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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
by 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 agoIt'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 agoThe 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 agoWhy would anyone buy those bonds if they could just keep their money in cash with no tax?
- pjc50 12y agoCash in large quantities has a carrying cost just like anything else. You have to have a warehouse with guards. You want to insure it. I think this works out at a few percent. Certainly there's a cost in trying to settle large transactions in cash. It's annoying enough if you're a supermarket or other note-and-coin handling business. Are Apple really going to construct a $164.5bn Scrooge McDuck money bin?
- harryh 12y agoOK yes, this is true. Which is why some people think that the zero lower bound really isn't exactly at zero. Doing this is a huge pain in the ass: http://static2.businessinsider.com/image/521246dbecad045f3b00001b-960/breaking-bad-money-pile-1.png http://static2.businessinsider.com/image/521246dbecad045f3b0... Estimates vary as to what the de-facto zero lower bound really is, but it's still there somewhere. You can see this in the data. The Fed REALLY DID have trouble drumming up inflation through monetary policy over the last several years.