Another central bank may have it backwards as lower rates turn out to be deflationary and slow things down via interest income channels?
Brazil Cuts Rates to Record Low as Economy Stalls
May 30 (Bloomberg) — Brazil’s central bank cut interest rates on Wednesday for the seventh straight time to a record low 8.50 percent, moving into uncharted territory in a bid to shield a fragile recovery from a gloomy global outlook.
President Dilma Rousseff has made lower interest rates one of the top priorities of her government which is struggling to steer the economy back to the 4 percent-plus growth rates that made Brazil one of the world’s most attractive emerging markets in the last decade.
The central bank’s monetary policy committee, known as Copom, voted unanimously to lower the benchmark Selic rate 50 basis points from 9 percent, in line with market expectations.
“At this moment, Copom believes that the risks to the inflation outlook remain limited,” the bank said in a statement that accompanied the decision. The statement used the exact same language as the previous statement when the bank cut the Selic rate in April.
With Wednesday’s cut, the central bank has now lopped 400 basis points off the Selic rate since August 2011, when it surprised markets by starting an easing cycle despite widespread concerns at the time about surging consumer prices.
Inflation has eased since then with some help from a sluggish global economy, bringing the annual rate to well below the 6.5 percent ceiling of the central bank’s target range.
That has allowed the central bank to test the boundaries on interest rates, ushering in what some economists predict might be a new era of lower borrowing costs for Brazil.
The size of Wednesday’s rate cut marked a slowdown in the pace of easing after two straight reductions of 75 basis points in March and April. The central bank signaled after its April policy meeting that future rate cuts might be more cautious.
The previous low for the Selic was set in 2009, when the central bank in the administration of former President Luiz Inacio Lula da Silva slashed the rate to 8.75 percent to fend off the global financial crisis.
“slow things down via interest income channels?”
But consumer credit has expanded significantly over the past decade too, so not sure what the net effect will be outside the govt sector.
They should pair it with a tax cut to be safe. 🙂
But they won’t for fear of expectations coming unhinged. 🙁
Looks like this is not a situation like in the US where with zero interest people have no income from savings at all.
Inflation below 6.5% , gdp growth below 4% and interest at 8.5%. What do you think should be the interest level?
@WARREN MOSLER, There must be some bookkeeping costs that ought to be covered. 🙂
@WARREN MOSLER, Well, then rate cuts are a step in the right direction.
I assume your complaint is that they do not accompany it with at least the same tax cut?
With such accompanying tax cut the public deficit would at least not decrease.
yes, I like 0 rates which i also happen to believe are deflationary, as it means taxes can be that much lower.
and i like all the other benefits of 0 rates as well.
Tough question: raising interest rates would seem to be a helicopter drop for savers; a helicopter crash for borrowers.
0 rates and a tax cut
Not sure if they have it backwards.
It’s all about exchange rate anyway.
and all the cb research shows hiking rates doesn’t support a currency
all other things equal it must support it as a point of logic.
the effect of rates is not the same for the US than for Brazil and other emerging economies.
and lowering rates has devalued the Real unless it’s only another coincidence
it’s only a scientific panic joke to obtain permission from Merkel:)
IMF sees room for ECB easing; says deficit cuts to be slow in 2013..
Correct, it is all just about exchange rates between central bank manipulated paper currencies.
Interest rates and tax levels in a fiat currency simply moves wealth distribution between classes of people, and either way bankers get the same cut of the top.
Brazil should issue gold backed government bonds or some other hard asset government bonds so the currency is tied to real productive value of the economic. Not fake financial ponzi values.
Sounds like India is already considering gold back government bonds, would make great sense for India.
@Alexander, How did you find your way here?
Please prove that gold has anything to with productive or even destructive economy. I suggest other heavy elements such as Uranium or Plutonium.
bank earnings vary considerably. right now they are looking so good for lots of banks. and banks do best in good economies with low unemployment.
brazil and others have tried that in the past, and crashed.
and today it’s their indexed bonds that can come back to haunt them
Comparison between Iceland and Ireland:
Iceland put the banking cartel criminals on trial, told the IMF and current “issuers” to take a flying hike. They have fully recovered in only a few years and looking forward to the future as a society.
Ireland got sold out to the banking cartel troika into perpetual debt slavery and is now being ripped apart, people leaving Ireland in droves to find work, families are being ripped apart as we speak, each day children watch as parents fall apart trying to put food on the table, violence is on the rise, major social downward spiral is in progress.
I do hope the people of Greece, Spain, Brazil, France, .. all wake up in time to tell the central bankers, wall street, and fiat currency managers to take a hike and then put these criminals on trail.
Personally I would prefer quick public executions of all central bankers and directors of central bank connected financial institutions.
Iceland devalued its currency.
It’s all about exchange rates.
Iceland’s currency was devalued. Iceland didn’t have anything to do with it (other than allowing it to float).
The UK’s currency was devauled by 25%. That hasn’t helped the UK recover anywhere near as well.
It’s not all about exchange rates at all.
Right, which it could not have done with gold backed currency or debt (assuming that was the same Alexander).
iceland could have done a whole lot better, as per my proposals on this website at the time.
they paid off a lot of entities they didn’t need to.
Warren nails it once againd – brilliant!
Dilma started her mandate promising higher growth and lower inflation than during the Lula era and got the exactly opposite result instead.
Interest rate reduction is hitting middle class savers hard. They were invested in government bonds that until a year ago were providing them with a safe real return of 5% plus and now they must content themselves with a meager 2% real return if not less, considering that services inflation is near double digit levels.
Also, the idea that Brazilian rates were prohibitive for firms is dead wrong. The development bank BNDES has been providing loans for investment projects in the order of the hundred billions of reais annually for many years, at below inflation rates.
It’s hard to accept that high interest rates were blocking growth when the Brazilian economy had a much better performance in the last decade than Mexico, for instance, even though Mexico had the supposed advantage of much lower rates. And Brazil enjoyed 7.5% growth in 2010 with record high interest rates.
But these facts don’t seem to interest the Dilma economic team. They’re obssessed with reaching “First World” rate levels even though the developed countries have stopped being a model for any reasonable person since at least 2008. This seems to be another instance of politicians wanting to fix imaginary problems, just like the European leaders decided to adopt the euro in the 90s to “fix” a monetary system that was in fact working quite well.
Many people here, including financial sector workers, are nostalgic for the economic policy of the Lula government, when a highly competent central bank governor kept rates high to control inflation while fiscal policy took care to maintain the deficit at adequate levels to ensure growth in aggregate demand and employment.
The present policy of ultra fast rate cuts risks ending badly. The government has already been forced to sell dollars in order to prevent excessive depreciation of the real – a rate of more than 2 reais per dollar might aggravate inflation via import channels and prevent the modernization of a Brazilian productive sector that is responsible for over two thirds of total imports. Growth projections for the year are being revised downwards almost daily. Most analysts are betting on less than 3% growth for 2012 and some are already forecasting 2%.
Unfortunately, Brazil risks becoming one more instance of proving MMT right – that Fiscal policy is the right tool for manipulating aggregate demand. But there is still some hope for a reversal of course by the government. There’s talk of a fiscal package in the making to stimulate demand. Let’s see if it becomes reality, the sooner the better.
I am not saying it was a good policy, but the depreciation of the Real was their objective to protect their industry.
@Jose, “return on Bonds”
Huh? Is Brasil only issuing floaters? If rates drop your bonds usually go up in value.
Not sure if this is what Jose meant, but if savers typically hold them to maturity, gains on principal are transitory, and reinvested principal then earns lower coupons.
Exactly what I meant, thank you for pointing it out.
Does Bernanke know that lower rates turn out to be deflationary? Is that perhaps why he has been keeping rates low in the US?
no, the fomc has it backwards best i can tell
How long is this going to Dragh? Does he really believe in what he has said or has he been paid to sit and do nothing or very little so that the fiscal integration could be enforced on the member countries?
“Mario Draghi said the central bank could not “fill the vacuum” left by member states’ lack of action as it was claimed the zone is on the point of “disintegration”.
Amid escalating talk of a potential bail-out for Spain, the president of the ECB said the central bank was powerless to stop the debt tornado. “It’s not our duty, it’s not in our mandate” to “fill the vacuum left by the lack of action by national governments on the fiscal front,” he said.”
BTW I do not agree with the point that lowering interest rates is always deflationary. Reducing the fiscal flow from the government to bond holders (interests) is deflationary but reducing the fiscal flow from people indebted in the banking sector (high propensity to consume) to people having deposits (usually lower propensity to consume) is not deflationary. Preventing bankruptcies leading to fire sales of the assets (resulting in lowering the prices of these assets) is not deflationary.
If the majority of mortgages have floating rates (as in Australia) then a drop in interest rates provides an immediate relief.
The effect on exchange rates going through capital markets (already mentioned) is not deflationary.
If we have a country with fixed-rate mortgages and a high ratio of public to private debt then the overall impact of a rate cut might be deflationary. If we have a country with very little public debt but a mountain of private debt them the overall impact may be inflationary.
What we are debating here are secondary effects. I agree that monetary policy is largely inefficient – the only cure for a deep recession and debt deflation is a fiscal stimulus (what may come in a form of lowered taxes).
MMT has it all backward when it comes to interest rates because it only looks at vertical transactions while the most important part is what’s happening within the private sector.. Cutting the nominal interest rate, everything else being equal, creates a welcome inflationary pressure.
