Federal Reserve Interest Rates Should Be Near Zero Forever

Kimura

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Warren Mosler is an American economist and co-founder of the Center for Full Employment And Price Stability at the University of Missouri-Kansas City.

I am a strong proponent of making the Fed's current near 0 percent interest rate policy permanent. A low-rate policy encourages long-term investments for businesses to expand and become more efficient, and for households to invest in new homes, improvements and appliances that can also add to efficiency, all of which increases long-term productivity and our real wealth. Low rates also keep the cost of holding business inventory down, and lower interest costs mean businesses sell at lower prices and also keep the shelves stocked, helping to prevent sudden shortages from disrupting output and employment.

However, savers are on the other side of low interest rates, and the private sector overall, including households, is a net saver. And lower interest rates mean less income to savers, which hurts the economy. But there are more dollars saved in the economy than borrowed. But how can that be? Well, for every dollar borrowed from the banks, there's only a dollar saved. Both sides are equal. So you would think a cut in interest rates would only shift dollars away from savers to borrowers. But don't forget the government is a large payer of interest to the economy which holds trillions of dollars of government debt. And how does that happen?

The "federal deficit" is when the government spends more than it taxes. And when government spends a dollar, there are only two possibilities. Either that dollar is used to pay taxes and is lost to the economy, or it remains in the economy as what we call "monetary savings." And so the government deficit - dollars spent by the government and not yet used to pay taxes - is in fact our monetary savings. And so this explains why the businesses and households in the economy are able to save so much. In fact, government deficit spending adds exactly that much to our savings, to the penny, as any government accountant will confirm!

So this means that when the Fed lower rates, the Treasury pays less interest to the economy on its debt, and that means less income for the economy. In other words, with the economy on balance a big saver, lowering rates removes interest income and therefore acts much like a tax increase, and this hurts the economy.

Fortunately, there are very "user friendly" ways to offset this interest income lost to the economy. These include tax cuts or public spending increases. The choice is political, as either alone or in combination can easily be sized to make sure the economy has enough income to sustain high levels of output and full employment. In fact, the problem today is that, for the size government we have, along with the low interest rate policy, the economy is grossly overtaxed and starved for income.

The remedy is quite simple. We can, again, either cut taxes (I've proposed a full payroll tax holiday, which would increase the average working family's take home pay by over $600 per month) and/or increase public spending (I've proposed establishing a minimum social security payment of $2,000 per month). Others options for increasing public spending might include restoring our public infrastructure for the likes of transportation, public safety, healthcare or education. Based on today's weak economy, I calculate the needed adjustments to be about $1 trillion per year.

Additionally, during an expansion, the private sector prefers to hire people already working and not those unemployed, so I've also proposed a federally funded "transition job" that pays $10 per hour to anyone willing and able to work. This facilitates that critical transition from unemployment to private sector employment, as it's well established that business far prefers to hire people already working.

So yes, lower rates hurt savers, which weakens the economy. And therefore you would be right to think that Fed rate hikes would help the economy. But why not instead make the low rates permanent and eliminate payroll taxes and increase Social Security payments to make up for the lost interest income, while keeping rates low for investment, home mortgages, car loans and lower costs for businesses to keep prices down.

And what about the budget deficit? Well, with a permanent 0 percent rate policy, there is no interest to speak of being paid, so you can forget about all those issues. And so the trick is to cut taxes or increase spending just enough to keep the economy humming along at full employment, which is what the real goal is.

Federal Reserve Interest Rates Should Be Near Zero Forever | Debate Club | US News Opinion
 

oldfart

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This is a terrible idea, upon which I will extrapolate later.
This is a wonderful idea, upon which I will extrapolate now.

Larry Summers has resurrected Alvin Hansen's secular stagnation scenario and created a lot of buzz. With the caveat that this is a "facts and circumstances" situation and not a "one theory fits everything for all time" argument, I would agree that we are thirty years or more into a period of secular stagnation. Keynes mused that in such a situation the correct policy for a central bank would be to drive the real rate of interest to zero. Now we seriously talk about the real rate of interest needing to be below zero, i.e. for there to be modest inflation. If this offends "free market" types that interest rates must be kept up for the rentier class because that is how markets behave, may I remind them of their constant harping on downward wage rigidity as a cause of unemployment. Since wages are the price of labor and interest the price of time-preference of money, why should one have a lower bound but not the other?

