationary pressure, they have to work extra hard to keep up. Tell me, when was the last time you stopped buying milk because you noticed housing prices coming down? Or stopped buying cars because you notice that coffee is getting cheaper? Hell, when was the last time you stopped buying coffee when you noticed coffee getting cheaper? We really need to start challenging the idea that mild inflation is the only acceptable monetary policy. At the very least, when considering the scariness of some degree of deflation, we should use an inflation metric that excludes consumables (as proven in repeated rounds of econometric studies that consumable items have no decrease in purchasing rates during downward pricing trends, and in fact have statistically significant increases in purchase rates).
- Mikeb85 12y ago
  The problem with deflation isn't that everyday things get cheaper, it's that investments (like houses) devalue, which leads to people hoarding cash. Now that's not to say it's always a bad thing. In Canada right now I'd argue houses are way too expensive, and that market needs to correct itself. If housing prices were to crash (and they very well might), they'd eventually bottom out at a reasonable level, because many people who held off buying a house when then buy one. However if deflation happened year after year, and everyone expected that the price of anything they bought would devalue, they might not buy it today. Enough people do that en masse, and you have problems.
  - shard972 12y ago
    > and everyone expected that the price of anything they bought would devalue, they might not buy it today. I don't see how this is different than today, there are not many things you buy aside from a house that don't lose value over time.
    - RockyMcNuts 12y ago
mox1 12y ago
It is a little scary to me that Ben is basically saying the "Wicksellian interest rate" is the best way to steer our economy, so we strive to use that.... To rely so heavily on theory to guide actual policy is at minimum reckless in my opinion. I hope there are / were other voices in the room with alternative opinions, not just PhDs giving him hourly ideal Wicksellian rate updates....
- rgross 12y ago
  Huh? It's reckless to guide economic policy by economic theory? How else do you propose the Fed sets interest rates, a Ouija board?
  - mox1 12y ago
    I meant by a single economic theory / equation...
    - rgross 12y ago
      You needn't worry that Fed policy is too simplistic. Bernanke is a distinguished economist (as is Yellen) and this blog post doesn't even scratch the surface of the depth of his economic knowledge and background. That's not to say that the Fed is perfect, of course, but the people in charge have serious expertise; this isn't Ted Cruz heading up an environmental committee.
jack9 12y ago
> That’s true only in a very narrow sense. I love his complete willingness to mislead. What an asshole. If a bank can borrow from the Fed at a lower rate, they refinance their existing debt almost immediately. This trickles down to smaller institutions without the ability to borrow directly from the Fed. It's not true that the Fed sets the interest rate in a narrow sense, it's true in a very strict and immediate sense.
- aros 12y ago
  Why did you take one sentence out of context and pretend to refute the entire article?
- dap 12y ago
  He doesn't say that the Fed doesn't set the nominal rate in the short term. As I understood it, the post argues that it's unsustainable for the Fed to attempt to set the nominal short-term rate to something different than the medium-term real rate, over which it has no control. Did you skip the whole part about what happens if the Fed sets the nominal short-term rate lower or higher than the medium-term real rate?
narrator 12y ago
The interest on the national debt would increase to very large levels if they were higher. The government would then have to borrow more. They wouldn't find buyers for all the treasuries they would have to issue, so the fed would have to print money to buy the bonds to make sure there wasn't a failed auction (a.k.a Permanent Open Market Operations). This printing would work, for a little while, but all the interest paid on the national debt would go higher than the magic level of about 8% of GDP in which case it's becomes unable to profitably reinvest itself and instead beings to flood into foreign exchange and hard assets causing severe inflation. If the fed did not print then there would be a failed debt auction and a debt default. That, or there would have to be an unacceptable massive federal budget cut or a likely counterproductive tax increase to cover the interest.
sprash 12y ago
Sadly, even the chairmen of central banks ignore the most important contribution to inflation: wages. The reason why we have deflation in Japan and Europe despite almost zero rates and even additional quantitative easing is because nominal median wages there are actually falling. It is very easy to make sure to have an inflation of 2%: Just raise the minimum wage 2% each year. Thats it. Example that inflation correlates strongly with wages for the EWU: http://www.flassbeck-economics.de/wp-content/uploads/2013/03/HF-4-3-2013.jpg http://www.flassbeck-economics.de/wp-content/uploads/2013/03...
- roymurdock 12y ago
  This is wrong. 3.3m workers work for the minimum wage in the US. This represents 2.6% of all wage and salary workers in the economy [0]. Raising the minimum wage would simply make 2.6% of the working population better off at the expense of their employers. It's a redistribution of wealth and it has nothing to do with inflation. You have your causation backwards. Employers being forced to pay a higher wage to 2.6% of the working force does not cause the money supply to increase. Central bank monetary policy causes the money supply to increase, creating inflation. Wages increase in order to preserve purchasing power in an inflationary economy. This is why the markets hang on the Fed's every word - the Fed has the power to change interest rates and inflation which, in turn, effects the labor market. To address your point about deflation: QE was designed to support bank balance sheets by removing risky and opaque assets and replacing them with liquidity. Banks now have a ton of liquidity [1], but no investment-worthy projects. Thus they choose to hold their reserves with central banks, choosing a negative interest rate over the risk of lending in the economy. Wages are falling because there is less money in the economy chasing an increasing amount of goods. Therefore money is appreciating in value. Once banks resume lending out the liquidity they have been injected with we will see wages rise. [0] http://www.pewresearch.org/fact-tank/2014/09/08/who-makes-minimum-wage/ http://www.pewresearch.org/fact-tank/2014/09/08/who-makes-mi... [1] http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=15Y1 http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1...
