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What's doublespeak about this? The problem where the Fed can't push interest rates below zero when the economy is doing especially poorly is well documented. He

by harryh 12y ago

What's doublespeak about this? The problem where the Fed can't push interest rates below zero when the economy is doing especially poorly is well documented. He's simply proposing a solution to this problem. Sure, the downsides might outweigh the benefits but it's a fairly straightforward and obvious solution. Of course some people will barter or find other ways to store value than money but it seems to me that would still leave the Fed with more flexibility than it had before. Do you disagree that there is ever a need for negative nominal interest rates? Do you think there is a better solution than this one?

nine_k 12y ago
Europe has already pushed certain interest rates below zero. Let's see how well will it help the EU.
- harryh 12y ago
  The EUs big problem is that they have a single currency covering many different countries with wildly different economies so it's very difficult (or impossible) to institute a monetary policy that is beneficial for all countries at the same time.
  - nine_k 12y ago
    Aren't the United States also a bunch of pretty diverse state-level economies? The US is more tightly integrated than the EU, but similarities are still strong (same currency, transparent borders, local governments + increasing federal oversight).
    - harryh 12y ago
      Sure, it can be a problem in the US as well. What's good for San Francisco might be different from what's good for a hollowed our rust belt city. But it's less of a problem in the US than in Europe. We at least have a common language. Culture differences are smaller. Tax and regulatory regimes don't vary as much. It's fundamentally easier to move from one city to another in the US than it is in Europe. This isn't just a hypothesis, it's supported by very clear data in labor mobility rates.
  - wyager 12y ago
    >The EUs big problem is that they have a single currency covering many different countries with wildly different economies And the U.S. has a single currency covering many different states with wildly different economies.
mike_hearn 12y ago
I certainly disagree that negative interest rates are necessary. The problem with central bank / government policy in the modern world is that they view everything through a thick sheet of plastic (statistics) that distorts what's really happening and removes all detail. Governments see an apparently simple relationship: spending -> jobs -> votes ... and decide that therefore, more spending is always good. What they don't see is whether the spending and the jobs it leads to are actually useful for society or just convoluted forms of makework. This was most obvious in the housing bubble. Spain has <a href="http://www.dailymail.co.uk/news/article-2102074/Spain-haunted-ghost-towns-built-boom-years-unemployment-tops-5million.html">entire http://www.dailymail.co.uk/news/article-2102074/Spain-haunte... "ghost housing estates"</a> where houses were built far in excess of actual non-stimulated demand. Once banks stopped squirting fresh money into the system via mortgage lending the demand for these houses evaporated - people would take them when the houses were effectively free, but if forced to pay for them more directly they weren't interested. Nonetheless from the perspective of central bankers and politicians between 2001 and 2008 they were doing everything right. There was lots of spending (on houses) that led to lots of jobs (in construction) that hired lots of low paid workers who might otherwise be unemployed (leading to votes). Job done! If the banking system wasn't constantly tampering with the money supply we might well have a period with less spending, fewer jobs and more unhappy voters. But once the economy got unbent it'd start creating jobs that are more socially and economically useful, and the end result would be better.
- harryh 12y ago
  That was a lot of things you said but none of it really had anything to do with negative nominal interest rates and the zero lower bound problem.
  - mike_hearn 12y ago
    What a weak answer. Sounds like you didn't read my post at all. There is no "zero lower bound problem". This "problem" exists only in the minds of central bankers and politicians. That is what I said already.
skywhopper 12y ago
The better solution is to encourage a higher baseline level of inflation (a 4% target rather than 2%). Central banks have gotten really good about holding down inflation, but they put themselves into a situation where they have very little power against economic slowdowns when they target a 2% inflation rate (a target which has become a hard cap in many ways). Of course, the best way to spur some necessary inflation at the moment would be to raise minimum wages, have governments borrow at these essentially zero interest rates and spend it on long-term investments that will allow their economies to grow for the next 70 years like they have for the past 70. But the powers that be pretend that hyperinflation is just around the corner and that government debt is sinful, while at the same time articles like this are published discussing how to facilitate long-term deflation.
- harryh 12y ago
  It's certainly reasonable to argue that the target inflation baseline is too low but that still doesn't negate the problem that when it falls too low sometimes the ideal monetary policy might be negative interest rates. You are also right that fiscal policy is an available tool from the proverbial tool belt but most people believe that it can't completely replace monetary policy. It's a fair debate though.
  - pjc50 12y ago
    The only reason to want negative interest rates is to discourage "cash hoarding". This is quite similar to the FDR gold ban reasoning: the economy has contracted, a small number of people refuse to allow their vast wealth to decrease, therefore the wealth decrease falls most harshly on those with least wealth. Given that most wealth in the present day is in the form of debt-like instruments or assets, there is another, fairer way to negative interest rates: tax on bond repayments. $100 zero-coupon zero-interest treasury bond with 1% tax on repayment has the same effect as negative interest rates.
    - harryh 12y ago
      Why would anyone buy those bonds if they could just keep their money in cash with no tax?
stegosaurus 12y ago
I disagree with the entire premise; but that's not why I posted. I take issue with the deliberate obfuscation employed. Rather than dealing with the elephant in the room (a cashless society is one in which commercial banks have far greater power than they do today), he says things like "resistant to change". The point is that he is not elucidating the downsides fairly and honestly.
- harryh 12y ago
  Willem Buiter's statements were made in a research piece for an educated audience. He made certain assumptions about what the audience already knew. It wasn't an essay meant for uninterpreted consumption by the general public.
pjc50 12y ago
If there is a need for negative nominal interest rates, then the solution is to increase inflation. As the goldbugs are forever reminding us, this can be done by printing money. And this time, distributing it to the public rather than just the finance industry. In the Swiss case where the rate imbalances are driven by capital inflows, institute capital controls. Also, what is the effect of negative nominal interest rates on asset prices? Isn't this just another attempt to keep the housing boom going despite all sense?
- harryh 12y ago
  Lowering interest rates is how the fed prints money. The issue at hand (well, the US economy might be beyond this point now but go back a year or three) is that you can't lower rates below zero. Certainly (as you hint at) the government can also implement fiscal policies in addition to the Fed's monetary policies but few people believe that fiscal policies can be effective on their own. You are certainly right that if the fed goes too far asset prices can inflate too heavily. As with many things in life finding an appropriate balance can be tricky!
  - pjc50 12y ago
    The treasury can mint money as well - remember the "trillion-dollar platinum coin" silliness of a few years ago?
    - harryh 12y ago
      Sure, but it has to get into the hands of the public somehow.
      - pjc50 12y ago
        Throw the trillion-dollar coin out of the President's helicopter. More seriously, there is a huge number of useful things it could be spent on that would free up cash for consumer spending and investment. It's just that too many people in public life regard other people's poverty as "morally improving".