When return on capital drops because economic conditions are poor, it’s normal that “savers” get less return on newly invested savings. If new savers were guaranteed real returns on govt bonds that outperformed expected equity returns, then why on earth would anyone invest in equities or anything else than govt bonds?
And re existing savings, for savers that bought long-dated fixed rate bonds, they will get a nice mark-to-market boost to reflect the fact that they’ve locked in an above market rate of return (as others have pointed out)
@DOB, So that’s worked really well in the aggregate, for Japan? 🙁
You would say it didn’t work because deficit wasn’t high enough.
I say it didn’t work because rates weren’t low enough.
OK, I’ll bite.
How low should Japanese rates go then?
Negative rates are deficit spending.
negative rates are a tax
Nominal rates were close to zero in Japan for 20 years and it didn’t work. The only way to make real rates significantly negative is to create inflation – what Paul Krugman advocates. If fiscal policy is not to be used to create inflation then the only remaining channel is debasing the currency.
If there is a 5-10% inflation and the economy is in a deep recession then the most likely outcome would be a further depreciation of the currency possibly leading to a financial breakdown (“capital flight”) rather than an increase in investment and consumption. Savers would try to purchase assets such as gold or foreign currencies rather than spend. A possible bubble in share prices won’t spur consumption either.
Debasing the currency moderately (“beggar thy neighbour”) policy may work if it only happens in one country. It takes however long time for the system to adjust.
High inflation even if it may wipe away the debt is not a solution which would be accepted by the majority of people. The Austrian school critique of Paul Krugman’s views may actually have some merit.
What Functional Finance school offers is far superior than fiddling with inflation and interest rates.
“How low should Japanese rates go then?” -> I don’t have an accurate quantitative answer. -1%? -3%? -10%? At some point, it will become worth it to spend & invest.. (MMT also isn’t very quantitative when it comes to sizing the deficit. It just needs to be “sufficiently” large)
“The only way to make real rates significantly negative is to create inflation” -> How about simply targeting nominal rates lower than the expected inflation rate?
“Negative rates are deficit spending.” -> Huh? How so?
Nominal rates cannot be (significantly) lower than 0% because otherwise people would hoard cash. If CPI inflation is let’s say 1-2% (what is common during a deep recession) then the idea is useless.
We know from history that CPI inflation can be negative. Only direct spending (or lowering taxation) can pull the economy from that state.
It is not true that I don’t understand the mainstream model.
I simply think that the model does not describe the reality. The model is based on the assumption that there is a market for loanable funds clearing at a certain interest rate where equilibrium is determined by supply and demand of funds.
Lowering the interest rate would lead to a flood of money being invested.
Paul Krugman and others are wrong as demonstrated in the following article:
Savers will not spend their savings on goods and services thus allowing debtors to deleverage when real interest rates are negative. Savers will try to find other saving vehicles such as foreign currencies or existing shares (companies do not expand during a recession). What is the point of investing when you can’t make any profit? What is the point of buying things you don’t need?
In the good old “real socialism” in the Eastern Bloc we had an “inflationary overhang” due to forced saving. This did not feed investment when the system was transformed. This fed very high inflation.
“Nominal rates cannot be (significantly) lower than 0% because otherwise people would hoard cash.” -> Trivially solved by:
1) removing parity between paper currency and digital currency (Fed takes back existing notes/issues new notes at a discount equal to the compounded interest since rates have been negative)
2) Getting rid of cash altogether and going fully digital (kind of overdue in my opinion)
“It is not true that I don’t understand the mainstream model.” -> I don’t think I said or even implied that. Also I wouldn’t exactly consider negative rates mainstream.
“We know from history that CPI inflation can be negative. Only direct spending (or lowering taxation) can pull the economy from that state.” -> My point is setting rates sufficiently below the inflation rate works too. It works for positive rates, and since there’s nothing special about the 0% boundary (other than the paper notes issue), it will work in the negative range as well.
“Savers will not spend their savings on goods and services thus allowing debtors to deleverage when real interest rates are negative. Savers will try to find other saving vehicles such as foreign currencies or existing shares (companies do not expand during a recession).” ->
I’m not advocating for deleveraging, or at least not through a reduction in money supply but through an increase in equity.
If a saver purchases a foreign currency, he’s just handed over the domestic currency to some other guy who becomes the new saver, changing nothing other than making the country more competitive.
If a saver buys an existing stock, he needs to find some other guy who already held the stock to give him the currency in exchange. That guy now becomes the new saver and again this changes nothing other than it increases equity valuation (reduces equity yields) which makes it more attractive to start a new business on the margin.
More interesting than savers are borrowers which will, at some sufficiently negative rate, be willing to borrow and invest into new ventures/houses/whatever they feel is most profitable, even in a recession, if the return burden is low enough.
“What is the point of buying things you don’t need?” -> Need is a relative term. At some sufficiently low price, I would hope we’d be willing to purchase our own output. Otherwise, an MMT tax-cut won’t work either and what’s an MMT government going to do with the excess output it purchased with deficit spending? Throw it out?
“In the good old “real socialism” in the Eastern Bloc we had an “inflationary overhang” due to forced saving.” -> I don’t know enough about economics of transition to comment or even understand how that’s relevant to the present topic. Maybe you want to clarify.
Will read the Krugman article and come back if I have thoughts on it. Thanks for pointing it out.
I read the article. Agree with Fullwiler. He’s just stating simple facts about how bank works which, as far as I can tell, do not contradict anything I’ve said.
““Nominal rates cannot be (significantly) lower than 0% because otherwise people would hoard cash.” -> Trivially solved by:
1) removing parity between paper currency and digital currency (Fed takes back existing notes/issues new notes at a discount equal to the compounded interest since rates have been negative)
2) Getting rid of cash altogether and going fully digital (kind of overdue in my opinion)”
Pretty interesting idea. I might start the transition by having the Fed bid greater than par for paper currency and coins. Nice windfall for the drug dealers I guess, but you might actually catch a few of them in the process.
Hard core libertarians would fight this like mad. It would remove one of the last vestiges of anonymous participation in the economy.
No, “nominal” negative rates are deficit spending. Cash always yields 0%.
the nominal rate is the stated interest rate on the security in question, all denominated in units of the currency itself.
“negative rates are a tax” -> While that’s technically true for those who choose to own government bonds, in my view a much more important feature of negative rates is their effect on purely private transactions and the fact that they give the Fed the credibility to twart any deflationary spiral without the need for the fiscal authorities to intervene through deficit spending.
Btw Warren, have you had a chance to review this post on our previous discussion? http://moslereconomics.com/2012/04/19/euro-denominated-debt-consideration/comment-page-1/#comment-187157
It’s related to this topic and I’d be curious to hear your thoughts..
“Pretty interesting idea. I might start the transition by having the Fed bid greater than par for paper currency and coins.” -> So in other words, you want to make the interest-on-paper-notes construct symmetric by letting the Fed pay interest on paper currency when rates are positive?
I’m kind of indifferent either way. It’s more consistent, but the argument against is the simplicity of not having to convert every bill when you’re at a restaurant.. In the case of negative rates it’s a necessary evil to kill the money-under-mattress option, but I think it’s OK to cap the “exchange rate” at 1-to-1. Since rates will likely come back into the positive range once the economy comes back to life, this means paper currency can, most of the time, be pegged at parity with the digital one..
“Hard core libertarians would fight this like mad. It would remove one of the last vestiges of anonymous participation in the economy.” -> Yes, they would definitely fight the removal of paper currency. And yes, lots of drug dealers and kidnappers or whatever who are sitting on large piles of cash are probably going to hate this.
My personal view is that it’s worth switching over to fully digital currency. But since that’s orthogonal to the negative rates issue which is a much higher priority, it’s not worth putting it on the critical path.
you are entitled to your opinion
The Gesellian solution…
But that’s not what he said, he said to use negative rates if beyond a time frame the currency is hoarded.
It’s effectively like a tax and it works to mobilize wealthy people money. Say for example: beyond 1 million USD the government will impose a tax on capital of 1% each month money is not ‘spent’ (invested in something or spent into the economy). This is not incompatible with MMT solutions IMO, I see them as complementary.
I have a lot of doubts of the social utility of ‘personal savings’ beyond certain point.
Didn’t know about Gesell. But thanks for the pointer, I will look into it some more!
Btw, the non-linear version (with a floor at $1mm or whatever) is riddled with problems.
-> no longer symmetric between lenders and borrowers
-> how do you treat multiple accounts at different banks? enforcement, etc.
-> money market funds? commercial paper? etc.
That rate has to be the interest rate target of the central bank regardless of balance..
Unless you’re talking about a tax on capital regardless of how it is invested? Then that’s a different issue..
just leave rates at 0
Not suggesting it as a solution, but as a quick example of what I meant. I’m not convinced this policies could be implemented or done anyway; and not even sure if they are really that helpful (not without a broad reduction in credit expansion, would propel asset bubbles probably). I think these would be fought very strongly by wealthy people which are the ultimate ‘creditors’ in the system.
“-> no longer symmetric between lenders and borrowers”
There has been symmetry about this ever? 😉 This would tip the balance a bit to borrowers, actually looks like a policy that a true democracy (other question is if we really want a true democracy or not) would push for (or something similar).
The other details would have to be worked out yes (an other space where the government can ‘fix’ prices, for the good or for the bad, and channel investment… for example only impose lower rates if the money is invested in certain projects etc.).
P.S: This wasn’t what Gesell asked for exactly though, he wanted real negative rates for all the savings in currency, regardless of income levels or accumulated savings.