  - sprash 12y ago
    > Raising the minimum wage would simply make 2.6% of the working population better off at the expense of their employers. But never the less those 2.6% percent will be directly responsible for the inflation since they barely get by now and if you increase their wages the prices will adjust accordingly so that they barely get by in the future. Also it has been shown that if you increase minimum wage all wages across the board will increase, even the highest ones. > Central bank monetary policy causes the money supply to increase, creating inflation. There is no evidence for that. The money supply has been expanded vastly in the last years but still there was almost no inflation. Why? because all the money arrived in the financial market where it "inflated" the value of financial products causing one bubble after the other. There is a very easy way to make absolutely sure that the money arrives in the real economy (which will be the driver of "investment-worthy" projects in the future): raise wages.
randyrand 12y ago
The comments I see in this thread make me so upset. HN has always been about making the world a better place. Doing things that matter. Making lives better. We look forward to self driving cars, solving heathcare, etc etc et. Yet I read these comments and apparently HN isn't as concerned about progress anymore. "Why do we need growth", "I'll take peace over growth at this point." Are you crazy? When did we stop caring about growth? Making things better? More efficient? Improving lives? What a depressing comment thread. edit: Some people are saying, but economic growth does not necessarily imply tech progress. yes, economic progress does not have to come from technology growth. You're right. tldr: but it would be incredibly incredibly difficult (and perhaps provably impossible in a free-ish society) to grow the economy without also encouraging and making technological growth (also finding oil deposits, other discoveries, etc) Growth comes from a few things. 1, operating at max utilization. Full employment. Going from 50% to 90% will grow the GDP. 2, saving. Saving what we already have. Building bridges, long lasting homes, etc to that we can be more efficient and focus on other problems in the future. Note, this does not increase yearly GDP but it increases overall wealth per capita. For example, many europeans live and benefit from homes that were built for them hundreds of years ago. They're free to worry less about building homes and more on improving other aspects of their lives. 3, technological progress. While it's true gorwth != tech progress, its also certain that growing the economy by #1 and #2 above will allow more room for people to work on #3. #2 is important. We can't work on nuclear physics before we build homes from physicists to live in. Likewise #1 is important. for every person that becomes employed, their handwork allows other people to focus on other things, research. We need enough farmers to feed researchers. The more farmers, the more researchers. So in a sense, you can, but it would be incredibly difficult to grow the economy without also encouraging and making technological growth.
- lsd5you 12y ago
  Growth!=Technological progress. I'm not sure what else there is to say. Do you realise you made this logical jump? Does it not need expanding upon or justifying? Do you not think it might be the source of the difference other people have?
  - alasdair_ 12y ago
Trumpet6 12y ago
Early on the author states "the Fed is keeping them low. That’s true only in a very narrow sense." He then proceeds to stay in this narrow sense, while explaining the theoretical framework driving the Fed's decision. While it is of course interesting to better know their reasoning, this article does not amount to a more nuanced response than "the Fed is keeping them low because the Fed thinks its best". Personally I think that's close enough to "the Fed is keeping them low" to not really bother with the distinction.
RockyMcNuts 12y ago
Bernanke seems to discount the value of QE. If short-term rates are already at zero, and the Fed can't impact longer-term interest rates, then QE would have no effect. But in fact, after the Fed pegged the overnight rate at 0, they could peg the 7-day rate at 0 just by committing to keep the overnight rate at 0 for 7 days, and offering to lend 7-day money at 0. And they can then peg the 1-year rate by offering to buy and sell 1-year T-bills at a given price. And so on up the yield curve. Of course, at some point inflation adjusts and the Fed can't peg the real rate over the long term. But in the short term they can peg a lot of nominal rates in a sense that is not as narrow as he lets on here. http://ftalphaville.ft.com/2015/03/30/2125256/did-bernanke-forget-about-qe/ http://ftalphaville.ft.com/2015/03/30/2125256/did-bernanke-f...
cbaker 12y ago
If you implement policies where all the benefits of growth go the people least likely to spend them, you'll end up with a glut of savings. That is why interest rates are so low.
oldpond 12y ago
"Equilibrium real interest rate"??? What a load of horseshit. Interest rates are low because if they raise them the entire world goes broke. They dropped them down in order to sell more and more debt. Now all the debt is sold. This is the result of globalization; there's only so much "good" debt to buy. With all individuals and governments in developed countries maxed out on their debts, the banking system is basically stuck. Economists dredge up techno baffle-gab like this to fool the public into thinking there's some complex mystery to the financial system that only quants can figure out. It's not that complicated. Declare debt amnesty, make all the banks suddenly smaller, and if you really want to prevent this kind of thing from happening again make currency speculation illegal. That's a good start.