by harryh 12y ago

nine_k 12y ago

Europe has already pushed certain interest rates below zero. Let's see how well will it help the EU.

harryh 12y ago
The EUs big problem is that they have a single currency covering many different countries with wildly different economies so it's very difficult (or impossible) to institute a monetary policy that is beneficial for all countries at the same time.
- nine_k 12y ago
  Aren't the United States also a bunch of pretty diverse state-level economies? The US is more tightly integrated than the EU, but similarities are still strong (same currency, transparent borders, local governments + increasing federal oversight).
  - harryh 12y ago
    Sure, it can be a problem in the US as well. What's good for San Francisco might be different from what's good for a hollowed our rust belt city. But it's less of a problem in the US than in Europe. We at least have a common language. Culture differences are smaller. Tax and regulatory regimes don't vary as much. It's fundamentally easier to move from one city to another in the US than it is in Europe. This isn't just a hypothesis, it's supported by very clear data in labor mobility rates.
- wyager 12y ago
  >The EUs big problem is that they have a single currency covering many different countries with wildly different economies And the U.S. has a single currency covering many different states with wildly different economies.

mike_hearn 12y ago

I certainly disagree that negative interest rates are necessary. The problem with central bank / government policy in the modern world is that they view everything through a thick sheet of plastic (statistics) that distorts what's really happening and removes all detail. Governments see an apparently simple relationship: spending -> jobs -> votes ... and decide that therefore, more spending is always good. What they don't see is whether the spending and the jobs it leads to are actually useful for society or just convoluted forms of makework. This was most obvious in the housing bubble. Spain has <a href="http://www.dailymail.co.uk/news/article-2102074/Spain-haunted-ghost-towns-built-boom-years-unemployment-tops-5million.html">entire http://www.dailymail.co.uk/news/article-2102074/Spain-haunte... "ghost housing estates"</a> where houses were built far in excess of actual non-stimulated demand. Once banks stopped squirting fresh money into the system via mortgage lending the demand for these houses evaporated - people would take them when the houses were effectively free, but if forced to pay for them more directly they weren't interested. Nonetheless from the perspective of central bankers and politicians between 2001 and 2008 they were doing everything right. There was lots of spending (on houses) that led to lots of jobs (in construction) that hired lots of low paid workers who might otherwise be unemployed (leading to votes). Job done! If the banking system wasn't constantly tampering with the money supply we might well have a period with less spending, fewer jobs and more unhappy voters. But once the economy got unbent it'd start creating jobs that are more socially and economically useful, and the end result would be better.