“just leave rates at 0” -> Please opine on this:
no problem for the nation with the 0% rate. no one profits from him in real terms.
the one paying 5% ‘suffers’ the ‘distortions’ he’s created.
“no problem for the nation with the 0% rate. no one profits from him in real terms.” ->
I disagree. The MMT country will get badly exploited:
If I live in the non-MMT country, I can go get a 30 year loan at -2% real yield + credit spread from a bank in the MMT country (I’m assuming your inflation target is 2%?), whereas I would have had to pay, say, 3% real yield + credit spread in my domestic currency.
30 years from now, if the REAL exchange rate between my country hasn’t moved by a factor of 330% in your favor (fat chance), I’m better off than if I had borrowed in my country.
Someone has to pay for this REAL benefit I got.
Since I borrowed money in your country to invest it in mine, I dumped it immediately in the spot FX market to source the domestic currency I need, thereby putting downward pressure on your currency, which is of course inflationary for your country. Your country has to raise taxes to fend off the inflationary pressure and support the currency.
So yes, the taxpayer in your country has just subsidized my loan.
His wage hasn’t changed. His cost of living hasn’t changed. But now he’s paying more taxes because of me. I call that being exploited.. and if I were him, I’d move to my country 🙂
i’d call it that too if it happened that way.
let’s start with you getting a loan from a bank in my country with a nominal charge of 3% for 30 years.
then you sell my currency that you just borrowed, and buy yours, raising yours relative to mine.
then you invest your currency in your country at a higher rate.
then 30 years from now you sell the currency you get back from your investment
and you sell some of that currency and buy my currency to pay back your loan,
and you keep your ‘extra’ currency as profit.
that’s called correctly betting your currency will do better over that period of time.
and the initial interest rate conditions certainly don’t guaranty that will happen.
“that’s called correctly betting your currency will do better over that period of time. and the initial interest rate conditions certainly don’t guaranty that will happen.” ->
Yes it’s the standard FX carry trade and no it’s not risk free. But for the borrower to lose money, your country would have to end up with a REAL exchange rate 4.4x stronger than at inception. Do you really believe this is likely enough to curb that behavior?
According to http://stats.oecd.org/Index.aspx?DataSetCode=CPL — the highest comparative price level ratio between ANY TWO rich countries is 1.8x (U.S. vs Switzerland)
short answer is yes, the market would discount the risks.
and the higher interest rates could cause higher inflation as well
“short answer is yes, the market would discount the risks.” ->
Would love to hear the long answer on why you think the same basket of goods could sustainably cost 4.4x less in your country than in mine? (with open borders and where both countries are “rich”)
“and the higher interest rates could cause higher inflation as well” ->
Let me now assume that my country has no government debt at all. It runs a balanced budget and so, there should be no “interest income channels”, right? The central bank has to lend reserves against non-government collateral (since there is no govt debt) and with higher haircuts. Do you still believe in that case higher interest rates lead to higher inflation?
(Note that I don’t believe govt should run balanced budgets or on 0 debt, but it helps make my example more crisp)
your country with a balanced budget and 0 govt debt could indeed have a very strong currency and no ‘inflation’ as generally defined.
however, unless there were no private sector net financial assets it would either have high unemployment or high net exports, and therefore that much less real wealth and a lower standard of living than my full employment zero rate economy that doesn’t have those kinds of net export biases.
But specifically to your last question, the higher rates require tighter fiscal than otherwise to ‘offset them.’
“your country with a balanced budget and 0 govt debt could indeed have a very strong currency and no ‘inflation’ as generally defined.” ->
Right, and remember that for my carry trader to lose money, it is YOUR currency that needs to become 4.4x stronger than mine, not the other way around..
“But specifically to your last question, the higher rates require tighter fiscal than otherwise to ‘offset them.’” ->
So in my fictional country with zero debt, which has PTSD from Weimar and introduced the golden rule in its constitution, you would recommend that they set rates very high to alleviate the pain from the tight fiscal policy?
and any fx profits made come from your country’s ‘taxpayers’/other citizens of your country best I can tell?
my country is at full employment, no output gap, and optimal real terms of trade.
and your country’s fx traders would presumably be employed elsewhere in my country.
and if we both have fx traders profiting on the same risk trades, my profits ‘fund’ imports while yours
are part of the net export dynamics?
The problem with higher rates ‘offsetting’ tight fiscal is that they are part of fiscal- govt payments of interest.
So they just change the composition of govt spending and support rentiers, which is also a negative for your country
I forgot to mention.
“and any fx profits made come from your country’s ‘taxpayers’/other citizens of your country best I can tell?” ->
Sorry but, your citizens, because of my FX trader now pay more taxes. Their (post-tax) cost of living and their (pre-tax) wages don’t change. Clearly, they are paying for the profit of my FX trader, no?
“my country is at full employment, no output gap, and optimal real terms of trade.” ->
Both countries are at full employment, no output gap, and if by optimal real terms of trade you mean no china-like competitive devaluation, I agree. Your country can still donate money to mine which is essentially what it does 🙂
“and your country’s fx traders would presumably be employed elsewhere in my country.” -> Nope, he’s in my country to avoid your taxes 🙂
“and if we both have fx traders profiting on the same risk trades, my profits ‘fund’ imports while yours are part of the net export dynamics?” -> Not sure why the FX traders profits would do anything other than buy them a nice mansion? Why would it ‘fund’ imports?
“The problem with higher rates ‘offsetting’ tight fiscal is that they are part of fiscal- govt payments of interest.
So they just change the composition of govt spending and support rentiers, which is also a negative for your country
I forgot to mention.” ->
I don’t like rentier behavior anymore than you do. But there is such a thing as real return on capital, and fair or not, you must pay the holders of capital that return, otherwise they’ll take it and leave (unless you’re for capital controls?). And by not aligning (risk adjusted) return on money to real return on capital, you are causing all kinds of inflationary/deflationary pressures which you then propose to address on the fiscal side in order to hit your inflation target. Since that can’t be done perfectly, it creates these weird incentives like that FX trade..
your fx trader isn’t curing cancer or growing food so no real output there.
and he’s paying taxes off of funds he made from your higher interest rates in your currency.
my guys are all producing and consuming what the produce- no leakages to net exports as a matter of policy.
my country not donating any of our currency to yours, your guy’s profits are in your currency.
and we don’t net export as a matter of policy.
my fx traders who left to go to your country are eating your food and consuming your output, not mine, as I don’t allow net exports.
that’s only if my fx traders, if i had any, would make the profits in your currency units, and then use that currency to import to my country.
there is the concept of a real return on real capital- tools help increase output. but no one has to get paid who doesn’t work who’s able bodied and able to work.
I don’t have an ‘inflation target’ per say but use a ‘transition job’ to as the price anchor and conduct fiscal accordingly.
Like the UMKC buckaroo currency.
The wierd incentives are created by your payment of interest at your expense.
Think of it this way.
Two bus companies- one in each city
both sell bus tokens in their cities for 1 hour of labor.
your city pays 5% interest on bus tokens it offers to hold on deposit for people who have extras, mine doesn’t.
who’s introducing distortions?
“your fx trader isn’t curing cancer or growing food so no real output there.” ->
Exactly. Yet he’s living in a nice mansion so someone’s got to be paying for it 🙂
“and he’s paying taxes off of funds he made from your higher interest rates in your currency.” ->
Sure. So he produces nothing, gets a load of cash through trading, gives some of that away in taxes. Nevertheless, he shouldn’t have made any money in the first place..
“my guys are all producing and consuming what the produce- no leakages to net exports as a matter of policy.” ->
Actually, I take something back in my previous response to you: the real terms of trade are NOT optimal. You’re going to be running a massive trade surplus (China style). Here’s how it goes:
-> My guys all want to short your currency
-> So they take loans out in your currency from your banks (directly or indirectly)
-> They sell that currency back to your citizens in exchange for capital goods and whatnot.
-> If you weren’t doing anything on the fiscal side, your currency would simply devalue and the real term of trades would suck in a transparent way, and the explanation would stop here.
-> But, since you are raising your tax rate to support your currency, your are supporting your currency through domestic demand.
-> So, your citizens agree to take back the currency that was loaned to my guys, but they don’t spend it (on goods or imports), since they have to pay taxes instead!
“my country not donating any of our currency to yours, your guy’s profits are in your currency.” ->
It’s donating interest payments it could otherwise have charged. It’s not actually writing a check, but it’s not collecting one it could have: it’s paying an opportunity cost.
“and we don’t net export as a matter of policy.” ->
But you do, by giving out a loan to my guys, you are net exporting (China style, except the loan is denominated in your domestic currency while China buys USD assets).. Your guys can’t afford to buy back from my guys because they’re too busy building your government’s budget surplus by paying taxes. Which in turn leads to a trade surplus.
Only way to prevent this is to put capital controls in place (yikes).
“there is the concept of a real return on real capital- tools help increase output. but no one has to get paid who doesn’t work who’s able bodied and able to work.” ->
Let’s say I own steel. It’s mine. It’s in my luggage. Would I ever bring it to your country to build a factory with it given what you just said? And if I lived in your country, wouldn’t I leave and take it with me where someone has a higher bid for it than zero return?
“I don’t have an ‘inflation target’ per say but use a ‘transition job’ to as the price anchor and conduct fiscal accordingly. Like the UMKC buckaroo currency.” ->
Sure but you raise the guaranteed job’s wage some fixed %-age every year right? I think your inflation rate will end up tracking that.