158 points by forrest_t 12y ago

irickt 12y ago

By Ben S. Bernanke, former Fed Chairman

tmcgoo 12y ago
Bingo

jacquesm 12y ago

Because the economy stopped growing, which means there is little demand for money. If there is a large demand for capital then interest rates will rise. It's ordinary supply and demand only applied to money rather than some good or service.

brador 12y ago
> there is little demand for money. Wrong side of the equation. There is an oversupply of money, leading to low interest rates.
- jacquesm 12y ago
  I guess it depends on which side you are thinking from in arguments like these. The interest rate a bank will give you depends on how much demand there is for the money that you are about to give that bank. If the bank has no way to make a profit on the money they give you because there is little demand then they will offer you a low interest percentage (or even none or a negative one). So yes, there is an oversupply, but that's the same as little demand on the other side of the bank, plus or minus some arbitrary skew in time. The bank simply tries to make money from being in the middle between supplier of capital (you and your savings) and the consumers of capital (the demand side, industry, mortgages and so on).
  - w0utert 12y ago
    The monetary system hasn't been about 'me and my savings', for at least 3 decades. Reasoning about banks, capital, supply/demand, return on investment, in terms of whether consumers spend their savings or leave it sitting on a bank account, will not make you any wiser about the state of the economy or our monetary system. Current rates are low because central banks everywhere are basically flooding the world with free money, throwing good money after bad money by monetizing poisonous debt, to prevent the financial system from imploding (which almost happened in 2008). Or at least postpone it for as long as possible. Ben Bernanke will be (almost) the last person on earth to say this out loud, which makes the value of this fluff piece on a site like this pretty dubious. There's a reason why his nickname is 'Helicopter Ben'.
    - jacquesm 12y ago
      That's definitely a good point, but even a madman with a printer counts as 'supply outweighing demand'. The principles don't really change. That's why printing all this money is going to catch up with us sooner or later.
      - BenoitEssiambre 12y ago
        Maybe but it's central banks being to timid in printing money, making it too valuable and increasing the demand for it that ends up making them print much more just to barely keep the economy going. They are making fiat so valuable that it displaces private investment as a store of value and money accumulates in the economy as idle excess reserves. If central banks had printed sufficiently and promised to push inflation high enough early in the financial crisis, the market would have cleared and much less money would have accumulated idle in the system overall. Here are some of my musings on this: http://bessiambre.tumblr.com/ http://bessiambre.tumblr.com/
      - mtviewdave 12y ago
        >That's why printing all this money is going to catch up with us sooner or later. In 2009, here on HN, people were warning that the first round of QE would lead to Weimar-style hyperinflation in fairly short order. Six years and two additional rounds of QE later, interest rates and inflation in the U.S. are still quite low. People tend to forget that the economy has done quite well even under inflation levels that we'd now consider high; during the Reagan boom, inflation fluctuated between 3-5%. Even if all this QE led to 5% inflation for a number of years, that's not really a serious problem (and certainly not hyperinflation). It starts to get painful when you get to 10%, 15%, 20%, but that's a fixable problem. Indeed, it was fixed at the end of the 1970s. It was painful, but it was fixed. So, yes, it might catch up with us. But when and how badly matter a lot. If the cost of all this QE is that average inflation in the 2020s is 5%, so what? That's hardly a disaster. Or let's say inflation creeps up to about 12%, and in 2025 the Fed takes strong action to get it under control, leading to a sharp painful recession in 2025-26. Should we have a decade or two's worth of stagnation to avoid this hypothetical? I personally don't think so.