harryh 12y ago
That was a lot of things you said but none of it really had anything to do with negative nominal interest rates and the zero lower bound problem.
- mike_hearn 12y ago
  What a weak answer. Sounds like you didn't read my post at all. There is no "zero lower bound problem". This "problem" exists only in the minds of central bankers and politicians. That is what I said already.

skywhopper 12y ago

The better solution is to encourage a higher baseline level of inflation (a 4% target rather than 2%). Central banks have gotten really good about holding down inflation, but they put themselves into a situation where they have very little power against economic slowdowns when they target a 2% inflation rate (a target which has become a hard cap in many ways). Of course, the best way to spur some necessary inflation at the moment would be to raise minimum wages, have governments borrow at these essentially zero interest rates and spend it on long-term investments that will allow their economies to grow for the next 70 years like they have for the past 70. But the powers that be pretend that hyperinflation is just around the corner and that government debt is sinful, while at the same time articles like this are published discussing how to facilitate long-term deflation.

harryh 12y ago
It's certainly reasonable to argue that the target inflation baseline is too low but that still doesn't negate the problem that when it falls too low sometimes the ideal monetary policy might be negative interest rates. You are also right that fiscal policy is an available tool from the proverbial tool belt but most people believe that it can't completely replace monetary policy. It's a fair debate though.
- pjc50 12y ago
  The only reason to want negative interest rates is to discourage "cash hoarding". This is quite similar to the FDR gold ban reasoning: the economy has contracted, a small number of people refuse to allow their vast wealth to decrease, therefore the wealth decrease falls most harshly on those with least wealth. Given that most wealth in the present day is in the form of debt-like instruments or assets, there is another, fairer way to negative interest rates: tax on bond repayments. $100 zero-coupon zero-interest treasury bond with 1% tax on repayment has the same effect as negative interest rates.
  - harryh 12y ago
    Why would anyone buy those bonds if they could just keep their money in cash with no tax?

stegosaurus 12y ago

I disagree with the entire premise; but that's not why I posted. I take issue with the deliberate obfuscation employed. Rather than dealing with the elephant in the room (a cashless society is one in which commercial banks have far greater power than they do today), he says things like "resistant to change". The point is that he is not elucidating the downsides fairly and honestly.

harryh 12y ago
Willem Buiter's statements were made in a research piece for an educated audience. He made certain assumptions about what the audience already knew. It wasn't an essay meant for uninterpreted consumption by the general public.

pjc50 12y ago

If there is a need for negative nominal interest rates, then the solution is to increase inflation. As the goldbugs are forever reminding us, this can be done by printing money. And this time, distributing it to the public rather than just the finance industry. In the Swiss case where the rate imbalances are driven by capital inflows, institute capital controls. Also, what is the effect of negative nominal interest rates on asset prices? Isn't this just another attempt to keep the housing boom going despite all sense?

harryh 12y ago
Lowering interest rates is how the fed prints money. The issue at hand (well, the US economy might be beyond this point now but go back a year or three) is that you can't lower rates below zero. Certainly (as you hint at) the government can also implement fiscal policies in addition to the Fed's monetary policies but few people believe that fiscal policies can be effective on their own. You are certainly right that if the fed goes too far asset prices can inflate too heavily. As with many things in life finding an appropriate balance can be tricky!
- pjc50 12y ago
  The treasury can mint money as well - remember the "trillion-dollar platinum coin" silliness of a few years ago?
  - harryh 12y ago
    Sure, but it has to get into the hands of the public somehow.
    - pjc50 12y ago
      Throw the trillion-dollar coin out of the President's helicopter. More seriously, there is a huge number of useful things it could be spent on that would free up cash for consumer spending and investment. It's just that too many people in public life regard other people's poverty as "morally improving".