“Two bus companies-one in each city” ->
Actually, the fact that bus tokens don’t pay interest does distort, to some minor extent their economics:
If (cash) interest rates were huge, I wouldn’t be loading up on bus tokens in advance since they don’t pay interest. In fact, I’d love to fund myself by shorting bus tokens, although unfortunately there’s no market for this.
If interest rates were negative and bus tokens were refundable at par, then I’d be loading up on bus tokens as a form of investment and redeem them as I need the cash.
Same goes for casino chips, etc.
So you see, the fact that bus tokens don’t pay interest in line with other assets (cash, risk adjusted for credit risk on bus co), creates a distortion!
i don’t ‘raise taxes to support my currency’ but adjust taxes to keep my transition jobs to a minimum.
and i leave the wage alone, buckaroo style.
and the distortion comes on the currency side, not the bus token side?
and I have tools like export taxes if net exports are draining real wealth.
any examples of nations getting hurt by exports because of their lower interest rates?
0 rates in japan have made the yen stronger frustrating their efforts to net export?
@Scott Fullwiler & WARREN MOSLER,
Btw, my response to Scott Fullwiler is posted here:
For some strange technical reason I couldn’t post it here.
“i don’t ‘raise taxes to support my currency’ but adjust taxes to keep my transition jobs to a minimum.” ->
Same difference, you’ll end up having to adjust your taxes higher because your job guarantee labor pool will be super dry due to high inflationary pressures from the carry traders.
“and i leave the wage alone, buckaroo style.” ->
So 0% growth in prices? Nominal wages 100 years from now are the same as today? That would be Ok but just wanted to clarify..
“and the distortion comes on the currency side, not the bus token side?” ->
The currency and the bus token are just two of many many asset classes. And those two might be mostly local to your domestic economy but other capital assets can flow. Those dictate what the long run return on capital is and money needs to be aligned on that (after risk/term adjustment).
“and I have tools like export taxes if net exports are draining real wealth.” ->
Sure, let’s slap on another bandaid on the hull to keep the ship from sinking 😀
“any examples of nations getting hurt by exports because of their lower interest rates?
0 rates in japan have made the yen stronger frustrating their efforts to net export?” ->
AFAIK, no one has ever committed to keeping short rates to 0% forever so even when countries lower rates, the curves remain somewhat steep. That carry trade is better done on the long end since over the short term FX vol will dominate (vol increases with square root while returns are linear in time).
In the case of Japan, their problem is they don’t have the credibility required to twart the deflationary spiral (since they refuse to go in the negative range/let the deficit run sufficiently high) so they’re in a textbook liquidity trap: deflationary expectations means their real rates probably aren’t that low despite nominal rates being super low.
I think the relevant piece of data here would be to get a history of 30-year real yields for major countries vs some metric of capital flows. I’m afraid I don’t have access to that kind of data.. but even if we got our hands on it, it would be hard to interpret as I’m sure there are all kinds of adjustments that need to be made. I doubt we would see large (3%+), sustained (1 year+) differences between any two rich countries though..
yes, for this example, the nominal transition wage remains the same, which is mildly deflationary with productivity increases.
The only channel for your standard of living being higher than mine is that somehow I’m forced into net exports to you.
I don’t see how you can force that on any nation by your interest rate policy?
it’s a tax that removes aggregate demand
Someone with 1 billion dollars is gonna spend more or less with this tax? You are the only one with that sort of money here so you tell us 😉
You prefer the government confiscates you a say… 2% yearly or you would rather go and spend that money into the economy, invest it whatever, etc.
i guess less at the macro level.
especially after it’s all been taxed away.
Also, I don’t think you get the idea…
The government does not really remove the money from the economy, like a real tax, as long as you keep moving it.
You spend that 1% on some goods I provide, then I’ve a period of time to spend these earning again before I get taxed etc. So the money keeps circulating and working as a medium of exchange.
It work to increase real demand, as someone will prefer to consume ‘something’ rather that giving the money he could have used to the government.
why bother? the way it is now unspent income means taxes can be that much lower for a given size govt.
for me that’s a good thing.
If you try removing anonymous participation in economy the end result is a totalitarian state. NB if I am a “libertarian” then a rather “progressive” one.
Currently the majority of transactions occur in the banking system and can be tracked so they are not 100% anonymous. It is not that a guy from Australian Taxation Office cannot audit my bank operations if there is a suspicion that I am involved in a fraud.
However the current system is decentralised. If the current system is centralised then we will be living in a totalitarian surveillance state.
The authorities currently don’t run a back office script which audits all the accounts daily and reconciles the data with information supplied from the ISPs regarding browsing habits of the individuals, with the data sold / acquired from social networking sites and with the data from the real-time traffic monitoring system running ANPR.
I lived in a communist country so I know what I am talking about.
Such a system is open to abuse. It is actually an open invitation for abuse. The current phone-hacking scandal in the UK is a warning sign what can be done with this kind of personal information.
People in Australia would probably start stashing gold. People in the US may be a bit less tolerant.
Haven’t you ever seen speed cameras shot through? (I actually saw one in Australia).
NB I believe that the state surveillance system existing in China may include some of the elements described above but it is still not fully centralised.
So what is precisely wrong with using fiscal policy – that it is open for political manipulation and abuse by the politicians before the elections and may therefore enlarge the government when ratcheting occurs? A “market-based” monetary solution involving negative interest would require policing every single transaction so that money doesn’t leak outside. This is far worse for the liberty I think….
The reason why I mentioned the article written by Scott is because the idea of using negative real interest rates to force people to spend money comes directly from the loanable funds market theory. But that theory is not only incorrect because it misinterprets the process of deposit creation but also does not anticipate the behaviour when people want to opt-out from using the currency they don’t like.
This paper may be of your interest, it only illustrates what I saw with my own eyes in 1987-1990 in Poland.
Instead trying to force people to spend the government by threatening them to confiscate their money the government can and should spend on their behalf when necessary.
BTW I fully agree with Warren that zero interest rate would be the most beneficial as it would not encourage money hoarding. Excessive aggregate demand can be trimmed using a wise taxation policy.
Thanks for your detailed answer.
“Currently the majority of transactions occur in the banking system and can be tracked so they are not 100% anonymous.” -> so it is the step from “majority of transactions” to “all of transactions” that cause you to go from a system that you can live with to a system you would describe as totalitarian?
There are plenty of ways to replace cash without loosing anonymity. Imagine a little digital key chain which is effectively a numbered account at whatever bank issued it (or the Federal reserve directly) and can hold up to $500 of digital money. You load it with money by going to an ATM. You can load your kids, or your friend’s keychain with your ATM card as it’s a completely anonymous device. Key chains can communicate and transfer money off of each other (maybe with the help of a machine). You can give the entire key chain as payment to someone if you want. The devices can also transfer money to merchants. Of course, one of the consequences of anonymity is that if you lose it, it’s gone, just like cash. The benefits is that we’re not wasting resources to produce, transport, count, destroy little pieces of metal or paper and we can charge negative interest rates 🙂
“Haven’t you ever seen speed cameras shot through? (I actually saw one in Australia).” -> what do you mean by ‘shot through’? Are you talking about traffic cameras that measure vehicle speed?
“A “market-based” monetary solution involving negative interest would require policing every single transaction so that money doesn’t leak outside. This is far worse for the liberty I think….” -> What? No! Nothing changes.. Money can never leak outside the banking system even now.. (again, other than paper notes)
“The reason why I mentioned the article written by Scott is because the idea of using negative real interest rates to force people to spend money comes directly from the loanable funds market theory.” -> I don’t want to force savers to do anything. Savers can’t create or destroy deposits. Borrowers do that.. I want to incentivize borrowers to borrow (& invest) despite low inflation expectation/business outlook, so the government doesn’t have to.
“But that theory is not only incorrect because it misinterprets the process of deposit creation but also does not anticipate the behaviour when people want to opt-out from using the currency they don’t like.” -> Although I’m not familiar with this loanable funds theory, I am well aware of the process of deposit creation. Any saver who tries to opt out actually helps twart the deflationary spiral (as demonstrated in my previous reply to you).
About the flat-line 0% interest rate that Warren proposes, it poses many issues. One is a capital flows issue and has been outlined here: http://moslereconomics.com/2012/04/19/euro-denominated-debt-consideration/comment-page-1/#comment-187157 and although it might seem like a technicality, I think it’s pretty massive. Still waiting on comments for that one..
Here’s another example: imagine a scenario of global growth and prosperity. All countries are facing healthy inflationary pressures. Country A’s central bank raises interest rates to fight those off. Country B is MMT-friendly and leaves interest rates at 0% and raises taxes instead. Both countries have the same level of spending and offer the same public services to its citizens. Capital flows aside, as a worker, why would I want to be in a country where I make the same amount of money, I get the same services from the govt, Goods & services cost the same, but I pay more taxes? Now you have a labour flow issue on your hand, on top of the capital flow issue. All that because of a massive distortion in incentives caused by bad fiscal and monetary policy.
I am not questioning the statement that the money cannot leave the system. It is precisely that feature of the system what triggers hyperinflation when everyone rushes to the exit.
I DO NOT think that we are close to that danger zone but someone engineering -5..-10% real negative interest rates for a longer period of time would play with fire.
There is a lag in the adjustment process when exchange rates wobble that’s why we cannot guarantee the stability of the system in general. A positive feedback may develop in the short run.