- cynicalkane 12y ago
  This is a false understanding of how the supply and demand for money works. For example, news about QE was positively correlated with long term interest rates. The expectation of an increased future money supply tilted the balance towards the demand side in the present. Money is fundamentally an intertemporal thing, and we've known since the 1930s that the cute little supply-demand time-slice diagrams in textbooks don't work on the money supply. Here we see the prices of 10-year bonds falling (=> interest rates rising) with each QE cycle: http://www.pragcap.com/wp-content/uploads/2013/11/arp1.png http://www.pragcap.com/wp-content/uploads/2013/11/arp1.png
  - abfan1127 12y ago
    I'm not sure I follow. The Federal Reserve has manipulated the interest rates and money supply since 1913. The money market demand can't help determine the supply of money since the cost of money is the interest rate. Consumers aren't allowed to see if its worth while to save their money and earn interest rather than spend their money. Businesses can't see if its worth it to focus on current production or invest in infrastructure for future production because of artificial rates.
    - sxcurry 12y ago
      But the article states exactly the opposite. Rates are determined by the state of the economy, and hence there is no such thing as artificial rates.
      - abfan1127 12y ago
        The article was written by Ben Bernanke, not exactly the person I'd expect to admit he's been meddling in the money market for years.
- BenoitEssiambre 12y ago
  Although you got the sign right, that is the rising supply of money does lower interest rates, in most of the world there is certainly not an oversupply. Money at around -2% real return is still pricing private stores of value, read new investment, out of the market. Money needs a real return that is lower than that so that fiat is not over valued compared to market stores of value, and people, banks and businesses don't hold their savings in excess idle reserves instead of in things that have intrinsic value and that are backed by economic activity.

colund 12y ago

Why the obsession of economic growth? In Sweden we currently have negative prime interest rate and people have higher salaries than ever and housing prices are all time high. This greed doesn't lead to less global warming or happier people. I think politicians and economists should start thinking about what actually makes people happy. Economics is efficient management of resources nothing else. Giving the population ability to stay healthy with affordable health care, moderate taxes and stability should be a main priority.

wvenable 12y ago
In the US and many other places, economic growth is essentially the retirement plan.
vasilipupkin 12y ago
economic growth, albeit imperfect, is a measure of things getting better for society. So, we should worry about worldwide economic growth, but not necessarily Swedish economic growth. Another point is, lack of growth is a leading indicator of the situation getting worse in the future, even if it is pretty good now. So, yes, economic growth is an imperfect measure, but we have few if any alternatives to economic growth in terms of assessing how things are going in an objective way
- TheOtherHobbes 12y ago
  Not so much imperfect as deceptively irrelevant. "Growth" has absolutely nothing useful to say about "things getting better for society." Things get better for society when jobs pay well, high quality education is freely accessible, talent and creativity are rewarded, cost of entry for entrepreneurship is low, and ecological support systems are stable. There's nothing even remotely difficult about measuring these factors. "Growth" is just a convenient way to disguise increasing inequality and decreasing economic freedom for the majority of the population. If the growth is never distributed it's a useless metric.
  - vasilipupkin 12y ago

vitriol83 12y ago

> The Fed does, of course, set the benchmark nominal short-term interest rate....The Fed’s ability to affect real rates of return, especially longer-term real rates, is transitory and limited. this would be a plausible argument if the us treasury weren't the biggest buyer of long-term government debt.