The only real objections that I see are political and ideological. With the world awash in excess loanable funds, I fail to see a danger of inflation or an argument for misallocation of resources. Can there be a misallocation more damaging to the economy than the present underutilization of resources?

So I look forward to hearing the argument against a long run policy very low (and sometimes negative) real rates of interest.
 

oldfart

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Others options for increasing public spending might include restoring our public infrastructure for the likes of transportation, public safety, healthcare or education. Based on today's weak economy, I calculate the needed adjustments to be about $1 trillion per year.
Please tell me you are not channeling Marty Feldstein!
 

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The author says "permanent." By "permanent," I take him at his word, ie 50 or 100 years, not 5 or 10 years to get the unemployment rate down and to monetize the debt before resumption of normalized policy.
 
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georgephillip

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The author says "permanent." By "permanent," I take him at his word, ie 50 or 100 years, not 5 or 10 years to get the unemployment rate down and to monetize the debt before resumption of normalized policy.
"The story is told, in several cultural variations, of a Jewish man spotting a friend reading an Arabic newspaper. 'Moshe, have you lost your mind?' he says.

“'Well, I used to read the Jewish papers, but what did I find?' Moshe replies. 'Jews being persecuted, Israel being attacked, Jews disappearing through assimilation, Jews living in poverty. So I switched to an Arab newspaper. Now what do I find? Jews own the banks, Jews control the media, Jews are all rich and powerful, Jews rule the world. The news is so much better!'”

World's 50 most influential Jews | JPost | Israel News
 

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Then why aren't businesses expanding? Why is unemployment so high? Why are record numbers on welfare, unemployment, disability, etc? Why? How long have interest rates been near zero already?
 

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Then why aren't businesses expanding? Why is unemployment so high? Why are record numbers on welfare, unemployment, disability, etc? Why? How long have interest rates been near zero already?
They are. At record rates. Look at the stock market. Read.
Unemployment is improving. It is not improving enough for a number of reasons. Not much to do with interest rates, but greatly to do with other factors that I am sure you favor. Different thread.

Record numbers are not. Those numbers are decreasing. And a smaller number is ALWAYS NOT a record if there was a larger number.

By the way, did you really think that disability numbers have something to do with interest rates?? Just wondering.

How long near zero? Pretty much since the economy started to improve.
 
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Mr. H.

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Then why aren't businesses expanding? Why is unemployment so high? Why are record numbers on welfare, unemployment, disability, etc? Why? How long have interest rates been near zero already?
They are. At record rates. Look at the stock market. Read.
Unemployment is improving. It is not improving enough for a number of reasons. Not much to do with interest rates, but greatly to do with other factors that I am sure you favor. Different thread.

Record numbers are not. Those numbers are decreasing. And a smaller number is ALWAYS NOT a record if there was a larger number.

By the way, did you really think that disability numbers have something to do with interest rates?? Just wondering.
Here come the Obamapologists...
 
OP
Kimura

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This is a terrible idea, upon which I will extrapolate later.
This is a wonderful idea, upon which I will extrapolate now.

Larry Summers has resurrected Alvin Hansen's secular stagnation scenario and created a lot of buzz. With the caveat that this is a "facts and circumstances" situation and not a "one theory fits everything for all time" argument, I would agree that we are thirty years or more into a period of secular stagnation. Keynes mused that in such a situation the correct policy for a central bank would be to drive the real rate of interest to zero. Now we seriously talk about the real rate of interest needing to be below zero, i.e. for there to be modest inflation. If this offends "free market" types that interest rates must be kept up for the rentier class because that is how markets behave, may I remind them of their constant harping on downward wage rigidity as a cause of unemployment. Since wages are the price of labor and interest the price of time-preference of money, why should one have a lower bound but not the other?