NB your example assumes free flow of workers. It doesn’t work like that – Europe is not like Australian or American states where you pack up your bags and go from NSW to WA or Queensland. NB Even in Australia there is a lot of drag. Bill Mitchell has commented about workers mobility and unemployment in Australia – I encourage you to have a look at his blog and papers.
About the technologically advanced solutions you are suggesting – I disagree with that. The simpler they are – the better.
Think about the robustness of the system in a case of multiple failures and the robustness when distributed denial of service access attack takes place.
Now let me tackle what I disagree the most in your proposal:
“I don’t want to force savers to do anything. Savers can’t create or destroy deposits. Borrowers do that.. I want to incentivize borrowers to borrow (& invest) despite low inflation expectation/business outlook, so the government doesn’t have to.”
By doing that they will go deeper and deeper in debt but it is precisely the debt overhang what triggered the current recession. Please look at the both sides of the balance sheet, not just one. Your proposal is exactly kicking the can down the road. Currently some people want to pay back their debt while others don’t want to spend their deposits. This desire needs to be accommodated by replacing private liabilities by state liabilities on the asset side of the widely-defined finance and banking sector.
historically ‘rushing to the exit’ has been more of a one time adjustment than ‘inflation’ which is continuous.
“I DO NOT think that we are close to that danger zone but someone engineering -5..-10% real negative interest rates for a longer period of time would play with fire.” -> Right, we are nowhere near the danger zone which is why lower rates are mandated now. When we are in the danger zone again, it means we’re out of the woods on the unemployment/growth front so it’s OK to raise rates again..
“NB your example assumes free flow of workers. It doesn’t work like that” — I’m not assuming free flow of workers. If that was the case, all workers would flow instantly at the slightest imbalance. I’m assuming the workers aren’t completely locked down and that there is SOME flow.. I’ve had a look at Bill’s blog. I’ll admit I’m not a huge fan.
By the way, capital flows much more efficiently than workers..
“About the technologically advanced solutions you are suggesting – I disagree with that. The simpler they are – the better.” -> Fine. I don’t like paper notes, but paper but they work too. Just need a calculator to compute the conversion rate.. maybe an abacus is less vulnerable to DoS attacks 🙂
“By doing that they will go deeper and deeper in debt but it is precisely the debt overhang what triggered the current recession. Please look at the both sides of the balance sheet, not just one.” -> That’s right, we have to look at both sides of the balance sheet. Going ‘deeper in debt’ doesn’t mean losing wealth! (other than interest payments, which I’m proposing we lower) Presumably, when you borrow some money, it is to buy something of value. That something is now part of your assets, so at the time of purchase, your equity doesn’t change. MMT is annoyed that the crowds think government debt is bad. I’m annoyed that they think private debt is bad..
While bad loans (negative amortization floaters and the likes) might have triggered the housing bubble pop, it should have simply caused losses for those who bought houses they couldn’t afford, and for the banks who loaned them the money and made a bad investment. It turned into a financial crisis due to badly designed capital rules for banks, and into a recession because monetary policy wasn’t accomodative enough (0% rate is too high). Fiscal policy can do the trick too, but causes the undesirable distortions I’ve already mentioned.
“Your proposal is exactly kicking the can down the road. Currently some people want to pay back their debt while others don’t want to spend their deposits.” -> Lowering rates help that.. Transfering private debt to the public sector is just kicking the can down a different road.
“This desire needs to be accommodated by replacing private liabilities by state liabilities on the asset side of the widely-defined finance and banking sector.” -> I disagree. Not every desire of the private sector needs to be accomodated. There are limited resources in the world and not everyone can have everything..
but all the ‘evidence’ seems to show lower rates reduce spending, implying even lower rates-negative rates- would reduce spending even more.
so take a closer look at the interest income channels
What about time arbitrage?
Let’s assume that the real interest rate on investment loans is -5%. Do you think that I won’t miss that opportunity? I am not interested in running my own business because I consider this a waste of time. Too much hassle. But is there is a (literally) golden opportunity why should I not go for it?
I’ll choose these non-monetary assets which are liquid and borrow as much as I can. Imagine I can borrow $500k. I buy gold, silver and other useless stuff. Over a year time I’ll make at least 25k in real terms – after repaying an initial loan. Nice – I can even go for a trip to Virgin Islands and watch a hurricane or three. I may even afford to “go fishin”. (If visiting North Queensland right between 2 cyclones for the purpose of kayaking on tropical rivers was not good enough for me).
What is even more interesting is I would not be alone and it is very likely that negative interest rates would trigger a massive bubble in any asset prices. Banks would not do anything about it – they don’t care.
That’s why in my opinion the proposal of negative real interest rates is not only naive – it is suicidal. If government spending leads to resource mis-allocation (what is not always true – how did you guys send a man to the Moon? – to me this was one of the greatest achievements of the mankind financed by the American Government), private spending financed by credit can be far worse.
I also disagree with the idea that private debt doesn’t matter. Since I disagree with Steve Keen’s models I won’t recommend them but this classical text is very much worth reading:
Finally, I don’t think that in the long run printing money is a solution. It is a short-term band-aid to stabilize the economy during a debt-deleveraging phase of the cycle. In the long run the size of the finance sector needs to be trimmed. Less net credit creation and less saving. The settings which were in place in the period 1945-1960 weren’t bad at all.
only if the 5% spread is on a risk adjusted basis (which market theory says won’t happen)
and only if you can actually buy the thing yielding the extra 5%
More on the superiority of free-market-based solutions:
“(Reuters) – Louisiana is embarking on the nation’s boldest experiment in privatizing public education, with the state preparing to shift tens of millions in tax dollars out of the public schools to pay private industry, businesses owners and church pastors to educate children.”
“The school willing to accept the most voucher students — 314 — is New Living Word in Ruston, which has a top-ranked basketball team but no library. Students spend most of the day watching TVs in bare-bones classrooms. Each lesson consists of an instructional DVD that intersperses Biblical verses with subjects such chemistry or composition.
The Upperroom Bible Church Academy in New Orleans, a bunker-like building with no windows or playground, also has plenty of slots open. It seeks to bring in 214 voucher students, worth up to $1.8 million in state funding.
At Eternity Christian Academy in Westlake, pastor-turned-principal Marie Carrier hopes to secure extra space to enroll 135 voucher students, though she now has room for just a few dozen. Her first- through eighth-grade students sit in cubicles for much of the day and move at their own pace through Christian workbooks, such as a beginning science text that explains “what God made” on each of the six days of creation. They are not exposed to the theory of evolution.
“We try to stay away from all those things that might confuse our children,” Carrier said.
Other schools approved for state-funded vouchers use social studies texts warning that liberals threaten global prosperity; Bible-based math books that don’t cover modern concepts such as set theory; and biology texts built around refuting evolution.”
My comment on this: moving aircraft carriers to the Asia-Pacific region will do nothing to preserve the American global status in the long run, knowing how much the Asian educational system is superior to the American one. “It was the Prussian teacher who has won the war” (France, 1871)
not an easy call telling parents how their kids must be educated
Sorry one more link, the last one as I am going for a morning run:
The article is a bit mainstream but I agree with the author in the most what he recommends and in his final conclusion.
It is either make or break for the Western social model.
AK, scary stuff… for americans, of course.
“I’ll choose these non-monetary assets which are liquid and borrow as much as I can. Imagine I can borrow $500k. I buy gold, silver and other useless stuff. Over a year time I’ll make at least 25k in real terms – after repaying an initial loan.” ->
That’s assuming Gold and Silver perform in line with CPI. If folks finally wake up and realize they’re just shiny pieces of rock, then you’re out $500k.
Note that you can already take that risk. Negative rates change nothing other than lowering your return hurdle..
“What is even more interesting is I would not be alone and it is very likely that negative interest rates would trigger a massive bubble in any asset prices.” ->
Bubble shmubble. Assets will price wherever assets will price. How do you define a bubble anyway? And why would there be a discontinuity at 0%? Rates are at 0% now, do we have a bubble?
“Banks would not do anything about it – they don’t care.” ->
Banks don’t want to loose money. With a proper capitalization system based on mark-to-market and risk, the shareholders of the bank bear all the profits and loss from the bank’s investments. They will try to maximize their profits, just like everyone else in the system (except they have access to cheap funding in return for which they are submitting themselves to capital rules).
“If government spending leads to resource mis-allocation (what is not always true – how did you guys send a man to the Moon? – to me this was one of the greatest achievements of the mankind financed by the American Government)” ->
I’m not American but I agree with you putting a man on the moon was amazing. I’m not saying the government shouldn’t spend anything. Though, since you claimed to be a libertarian, how do you justify having a government that claims resources to send a guy on the moon? Not that it’s relevant to the conversation but the private sector is now putting guys in orbit 🙂 – http://en.wikipedia.org/wiki/Space_Adventures
“private spending financed by credit can be far worse.” -> I guess we have to agree to disagree 🙂
“Finally, I don’t think that in the long run printing money is a solution. It is a short-term band-aid to stabilize the economy during a debt-deleveraging phase of the cycle. In the long run the size of the finance sector needs to be trimmed. Less net credit creation and less saving.” ->
I don’t think the economy needs to be stabilized per se. It just needs to be rid of the ill caused by nominal price rigidities. Unemployment is a monetary phenomenon and the solution is therefore, monetary. I don’t think the finance sector needs to be trimmed, I think it needs to be cleaned up, with things such as clearing (to avoid chain defaults), living wills (to eliminate the social/legal cost of a bankrupty) and better capital rules (to protect the public sector from losses). Then let the markets determine what size this sector should be.