o_nate 12y ago
The Fed stopped buying Treasuries in November of last year and since that time long-term rates (both real and nominal) have fallen.

don_draper 12y ago

Another good question: Why are S&P500 stock dividends so low? The average S&P500 stock dividend yield is like 2%. In theory, you buy stocks to receive earnings. But if companies only give out a fraction of those earnings, you as an investor are not really getting much. So how can companies get away with a 2% dividend yield?

patio11 12y ago
To oversimplify, companies can distribute earnings as dividends or as capital gains. The US' tax regime strongly rewards the latter. Investors, particularly large investors, have both a) explicitly asked for and b) implicitly expressed their preference (via market mechanisms) for their earnings to be in the form of capital gains.
- exelius 12y ago
  This is true, though tax reforms have made the distinction less relevant for the average investor (since dividends have been taxed at the capital gains rate for most long-term investments since 2003). Regardless, there is still a benefit to buybacks on the order of a percent or two for large institutional investors as they move in and out of positions, so there is still pressure to distribute profits via stock buybacks as opposed to issuing dividends (see Apple's recent buyback programs as an example).
arielweisberg 12y ago
Dividends are a tax inefficient way to compensate share holders because dividends are taxable. I hope dividends disappear. Share buybacks increase net asset value without any tax impact. There might be a downside, but I haven't heard it yet.
- mauricemir 12y ago
  Having to pay the bankers 2% for arranging the loans to do the buy back. As mentioned in Todays Alex http://www.telegraph.co.uk/finance/alex/?cartoon=11503607&cc=11443625 http://www.telegraph.co.uk/finance/alex/?cartoon=11503607&cc...

jellicle 12y ago

It is worth also reading Paul Krugman's take on this blog post: http://krugman.blogs.nytimes.com/2015/03/30/ben-bernanke-blog-blogging/ http://krugman.blogs.nytimes.com/2015/03/30/ben-bernanke-blo... In particular Krugman notes that the average retiree has basically nothing in interest earnings. The median retiree has a bit more than $100K in total net worth (most of it in housing), and earns bupkis in interest.

cylinder 12y ago
Raising interest rates will actually improve the economy for this reason, but policy makers don't understand this. Read more here http://www.amazon.com/The-Great-Rebalancing-Conflict-Perilous/dp/1491531339 http://www.amazon.com/The-Great-Rebalancing-Conflict-Perilou...
Balgair 12y ago
I mean, if that isn't the scariest thing out there in the US, then I really don't know what is (excepting nukes, MRSA, and the like). That aging population is going to wreak havoc on the economy, with the exception of elder care. Oh, and when is that all supposed to be timed to go off? About 2030, just in time for 9 billion other humans to go about their lives too, water wars really starting to heat up, etc. The 2028 and 2032 elections are going to be a hell of a thing as REAL politics and compromise get going.
nwah1 12y ago
Inequality is also explained, to a shocking extent, by housing. And housing is a euphemism for land. http://www.washingtonpost.com/blogs/wonkblog/wp/2015/03/19/meet-the-26-year-old-whos-taking-on-thomas-pikettys-ominous-warnings-about-inequality/ http://www.washingtonpost.com/blogs/wonkblog/wp/2015/03/19/m... Rent rises whenever things improve, but those returns don't help everyone, nor do they help the people responsible for the improvements. Rather, they help the select fortunate landholders who are profiting by owning prime locations, particularly urban locations.

joshfraser 12y ago

CPI is a horrible way to measure inflation. This is a pretty biased piece coming from the former chairman of the Fed. It takes for granted that we need centralized organizations to control the supply of money and that our only option is never-ending inflation. There are many who believe we'd be better off it we ended the Fed and the tax of inflation that devalues our money and punishes savers.