The only real objections that I see are political and ideological. With the world awash in excess loanable funds, I fail to see a danger of inflation or an argument for misallocation of resources. Can there be a misallocation more damaging to the economy than the present underutilization of resources?

So I look forward to hearing the argument against a long run policy very low (and sometimes negative) real rates of interest.
MMT views monetary policy as horrendous for counter-stabilization. It's like using a wreaking ball to swat a fly. There's isn't any concrete research which assumes that borrowers have more of a propensity to consume than lenders.

Fiscal policy is a POWERFUL tool because it's to the point. It can create/destroy net financial assets in the non-government sector. It doesn't rely on assumptions. Ultimately, anything over 2% unemployment is a deviation from the norm. This is a natural economic state so to speak.

We should view the deficits as the desire of the non-government sector to save in dollars. If the deficit isn't sufficient, and we have high unemployment, we know spending hasn't covered the aggregate spending gap.

Running deficits add to bank reserves which creates reserve surpluses in the banking system. These excess reserve generate interbank market competition. The banks are looking for better returns than the FED can offer. It makes total sense not to support at rate at all. Deficit spending (public sector) will decrease the overnight interest rate to zero since interbank competition will not remove systemic surpluses. All of their transactions will net to zero.

If we pursue a policy of full employment, fiscal policy will drive the short-term rates down to zero.
 
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Rshermr

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Then why aren't businesses expanding? Why is unemployment so high? Why are record numbers on welfare, unemployment, disability, etc? Why? How long have interest rates been near zero already?
They are. At record rates. Look at the stock market. Read.
Unemployment is improving. It is not improving enough for a number of reasons. Not much to do with interest rates, but greatly to do with other factors that I am sure you favor. Different thread.

Record numbers are not. Those numbers are decreasing. And a smaller number is ALWAYS NOT a record if there was a larger number.

By the way, did you really think that disability numbers have something to do with interest rates?? Just wondering.
Here come the Obamapologists...
I know. You just hate facts. Makes posting drivel so difficult.

So, you are not going to comment on your really, really stupid comment about disability numbers??? You just walking away, eh. Admitting you were full of crap. Which, in actuality, was obvious to all concerned.
 

Toro

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This is a terrible idea, upon which I will extrapolate later.
This is a wonderful idea, upon which I will extrapolate now.

Larry Summers has resurrected Alvin Hansen's secular stagnation scenario and created a lot of buzz. With the caveat that this is a "facts and circumstances" situation and not a "one theory fits everything for all time" argument, I would agree that we are thirty years or more into a period of secular stagnation. Keynes mused that in such a situation the correct policy for a central bank would be to drive the real rate of interest to zero. Now we seriously talk about the real rate of interest needing to be below zero, i.e. for there to be modest inflation. If this offends "free market" types that interest rates must be kept up for the rentier class because that is how markets behave, may I remind them of their constant harping on downward wage rigidity as a cause of unemployment. Since wages are the price of labor and interest the price of time-preference of money, why should one have a lower bound but not the other?

The only real objections that I see are political and ideological. With the world awash in excess loanable funds, I fail to see a danger of inflation or an argument for misallocation of resources. Can there be a misallocation more damaging to the economy than the present underutilization of resources?

So I look forward to hearing the argument against a long run policy very low (and sometimes negative) real rates of interest.
MMT views monetary policy as horrendous for counter-stabilization. It's like using a wreaking ball to swat a fly. There's isn't any concrete research which assumes that borrowers have more of a propensity to consume than lenders.

Fiscal policy is a POWERFUL tool because it's to the point. It can create/destroy net financial assets in the non-government sector. It doesn't rely on assumptions. Ultimately, anything over 2% unemployment is a deviation from the norm. This is a natural economic state so to speak.

We should view the deficits as the desire of the non-government sector to save in dollars. If the deficit isn't sufficient, and we have high unemployment, we know spending hasn't covered the aggregate spending gap.

Running deficits add to bank reserves which creates reserve surpluses in the banking system. These excess reserve generate interbank market competition. The banks are looking for better returns than the FED can offer. It makes total sense not to support at rate at all. Deficit spending (public sector) will decrease the overnight interest rate to zero since interbank competition will not remove systemic surpluses. All of their transactions will net to zero.