Will read your Fisher paper. Thanks.
my proposals, including eliminating tsy secs etc., would also work to reduce the financial sector via market forces.
and if japan and more recently the us is any guide, 0 rates don’t support all that much aggregate demand…
Correct.. and by the same token, if japan and more recently the us is any guide, a 9% of GDP budget deficit doesn’t support all that much aggregate demand…
right, though it’s down to maybe 6 something now. just means for that size gov taxes can be that much lower
“right, though it’s down to maybe 6 something now. just means for that size gov taxes can be that much lower” ->
Right. Rates could be lower too 🙂
We agree that there’s not enough stimulus, we just disagree on which of fiscal or monetary stimulus is best.
Since policy makers have applied both fiscal AND monetary stimulus, there is no way to make a claim that “rates” didn’t do their job but “spending” did…
It’s particularly weak to claim that Japan is an example of why low rates aren’t working given how large its public debt is.
ok, i’m particularly weak.
and yes, it’s a judgement call, though Fed staffers tell me their econometrics detect no effect on output/employment from the rate cuts, and trace it all to the ‘fiscal impulse’ as they call it.
“and yes, it’s a judgement call, though Fed staffers tell me their econometrics detect no effect on output/employment from the rate cuts, and trace it all to the ‘fiscal impulse’ as they call it.” ->
Ok, please put yourself in my shoes:
There you are, claiming that monetary policy works opposite than what everyone thinks, your argument is that vertical “interest income channels” dominate any effect of private sector credit formation (right?) and the evidence you cite is obtained through undisclosed research by anonymous Fed staffers.
Meanwhile, the Fed (and all central banks) moves interest rates in a way that its own research would allegedly qualify as counter-productive, mainstream academics think interest rates work, the whole world thinks interest rates work, I would argue that even MMT (ex-your zero interest rate paper) isn’t incompatible with interest rates working..
Who would you believe?
yes, all anecdotal, and your last statement is valid as well.
I just call it the way I see it.
And the interest rate channels are pretty much entirely left out of mainstream discussion.
But I just remembered the Bernanke, Sacks, and Reinhart paper on the Fed’s website that has a part about
what they call the fiscal channel of interest rates where they show how lower rates reduce govt spending and can offset with fiscal adjustments.
Let me know what you think.
“But I just remembered the Bernanke, Sacks, and Reinhart paper on the Fed’s website that has a part about what they call the fiscal channel of interest rates where they show how lower rates reduce govt spending and can offset with fiscal adjustments.
Let me know what you think.” ->
Do you mean this paper? http://www.federalreserve.gov/pubs/feds/2004/200448/200448pap.pdf
I’m not promising to read all 113 pages but I’ll definitely have a closer look 🙂
yes, just the part on the fiscal effect of interest rate changes
Berlusconi has said:
I can’t remember a time in my life more difficult than this. People are really hopeless. What move can change the recessive spiral?
The economic crisis is not resolvable internally. The Government must pick up where we left off and change its political line.
We have to go to Europe to say emphatically that the ECB should start printing money. So change the economy. The ECB must change its mission, must become the guarantor of last resort debt and begin to print currency. Otherwise, we should be strong enough to say “bye, bye” to the euro and therefore leave the euro, while staying in the EU, or tell Germany to leave the EU if they don’t agree.
My crazy idea is that the Bank of Italy should either print euros or print our own currency. I invite you to explore this idea.
Berlusconi has said:
you forgot to add
“with a smile and irony”
“but all the ‘evidence’ seems to show lower rates reduce spending, implying even lower rates-negative rates- would reduce spending even more.
so take a closer look at the interest income channels” ->
Please share pointers to the research you’re referring to. Thanks!
just anecdotal evidence from Japan and the US under 0 rate policies.
and the US when interest rates were hiked previously.
In my opinion, it is impossible to evaluate the worthiness of a policy based on “anecdotal evidence”:
If the FOMC committee cuts rates because it thinks the economy is slowing down, does it mean the economy slows down BECAUSE of low rates?
Japan has large public debt and deficits and has had a horrendous past 20 years, does it mean that deficits are bad?
The fact that multiple policies are applied at the same time and private sector preferences and expectations are shifting at the same time makes it very, very difficult to establish causality purely on a statistical observation basis, in my opinion.
Don’t know if anyone’s still engaged in the discussion above on negative rates, but I wrote two blogs at NEP three years ago critiquing the idea, including taxing currency. The ultimate result is a giant portfolio shift, not more spending, along with less AD. If normal interest rate channnels were were working (.e., horizontal), you wouldn’t need rates to be negative anyway–they’re already at historical lows and the economy still can’t get to 3% growth (barely 2% for that atter) coming out of a very deep recession; from history one would expect a much faster pace. Obviously a balance sheet recession is different even if one wants to believe in interest rate channels–where low rates do work is in helping those with debt refinance and lower payments, but those with credit card debt, for instance, can’t take advantage of that because markups there are countercyclical.
they’re all balance sheet recessions!
If a plague wiped half of earth’s population, would you call the resulting decrease in output a balance sheet recession?
good point, we could have negative nominal gdp with full employment.
I neglected that possibility, sorry. Don’t know how I let that one slip by!
How about all negative growth associated with unemployment, which includes all the modern day recessions, is a balance sheet issue.
Couldn’t post my response here for some strange technical reason, so I put it directly under one of your blog posts on NEP.
“The only channel for your standard of living being higher than mine is that somehow I’m forced into net exports to you.
I don’t see how you can force that on any nation by your interest rate policy?” ->
It comes from the fact you’ve set a real return target for your currency below the natural rate of return on capital and you’ve committed to never change that regardless of market pressure. Your tax payer then bears the weight of all this pressure since it’s inflationary for your currency and you’re taxing him to prevent inflation.
The reason it only hits your nation is precisely because you use fiscal policy to maintain your inflation rate so it localizes the pressure to your tax payers, not to the users of your currency (which can be outside your tax base like my carry traders).
If you instead had set nominal rates to 0% and left taxes/spending alone, your currency would just inflate fast and folks in your country would just stop using it. In that instance, you would not be ‘donating’ net exports to neighboring countries, you’d just be hurting your country with the ills of hyperinflation (presumably no other country benefits from that).
So 0% nominal rate for ever =
1) Donation to other countries if you use fiscal policy to control the inflation (MMT)
2) Hyperinflation if you don’t
Not sure which is more desirable.
I don’t see how the negative real return target implied by leaving the transition wage fixed is inflationary.
Seems to me it’s modestly deflationary- the same nominal wage buys more due to productivity gains- and the currency will be internally strong, and longer term externally strong vs any currency with a positive inflation rate (purchasing power parity).
And the tax payer bears only the weight of real goods and services being transferred to the public sector when it spends.
Sorry, miscommunication: what’s inflationary is my carry trader’s actions as a response to your 0% rate policy.. nothing to do with the JG.
And the tax payer bears the weight in the form of real exports flowing out your country. He’s taxed so that he can’t afford all that he produces so that what’s left can flow out of the country.
In your supermarket analogy (from your book), some fraction of the goods produced by your public sector will be exported and as a result you need to tax your people more such that they can’t afford more than what’s left.
my taxes are low enough so between gov and non gov spending we can net save and buy all we can produce at full employment and all the rest of the world wants to sell us that we want to buy.
As before, I don’t see how a nation can be forced to net export.
The British used to do it by imposing currency boards, etc. because it never happened ‘naturally’.
“my taxes are low enough so [..] we can [..] buy all we can produce at full employment” ->
If you do that, you’ll have inflation, because demand will be full output from your citizens + some extra from the carry traders which is greater than full output -> inflation.
“I don’t see how a nation can be forced to net export.” -> Do you agree when FX carry traders load up on their trade it causes net exports?
when your carry traders sell my currency to buy their own, hoping for a reversal some day,
they aren’t buying my real goods and services and taking them home, best I can tell?
So I don’t see any ‘extra’ from the carry traders?
If I sell yen and buy $A to bet on the ‘carry trade’ i don’t import anything from japan?
So when the Chinese govt buys dollars, don’t they affect net exports? 🙂 They aren’t buying real goods either..
Does it matter who’s buying the dollars? If I were to borrow CNY to buy USD (assuming I were allowed to..), would it have an effect that’s any different on U.S./China trade than when the Chinese govt does it?
“If I sell yen and buy $A to bet on the ‘carry trade’ i don’t import anything from japan?” ->
You don’t but you’re still affecting exports, the same way the BoJ would if intervened in the FX markets.
yes, when China buys dollars it drives exports to the US because the seller of those dollars has to somehow get them, unless another domestic wants to sell them short to the Chinese govt.
So yes, borrowing CNY to buy USD and hold them as $ financial assets would do the same thing.
And in our example, if your fx guy shorts my currency vs yours, absent any other policy it would do same.
So two things.
First, that would happen no matter what my interest rates were.
And with my 0 rate policy and fixed transition wage keeping my currency internally appreciating,
the risk of loss via my currency appreciating
vs yours that pays interest makes shorting mine to buy yours
something far less than a sure winner.
Second, as previously mentioned, I can legislate export restrictions and the like, that would
limit your fx trader to holding financial assets.
“And in our example, if your fx guy shorts my currency vs yours, absent any other policy it would do same.” ->
So we agree on that.