guelo 12y ago
Is there an example of a successful economy that ran without a central bank?
- Mikeb85 12y ago
  Well, the main purpose of a central bank is to issue currency, so an economy without a central bank would need to use something else as currency (either a foreign currency, or some sort of commodity like gold or grain).
  - antientropic 12y ago
    The US had its own currency long before it had a central bank.
- ArkyBeagle 12y ago
  You can look up the Free Scots Banks. Successful? Hard to say.
- mkempe 12y ago
  The USA before 1913. See [1] for a detailed treatment of economies that thrived without central banking. [1] http://www.amazon.com/dp/B004VMUL6G http://www.amazon.com/dp/B004VMUL6G
  - dap 12y ago
    What about an example of a major economy without a central bank that survived a major depression (say, the size of the Great Depression)? Or counterexamples? (I believe there are counter-examples -- nations with no central bank that took a worse beating than other nations that had a central bank during a major recession -- but I cannot remember them. Sorry.)

roymurdock 12y ago

Consider the simple aggregate production function: Q = zF(L,K) where Q is output, z is the level of technology, known as Total Factor Productivity (TFP), L is labor, and K is capital. Sustainable economic growth is driven by increases in z, TFP which drives the production function. Government investment in education, R&D, healthcare, and infrastructure increase TFP. There is a serious lack of gov't investment in these areas. In my opinion the share of capital (K) in the equation has grown far beyond what is healthy. Solow posits that capital attracts capital [0]. We have not done enough to offset this natural tendency, and we are seeing the result - huge and constantly growing wealth & income inequality. The economy is growing in an unsustainable fashion. There is a serious lack of "good", sustainable investments in the global economy. One example of this is investor's willingness to pay the Swiss central bank to hold their money for them. Investors are scared - they know a serious revision in value is bound to occur. Many parts of the EU are beginning to flirt with deflation. The top comment mentions negative prime interest rates in Sweden that have not affected the standard of living. This is very interesting given the traditional viewpoint that any form of deflation, however minor, is an economic calamity. Maybe for the central banks it is, as they lose control of one their control over the setting of short term interest which has been their prime monetary policy weapon over choice over the past 30 years. Whatever happens, this is an interesting situation that I'm sure will inform generations to come. [0] http://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model http://en.wikipedia.org/wiki/Solow%E2%80%93Swan_model

upofadown 12y ago

In the absence of some technological breakthrough that would allow new capital investment to pay for itself, interest rates just can't be that high. We can lend each other money to buy stuff (ex. mortgages) but there are strong limits to the value of that sort of activity (as has recently been demonstrated).

saosebastiao 12y ago

Interest rates are low because inflation is low and central banks are irrationally terrified of even mild deflation, fearing some sort of hypothetical deflationary spiral (despite a complete lack of precedent). And since the rate of technological progress is increasing, and technological progress creates deflationary pressure, they have to work extra hard to keep up. Tell me, when was the last time you stopped buying milk because you noticed housing prices coming down? Or stopped buying cars because you notice that coffee is getting cheaper? Hell, when was the last time you stopped buying coffee when you noticed coffee getting cheaper? We really need to start challenging the idea that mild inflation is the only acceptable monetary policy. At the very least, when considering the scariness of some degree of deflation, we should use an inflation metric that excludes consumables (as proven in repeated rounds of econometric studies that consumable items have no decrease in purchasing rates during downward pricing trends, and in fact have statistically significant increases in purchase rates).

Mikeb85 12y ago
The problem with deflation isn't that everyday things get cheaper, it's that investments (like houses) devalue, which leads to people hoarding cash. Now that's not to say it's always a bad thing. In Canada right now I'd argue houses are way too expensive, and that market needs to correct itself. If housing prices were to crash (and they very well might), they'd eventually bottom out at a reasonable level, because many people who held off buying a house when then buy one. However if deflation happened year after year, and everyone expected that the price of anything they bought would devalue, they might not buy it today. Enough people do that en masse, and you have problems.
- shard972 12y ago
  > and everyone expected that the price of anything they bought would devalue, they might not buy it today. I don't see how this is different than today, there are not many things you buy aside from a house that don't lose value over time.
  - RockyMcNuts 12y ago

mox1 12y ago

It is a little scary to me that Ben is basically saying the "Wicksellian interest rate" is the best way to steer our economy, so we strive to use that.... To rely so heavily on theory to guide actual policy is at minimum reckless in my opinion. I hope there are / were other voices in the room with alternative opinions, not just PhDs giving him hourly ideal Wicksellian rate updates....