If we pursue a policy of full employment, fiscal policy will drive the short-term rates down to zero.
Short term rates at zero forever would create destabilizing inflation, either in consumer end markets or in asset markets. It would also eventually lead to the end of the currency.

But the thesis plays well into the endless asset bubbles of the past 15 years the central banks have fueled and helped create.

:).
 

iamwhatiseem

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Short term rates at zero forever would create destabilizing inflation, either in consumer end markets or in asset markets. It would also eventually lead to the end of the currency.

But the thesis plays well into the endless asset bubbles of the past 15 years the central banks have fueled and helped create.

:).
Hmm...funny I remember you celebrating all of this because you are doing well in investments. So which is it...you love it because you personally gain from it...or you finally start caring about something other than your own personal finances?
 

expat_panama

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...am a strong proponent of making the Fed's current near 0 percent interest rate policy permanent. A low-rate policy encourages long-term investments for businesses to expand and become more efficient, and for households to invest in new homes...

... lowering rates removes interest income and therefore acts much like a tax increase, and this hurts the economy...

... the economy is grossly overtaxed and starved for income. The remedy is quite simple. We can, again, either cut taxes (I've proposed a full payroll tax holiday, which would increase the average working family's take home pay by over $600 per month) and/or increase public spending...

...what about the budget deficit? Well, with a permanent 0 percent rate policy, there is no interest to speak of being paid...
That's an edited "Cliff Notes" version --boiling down the ramble in an effort to make sense out of it. Unfortunately there was so little sense to be found there after the boiling, so what we're left with is that he admits we're over taxed and he admits that his solution is probably more taxing.

What he doesn't get into is the fact that all this taxing has gotten us to--

--ruined family incomes and soaring unemployment. On top of that, this is a recovery. Just imagine what this 'recover' will look like with even more taxes.
---
 

Toro

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Short term rates at zero forever would create destabilizing inflation, either in consumer end markets or in asset markets. It would also eventually lead to the end of the currency.

But the thesis plays well into the endless asset bubbles of the past 15 years the central banks have fueled and helped create.

:).
Hmm...funny I remember you celebrating all of this because you are doing well in investments. So which is it...you love it because you personally gain from it...or you finally start caring about something other than your own personal finances?
It will make sense to you once you realize how awesome I am!
 

Toro

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...am a strong proponent of making the Fed's current near 0 percent interest rate policy permanent. A low-rate policy encourages long-term investments for businesses to expand and become more efficient, and for households to invest in new homes...

... lowering rates removes interest income and therefore acts much like a tax increase, and this hurts the economy...

... the economy is grossly overtaxed and starved for income. The remedy is quite simple. We can, again, either cut taxes (I've proposed a full payroll tax holiday, which would increase the average working family's take home pay by over $600 per month) and/or increase public spending...

...what about the budget deficit? Well, with a permanent 0 percent rate policy, there is no interest to speak of being paid...
That's an edited "Cliff Notes" version --boiling down the ramble in an effort to make sense out of it. Unfortunately there was so little sense to be found there after the boiling, so what we're left with is that he admits we're over taxed and he admits that his solution is probably more taxing.

What he doesn't get into is the fact that all this taxing has gotten us to--

--ruined family incomes and soaring unemployment. On top of that, this is a recovery. Just imagine what this 'recover' will look like with even more taxes.
---
Zimbabwe is awesome, I understand ...
 

Sallow

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This is a terrible idea, upon which I will extrapolate later.
I quite agree.

Interest rates should be a method both dealing with economic issues and a source of income for the Fed.

Keeping them at "zero" is a fools errand. It was a monumentally bad idea in the first place. :doubt:
 

iamwhatiseem

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This is a terrible idea, upon which I will extrapolate later.
I quite agree.

Interest rates should be a method both dealing with economic issues and a source of income for the Fed.

Keeping them at "zero" is a fools errand. It was a monumentally bad idea in the first place. :doubt:
So is buying up $85bn PER MONTH to keep it afloat.
But we won't talk about that.
 

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