“First, that would happen no matter what my interest rates were.” ->
Why? If you set real return on your currency at 10%, you think the whole world will still be shorting it to buy another?
“And with my 0 rate policy and fixed transition wage keeping my currency internally appreciating,” ->
What does ‘internally appreciating’ mean?
“the risk of loss [..] makes shorting mine to buy yours something far less than a sure winner.” ->
Let’s redo the math based on fixed transition wage (~ 0% price inflation) over 30 years assuming 3% real return in my country’s currency: 1.03^30 = 2.43 — so the real exchange rate would have to move in your favor by that factor for my guy to lose money.
That may not be a sure winner, but sounds like a trade that everyone should have some amount of in their portfolio given that the highest comparative price level ratio between ANY TWO rich countries is 1.8x (U.S. vs Switzerland)
“Second, as previously mentioned, I can legislate export restrictions and the like, that would limit your fx trader to holding financial assets.” ->
That sounds like capital controls..
a lot of money has been made shorting currencies with high interest rates. like the $A recently, Brazil, India, etc.
The BOE came out with a paper a few years back showing no correlation between rates and the level of a currency.
Internally appreciating means ‘negative inflation’ should productivity increase, as it generally does.
Agreed on your maths.
And the spot level of the currency will discount/risk adjust the option of your ‘carry trade’
Lots of examples of export restrictions like ‘you can’t export corn’, and/or export taxes, which you’re free to call capital controls but not the common definition.
Note the UMKC buckaroo. it’s 0 interest rate, worth, as a point of logic, one hour of student labor, and the issuer doesn’t support an interest rate on savings.
When it came out in the late 1990’s you could buy one from a student for $5. Today, maybe $15. Don’t know if that ‘beat’ the $ with it’s positive interest rate policies but seems it probably did.
I’ve long ‘suspected’ that to ensure a positive nominal rate yields a real rate you’d have to have tight enough fiscal which means higher unemployment than otherwise.
Seems to be proving out.
“The BOE came out with a paper a few years back showing no correlation between rates and the level of a currency.” ->
Sure, standard Goodhart’s law.. In your case the law doesn’t apply though because you no longer use rates as a policy tool.
“Internally appreciating means ‘negative inflation’ should productivity increase, as it generally does.” ->
So all the evil rentiers sitting on cash are turning a profit after all? 🙂 And they don’t have to pay any taxes on it since on a nominal basis they made nothing..
“And the spot level of the currency will discount/risk adjust the option of your ‘carry trade’” ->
I think what you’re saying is the currency won’t appreciate in the future but it will devalue immediately to reflect everything. While that might be true, it would have to devalue by that factor and the difference in price levels would still be there albeit in the other direction. Besides, such a devaluation would be highly inflationary for you so you’ll use fiscal policy to make sure it doesn’t happen.
“Lots of examples of export restrictions like ‘you can’t export corn’, and/or export taxes, which you’re free to call capital controls but not the common definition.” ->
Yeah I mean at this point the govt has to regulate everything and say yay or nay on every bit of export that goes out of the door, we’re basically back to a centrally planned economy.. If I own some capital and live in your country and I want to pack up and leave (with my stuff), it’s something I should be allowed to do purely from an ethical/personal freedom standpoint (obviously there’s no science behind this statement, it’s an opinion).
If there was no other way, I’d say maybe, but what are we gaining again from your 0% rate policy? Is the cost of paying a competitive real return on money so high that you’re willing to bloat up your international trade regulations so much?
“Note the UMKC buckaroo. it’s 0 interest rate, worth, as a point of logic, one hour of student labor, and the issuer doesn’t support an interest rate on savings.” ->
And I’ve love to borrow UMKC buckaroos out the wazoo for 30 years at 0% and invest it into something with a higher real return than increase in student productivity. To keep the buckaroo’s value the school will have to run a surplus though..
“When it came out in the late 1990′s you could buy one from a student for $5. Today, maybe $15. Don’t know if that ‘beat’ the $ with it’s positive interest rate policies but seems it probably did.” ->
ln(15 / 5) / (2012 – 1990) = 5%
The evil rentiers that sat on buckaroos in a savings account made out like bandits 🙂
“I’ve long ‘suspected’ that to ensure a positive nominal rate yields a real rate you’d have to have tight enough fiscal which means higher unemployment than otherwise.” ->
If nominals are too high, you’ll need loose fiscal to stay at full employment. My proposal is to have govt bond issuance match the maturity profile of the govt’s assets (job guarantee has a maturity of 0 years so would have to be taxed away immediately, so purely immediate redistribution) and let monetary policy bring full employment. That strategy is unexploitable even with free international trade.
the rentier’s nominal holdings buy the same amount of unskilled labor each year, but point taken.
if people living off of savings becomes an issue it can be addressed. Doesn’t seem to happen with 0 rates but open to that possibility.
Your currency at a lower spot level due to your interest rate policy means you might net export to me?
yes, controls on real capital (vs nominal capital) are always part of the institutional structure.
most real capital was built with public support of one kind of another and is subject to that kind of regulation.
but it’s rarely an issue.
nominal and real returns on real investment don’t require nominal rates over 0
you can borrow buckaroos from the students.
then you can sell them to the same students or others for dollars,
which presumably think is ‘cheaper’ on a long term total return basis than just borrowing dollars term?
rentiers that held buckaroos buy the same amount of student labor today as in the past.
and i think if nominal are too high you need tighter fiscal, but other details can tip that one way or another.
except i don’t see employment as a function of ‘monetary policy’ which is interest rate adjustment.
and i don’t employ anyone in tsy bond issuance or subsequent trading, etc. so my people can be doing other things we consider more useful.
also, we’re disagreeing over what we suspect the various propensities to consume are, which is necessarily a guess.
“Your currency at a lower spot level due to your interest rate policy means you might net export to me?” ->
Wrong direction: your currency is the low yielder so it has the lower spot price/higher forward price. You’re net exporting to me 🙂
“also, we’re disagreeing over what we suspect the various propensities to consume are, which is necessarily a guess.” ->
Ah the eternal debate over whether borrowers or savers have higher marginal propensity to spend and therefore whether interest rate reductions do anything. My view is it doesn’t matter: propensity to spend is how much I will spend if my net wealth increases by $1. But the point isn’t what will happen due to the wealth effects of interest rate adjustments (I mean, what’s the propensity to consume of the average swap counterparty??). What’s interesting is: will the borrowers borrow more? While borrowing does not increase net wealth, propensity to spend borrowed money is 100%! (Very rarely will someone borrow money to let it sit in a checking account). More borrowing = more spending.
“except i don’t see employment as a function of ‘monetary policy’ which is interest rate adjustment.”
Yes there is a big disconnect in our views there and I think we’ve taken this debate about as far as it could go. I’m putting together a website summarizing my views (with detailed explanations). Will share with you once it’s complete if you’re interested.
Agreed on the differential, but I meant your currency has a lower spot price than otherwise due to your higher rate policy as per the prior discussion.
It’s the propensities to spend or not spend as per current income.
Right, borrowing to spend is part of that- spending more than one’s income- dis-saving, etc.
And we don’t ever seem to see high borrowing materialize with 0 rate policies, again like Japan and the US recently.
“Agreed on the differential, but I meant your currency has a lower spot price than otherwise due to your higher rate policy as per the prior discussion.” ->
Sorry there must be some miscommunication here. Why would my currency have a lower spot price with higher interest rate? Are you referring to something specific in the discussion? I’m missing something..
“It’s the propensities to spend or not spend as per current income.” ->
Income, increase in wealth, same thing 🙂
“And we don’t ever seem to see high borrowing materialize with 0 rate policies, again like Japan and the US recently.” ->
Right. Because 0% isn’t low enough..
your currency has a lower spot price than otherwise due to your higher nominal interest rate policy.
the ‘indifference level’ of the spot price vs yours will tend towards the no exports to you level.
Increase in wealth can be mark to market appreciation of real assets with no nominal income associated with it.
with overly tight fiscal, the nominal rate is never low enough.
and lower rates make it worse.
but i know we don’t agree on that interest rate thing, though I do agree you are correct with fixed fx policy.
“your currency has a lower spot price than otherwise due to your higher nominal interest rate policy.” ->
Sorry but I’m completely confused. Where is this statement coming from? In the example we discussed, everything pointed to downward pressure on your currency with the only offsetting factor being a tight fiscal policy response..
“Increase in wealth can be mark to market appreciation of real assets with no nominal income associated with it.” ->
I’m not sure you’re trying to tell me with that sentence but I recall mentioning something similar in the context of a discussion on “interest income channels” with you and how reduced rates means higher mark-to-market on the public sector’s treasury portfolio 🙂
“but i know we don’t agree on that interest rate thing,” ->
Yes, let’s agree to disagree for now. Will send you a website with my thoughts when it’s ready for show (hopefully ~ 1 to 2 weeks :))
you keep saying there’s a downward pressure on my currency.
i don’t agree. in fact, with it’s deflationary bias the currency should have a bias towards appreciation. just like the buckaroo.
you were saying a wealth increase is an income increase. i was distinguishing increased wealth via nominal income vs increased wealth via asset appreciation.
“you keep saying there’s a downward pressure on my currency.
i don’t agree. in fact, with it’s deflationary bias the currency should have a bias towards appreciation. just like the buckaroo.” ->
The productivity driven deflationary trend might lead to some appreciation of the currency over time (assuming real exchange rates are stable), but on a much shorter time scale, the carry traders shorting the heck out of the currency will dominate and if real exchange rates are indeed stable, they will be profitable.