rgross 12y ago
Huh? It's reckless to guide economic policy by economic theory? How else do you propose the Fed sets interest rates, a Ouija board?
- mox1 12y ago
  I meant by a single economic theory / equation...
  - rgross 12y ago
    You needn't worry that Fed policy is too simplistic. Bernanke is a distinguished economist (as is Yellen) and this blog post doesn't even scratch the surface of the depth of his economic knowledge and background. That's not to say that the Fed is perfect, of course, but the people in charge have serious expertise; this isn't Ted Cruz heading up an environmental committee.

jack9 12y ago

> That’s true only in a very narrow sense. I love his complete willingness to mislead. What an asshole. If a bank can borrow from the Fed at a lower rate, they refinance their existing debt almost immediately. This trickles down to smaller institutions without the ability to borrow directly from the Fed. It's not true that the Fed sets the interest rate in a narrow sense, it's true in a very strict and immediate sense.

aros 12y ago
Why did you take one sentence out of context and pretend to refute the entire article?
dap 12y ago
He doesn't say that the Fed doesn't set the nominal rate in the short term. As I understood it, the post argues that it's unsustainable for the Fed to attempt to set the nominal short-term rate to something different than the medium-term real rate, over which it has no control. Did you skip the whole part about what happens if the Fed sets the nominal short-term rate lower or higher than the medium-term real rate?

narrator 12y ago

The interest on the national debt would increase to very large levels if they were higher. The government would then have to borrow more. They wouldn't find buyers for all the treasuries they would have to issue, so the fed would have to print money to buy the bonds to make sure there wasn't a failed auction (a.k.a Permanent Open Market Operations). This printing would work, for a little while, but all the interest paid on the national debt would go higher than the magic level of about 8% of GDP in which case it's becomes unable to profitably reinvest itself and instead beings to flood into foreign exchange and hard assets causing severe inflation. If the fed did not print then there would be a failed debt auction and a debt default. That, or there would have to be an unacceptable massive federal budget cut or a likely counterproductive tax increase to cover the interest.

sprash 12y ago

Sadly, even the chairmen of central banks ignore the most important contribution to inflation: wages. The reason why we have deflation in Japan and Europe despite almost zero rates and even additional quantitative easing is because nominal median wages there are actually falling. It is very easy to make sure to have an inflation of 2%: Just raise the minimum wage 2% each year. Thats it. Example that inflation correlates strongly with wages for the EWU: http://www.flassbeck-economics.de/wp-content/uploads/2013/03/HF-4-3-2013.jpg http://www.flassbeck-economics.de/wp-content/uploads/2013/03...

roymurdock 12y ago
This is wrong. 3.3m workers work for the minimum wage in the US. This represents 2.6% of all wage and salary workers in the economy [0]. Raising the minimum wage would simply make 2.6% of the working population better off at the expense of their employers. It's a redistribution of wealth and it has nothing to do with inflation. You have your causation backwards. Employers being forced to pay a higher wage to 2.6% of the working force does not cause the money supply to increase. Central bank monetary policy causes the money supply to increase, creating inflation. Wages increase in order to preserve purchasing power in an inflationary economy. This is why the markets hang on the Fed's every word - the Fed has the power to change interest rates and inflation which, in turn, effects the labor market. To address your point about deflation: QE was designed to support bank balance sheets by removing risky and opaque assets and replacing them with liquidity. Banks now have a ton of liquidity [1], but no investment-worthy projects. Thus they choose to hold their reserves with central banks, choosing a negative interest rate over the risk of lending in the economy. Wages are falling because there is less money in the economy chasing an increasing amount of goods. Therefore money is appreciating in value. Once banks resume lending out the liquidity they have been injected with we will see wages rise. [0] http://www.pewresearch.org/fact-tank/2014/09/08/who-makes-minimum-wage/ http://www.pewresearch.org/fact-tank/2014/09/08/who-makes-mi... [1] http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=15Y1 http://research.stlouisfed.org/fred2/graph/fredgraph.png?g=1...
- sprash 12y ago
  > Raising the minimum wage would simply make 2.6% of the working population better off at the expense of their employers. But never the less those 2.6% percent will be directly responsible for the inflation since they barely get by now and if you increase their wages the prices will adjust accordingly so that they barely get by in the future. Also it has been shown that if you increase minimum wage all wages across the board will increase, even the highest ones. > Central bank monetary policy causes the money supply to increase, creating inflation. There is no evidence for that. The money supply has been expanded vastly in the last years but still there was almost no inflation. Why? because all the money arrived in the financial market where it "inflated" the value of financial products causing one bubble after the other. There is a very easy way to make absolutely sure that the money arrives in the real economy (which will be the driver of "investment-worthy" projects in the future): raise wages.

randyrand 12y ago

The comments I see in this thread make me so upset. HN has always been about making the world a better place. Doing things that matter. Making lives better. We look forward to self driving cars, solving heathcare, etc etc et. Yet I read these comments and apparently HN isn't as concerned about progress anymore. "Why do we need growth", "I'll take peace over growth at this point." Are you crazy? When did we stop caring about growth? Making things better? More efficient? Improving lives? What a depressing comment thread. edit: Some people are saying, but economic growth does not necessarily imply tech progress. yes, economic progress does not have to come from technology growth. You're right. tldr: but it would be incredibly incredibly difficult (and perhaps provably impossible in a free-ish society) to grow the economy without also encouraging and making technological growth (also finding oil deposits, other discoveries, etc) Growth comes from a few things. 1, operating at max utilization. Full employment. Going from 50% to 90% will grow the GDP. 2, saving. Saving what we already have. Building bridges, long lasting homes, etc to that we can be more efficient and focus on other problems in the future. Note, this does not increase yearly GDP but it increases overall wealth per capita. For example, many europeans live and benefit from homes that were built for them hundreds of years ago. They're free to worry less about building homes and more on improving other aspects of their lives. 3, technological progress. While it's true gorwth != tech progress, its also certain that growing the economy by #1 and #2 above will allow more room for people to work on #3. #2 is important. We can't work on nuclear physics before we build homes from physicists to live in. Likewise #1 is important. for every person that becomes employed, their handwork allows other people to focus on other things, research. We need enough farmers to feed researchers. The more farmers, the more researchers. So in a sense, you can, but it would be incredibly difficult to grow the economy without also encouraging and making technological growth.

lsd5you 12y ago
Growth!=Technological progress. I'm not sure what else there is to say. Do you realise you made this logical jump? Does it not need expanding upon or justifying? Do you not think it might be the source of the difference other people have?
- alasdair_ 12y ago

Trumpet6 12y ago

Early on the author states "the Fed is keeping them low. That’s true only in a very narrow sense." He then proceeds to stay in this narrow sense, while explaining the theoretical framework driving the Fed's decision. While it is of course interesting to better know their reasoning, this article does not amount to a more nuanced response than "the Fed is keeping them low because the Fed thinks its best". Personally I think that's close enough to "the Fed is keeping them low" to not really bother with the distinction.

RockyMcNuts 12y ago

Bernanke seems to discount the value of QE. If short-term rates are already at zero, and the Fed can't impact longer-term interest rates, then QE would have no effect. But in fact, after the Fed pegged the overnight rate at 0, they could peg the 7-day rate at 0 just by committing to keep the overnight rate at 0 for 7 days, and offering to lend 7-day money at 0. And they can then peg the 1-year rate by offering to buy and sell 1-year T-bills at a given price. And so on up the yield curve. Of course, at some point inflation adjusts and the Fed can't peg the real rate over the long term. But in the short term they can peg a lot of nominal rates in a sense that is not as narrow as he lets on here. http://ftalphaville.ft.com/2015/03/30/2125256/did-bernanke-forget-about-qe/ http://ftalphaville.ft.com/2015/03/30/2125256/did-bernanke-f...

cbaker 12y ago

If you implement policies where all the benefits of growth go the people least likely to spend them, you'll end up with a glut of savings. That is why interest rates are so low.

oldpond 12y ago

"Equilibrium real interest rate"??? What a load of horseshit. Interest rates are low because if they raise them the entire world goes broke. They dropped them down in order to sell more and more debt. Now all the debt is sold. This is the result of globalization; there's only so much "good" debt to buy. With all individuals and governments in developed countries maxed out on their debts, the banking system is basically stuck. Economists dredge up techno baffle-gab like this to fool the public into thinking there's some complex mystery to the financial system that only quants can figure out. It's not that complicated. Declare debt amnesty, make all the banks suddenly smaller, and if you really want to prevent this kind of thing from happening again make currency speculation illegal. That's a good start.