“you were saying a wealth increase is an income increase. i was distinguishing increased wealth via nominal income vs increased wealth via asset appreciation.” ->
$1 in the pocket is $1 in the pocket, whether it comes from income, assets, or winning the lottery, no?
as you said before, your ‘carry traders’ will only be profitable if they can force my guys into a net export posture.
and I have a sharp eye on optimizing our real terms of trade, so good luck to them.
$1 of increase in the value of your home isn’t necessarily the same as $1 increase in nominal income.
“as you said before, your ‘carry traders’ will only be profitable if they can force my guys into a net export posture.” ->
Actually my carry traders will force you into a net export posture regardless of whether they end up being profitable or not.. Much like Chinese authorities unprofitably forces the U.S. into a net export position. Of course, if the carry traders end up being unprofitable, they’ll eventually stop..
“and I have a sharp eye on optimizing our real terms of trade, so good luck to them.” ->
I don’t doubt that, but your sharp eye is increasingly looking like a central planning authority which aims to plug all the holes caused by bad policy in the first place.
The carry traders are just a manifestation of the problem. If a citizen of your country is sitting there with capital and wants to pack up and leave (with his capital), are you going to let him? Are you going to confiscate (tax) some portion of his capital when he crosses the border? If so, I have a problem with this from a personal freedom standpoint..
“$1 of increase in the value of your home isn’t necessarily the same as $1 increase in nominal income.” ->
Other than the fact that increases in income tend to be ‘perpetual’ and that increase in home value will require a sale/refinance to be turned into cash, I don’t see the difference..
You will bow down and SERVE slave! Or meet the full force of this fully functional death star predator DRONE! Do not underestimate the POWER of the darkside! 😉
•EU SOURCES HAVE DISCUSSED IMPOSING CAPITAL CONTROLS AS WORST CASE SCENARIO IF GREECE LEAVES EUROZONE – RTRS
•IMPOSING BORDER CHECKS, LIMITING ATM WITHDRAWALS ALSO PART OF WORST-CASE SCENARIO PLANNING – EU SOURCES – RTRS
•SUSPENSION OF SCHENGEN ALSO DISCUSSED
It couldn’t have happened to a nicer country. On March 18, with very little pomp and circumstance, president Obama passed the most recent stimulus act, the $17.5 billion Hiring Incentives to Restore Employment Act (H.R. 2487), brilliantly goalseeked by the administration’s millionaire cronies to abbreviate as HIRE. As it was merely the latest in an endless stream of acts destined to expand the government payroll to infinity, nobody cared about it, or actually read it. Because if anyone had read it, the act would have been known as the Capital Controls Act, as one of the lesser, but infinitely more important provisions on page 27, known as Offset Provisions – Subtitle A—Foreign Account Tax Compliance, institutes just that. In brief, the Provision requires that foreign banks not only withhold 30% of all outgoing capital flows (likely remitting the collection promptly back to the US Treasury) but also disclose the full details of non-exempt account-holders to the US and the IRS. And should this provision be deemed illegal by a given foreign nation’s domestic laws (think Switzerland), well the foreign financial institution is required to close the account. It’s the law. If you thought you could move your capital to the non-sequestration safety of non-US financial institutions, sorry you lose – the law now says so. Capital Controls are now here and are now fully enforced by the law.
@DOB, In 1962, along with Marcus Fleming, he co-authored the Mundell–Fleming model of exchange rates, and noted that it was impossible to have domestic autonomy, price stability, and free capital flows: no more than two of those objectives could be met. The model is, in effect, an extension of the IS/LM model applied to currency rates.
he failed to recognize the currency is a simple public monopoly so he was mistaken
I’d say he recognized that with free capital flows the government has no monopoly on the currency in which the private sector saves.
@DOB, DOB, I want to use Warren Mosler himself as a good example of the REAL TRAJEDY that he has allowed the state to make such a SLAVE of himself and his family.
The world is a very large and dynamic place, car races are happening all over (warren likes those), sail boat races (warren has a superyacht), I watch this tv show river monsters where this guy goes all over the world to fish (warren likes to fish), there are financial conferences and meetings all over (warren just went to italy), and rick steves says that travel is the enemy of narrow mindedness and such.
But here is our esteemed host, Warren Mosler, renaissance man, lila thinker, LOCKED DOWN to 1 piece of land, a tiny island, for 6 months out of the year, (he must stay on his USVI island to get those tax breaks), I was just down there in the USVI a few months ago, I asked everyone, if you were rich, would you stay in the USVI for 6 months a year, the all said NO! If they were rich, they would get out of that hurricane death trap.
I am not as rich as warren, but I love to travel, and I like to see car races all over, and go to conferences all over, and fish all over, and how a man of his wealth can be happy locking himself and his family 6 months a year into a hurricane death trap piece of land shows what a REAL SLAVE he really is 🙁 Now he tells me his car company only has 3 employees, but I thought some USVI refinery just closed down and there are lots of people without work that he could probably hire with government subsidies for his company or another alternative energy company, etc etc
I imagine if I had my own car company like he does, with races all over the place, I would want to be there in person and watch my baby. I wouldn’t want to be locked down to 1 small piece of land 6 months out of every year. Look at the things warren CAN’T do because he has to stay a slave to those capital rules he wants to follow for those 3% tax rates, what a shackle!
Actually I’d like to be here 365 days a year.
And it’s been years since I made enough for the tax breaks to help any.
A very entertaining post!
that’s one place we do not agree,
i don’t think you can force my guys into net exports, given all the tools I have at hand.
And I do see your point that your guys could borrow my currency and buy things from us if they wanted to,
but I can limit real exports in a variety of ways, and I can buy things from you, etc.
Govt is necessarily a central planning vehicle for public purpose such as the legal system, military, etc.
And as a by product of that activity my govt will not burden with residual unemployment created by the tax liabilities,
or adversely disrupt the pursuit of optimal real terms of trade.
My citizens can, in this context, buy anything they want with their local currency.
Not sure what you mean by taking his capital and leaving- shipping drill presses to other nations?
The difference in incomes is one is an addition to your financial assets and the other isn’t.
“but I can limit real exports in a variety of ways, and I can buy things from you, etc.” ->
I think those ways are either forms of capital controls, or you can run the opposite (negative) carry trade on your government’s balance sheet. This involves your government shorting a currency it cannot print in potentially very large size..
“[..] with residual unemployment created by the tax liabilities,” ->
Unemployment is a direct consequence of price rigidities under deflationary pressures. I believe that’s in your book? So I’m not sure why a slew of fiscal operations which all have distortionary effects which you heroically attempt to get exactly right such that they all cancel down to just pushing off my carry traders would do a better job at affecting the price level than setting interest rates which is perfectly targeted to affect nothing but the value of money and fend off deflationary pressures..
“My citizens can, in this context, buy anything they want with their local currency.” ->
Yes, but less of it, because you have to tax them to support your currency (that’s assuming you don’t have capital controls on, of course with capital controls all bets are off but I’m rejecting those on ethical grounds).
“Not sure what you mean by taking his capital and leaving- shipping drill presses to other nations?” ->
Yes (though I’ll admit I’m not sure what that is). Or oil. Or steel. Or computers.. For sure it’s going to be hard to uproot a factory from the ground and ship it but it’s not just about the guys that will want to leave, it’s also about the guys that might have come but won’t. The factories that could have been built but won’t be.
“The difference in incomes is one is an addition to your financial assets and the other isn’t.” ->
Can be turned into addition to financial asset with refi/sale if your mortgage isn’t underwater but I think we’re splitting hair here.. If my salary was paid to me by my employer settled in Gold, would my behavior be any different than if I got dollars? I’d just sell the Gold to get dollars..
“For sure it’s going to be hard to uproot a factory from the ground and ship it”
You must be joking! LOL! Imports are a benefit, exports a cost 😉 Here is a picture showing us exporting entire cities, hell we exported the whole state of michigan according to this photo!
@DOB, PS, notice 1990 shanghai with nice clear blue skies, but now all dirty and killing the asian childrens lungs with cancer, but modern day detroit has lots of green grass and wide open parks and few polluting factories, maybe Larry Summers and the crats have it right with carbon cap and trade, export the pollution to the third world while the western world sits down and enjoys our fresh air and long lives.
I can buy your goods and services by selling my currency for yours in the market place and then buying your goods and services with your currency.
there is no short position on my end, and if it’s offsetting your attempt to somehow force me to export to you it seems like it’s ‘aggregate demand neutral’ though I still don’t see how my guys can be forced to export to you because your interest rates are higher. And if that were the case, it would follow that cutting rates would increase exports, probably via a weakening currency? So it’s back to you believing that my lower rates mean my currency is weaker? Again, that’s the mainstream view and what’s driving policy in most nations, but I don’t see it that way in theory or practice.
Unemployment is a direct result of taxation, as per my book. And govt. spending subsequently hires those who the tax caused to be unemployed.
What I meant was my citizens were not legally prevented from buying anything they want with their funds.
Yes, can be turned into financial assets at ‘market prices’, but that doesn’t mean they don’t differ.
The difference matters because desires to save financial assets cause spending to sag, as the currency is a case of ‘inside money’ and in that sense a ‘closed’ system. And the evidence of unrealized savings desires is unemployment, again as per my book.
Yes, you could sell the gold to get dollars, but then that guy doesn’t have dollars. net financial assets of a sector can’t be altered by transactions within the sector.