Federal Reserve Interest Rates Should Be Near Zero Forever

[Kimura]

...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 ...

We can't compare the US to Zimbabwe. Seriously.

Zimbabwe had around 80% of its productive capacity destroyed due to corruption and civil war, and its had debts denominated in other currencies like the US Dollar.

 

[TakeAStepBack]

Thankfully, your opinion on this is the absolute fringe left minority. Everyone with any sense of economic law knows this is exactly what we dont need, and that it has extremely hazardous implications. After that, all i really have to add to this "discussion" is..

 

[Toro]

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 ...

We can't compare the US to Zimbabwe. Seriously.

Zimbabwe had around 80% of its productive capacity destroyed due to corruption and civil war, and its had debts denominated in other currencies like the US Dollar.

Hyperinflation can happen anywhere. It doesn't matter if all debts are in the home currency.

Western nations experienced double digit inflation in their own currencies in the 60s and 70s.

 

[Kimura]

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.

.

The asset bubbles were due to the private sector going into deficit, as well as various degrees of control fraud.

Take a look at the Yen. It's been one of the best stores of vale for decades, and they run the world's largest deficits, the largest QE, and lowest interest rates. And the Japanese Central bank has been trying to inflate to no avail. It's very hard to generate a sufficient inflation.

Also, monetary policy, as we define it has done squat in regards to aggregate demand, so we're at the mercy of Congress to close the output gap.

 

[Toro]

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.

.

The asset bubbles were due to the private sector going into deficit, as well as various degrees of control fraud.

Take a look at the Yen. It's been one of the best stores of vale for decades, and they run the world's largest deficits, the largest QE, and lowest interest rates. And the Japanese Central bank has been trying to inflate to no avail. It's very hard to generate a sufficient inflation.

Also, monetary policy, as we define it has done squat in regards to aggregate demand, so we're at the mercy of Congress to close the output gap.

Asset bubbles occurred because the cost of capital was mispriced. The Fed influences the cost of capital and was the primary cause of the Housing Bubble.

The story of Japan isn't over. That we haven't had inflation doesn't mean that the end game is good.

 

[Kimura]

Zimbabwe is awesome, I understand ...

We can't compare the US to Zimbabwe. Seriously.

Zimbabwe had around 80% of its productive capacity destroyed due to corruption and civil war, and its had debts denominated in other currencies like the US Dollar.

Hyperinflation can happen anywhere. It doesn't matter if all debts are in the home currency.

Western nations experienced double digit inflation in their own currencies in the 60s and 70s.

I beg to differ.

The classical examples of Weimar and Zimababe aren't good examples when making comparisons to the United States or any modern, industrialized country. All modern cases of hyperinflation are VERY similar. Historically, these countries have suffered through wars, corruption, had FOREIGN denominated debt, regime change, even civil war. This has been this case with Austria, Hungary, China, Greece, Argentina, Poland, Russia, Austria, Wiemar and Zimbabwe during the 20th century.

Let's look at the Peter Schiff's example of Weimar. Actually, Peter and the other candidate for the Darwin Award, Ron Paul, always mention Weimar. The Weimar Republic had its debt denominated in Sterling, and its industrial capacity was destroyed was useless because other nations effectively controlled its output. The $$$$ that they were printing wasn't being off-put by a corresponding supply of real goods and services. This will NEVER happen in the US, barring a civil war or or other catastrophe.

Hyperinflation is MUCH more than monetary events. They weren't the result of overspending, but rather a rejection of the national currency due to externalizes. This completely different than inflation, which is normal in a healthy, growing economy.

 

[TakeAStepBack]

Crack kills, fella. Crack kills.

 

[Sallow]

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.

So is buying up $85bn PER MONTH to keep it afloat.
But we won't talk about that.

Talk about what?

Your "let it die" alternative was tried a few times.

Once during the great depression.

And to a smaller extent during the great recession when Lehman went south.

It wasn't a big hit in either case, I tell you what.

 

[Sallow]

Thankfully, your opinion on this is the absolute fringe left minority. Everyone with any sense of economic law knows this is exactly what we dont need, and that it has extremely hazardous implications. After that, all i really have to add to this "discussion" is..

Toro and I both work for the financial industry. We actually live and breath this stuff.

You..do...what..again?

 

[Toro]

We can't compare the US to Zimbabwe. Seriously.

Zimbabwe had around 80% of its productive capacity destroyed due to corruption and civil war, and its had debts denominated in other currencies like the US Dollar.

Hyperinflation can happen anywhere. It doesn't matter if all debts are in the home currency.

Western nations experienced double digit inflation in their own currencies in the 60s and 70s.

I beg to differ.

The classical examples of Weimar and Zimababe aren't good examples when making comparisons to the United States or any modern, industrialized country. All modern cases of hyperinflation are VERY similar. Historically, these countries have suffered through wars, corruption, had FOREIGN denominated debt, regime change, even civil war. This has been this case with Austria, Hungary, China, Greece, Argentina, Poland, Russia, Austria, Wiemar and Zimbabwe during the 20th century.

Let's look at the Peter Schiff's example of Weimar. Actually, Peter and the other candidate for the Darwin Award, Ron Paul, always mention Weimar. The Weimar Republic had its debt denominated in Sterling, and its industrial capacity was destroyed was useless because other nations effectively controlled its output. The $$$$ that they were printing wasn't being off-put by a corresponding supply of real goods and services. This will NEVER happen in the US, barring a civil war or or other catastrophe.

Hyperinflation is MUCH more than monetary events. They weren't the result of overspending, but rather a rejection of the national currency due to externalizes. This completely different than inflation, which is normal in a healthy, growing economy.

Of course America can have hyperinflation. Just print $100,000,000,000,000,000,000,000,000,000,000,000,000,000 of dollars and voila! Hyperinflation.

Besides, you can still have pernicious inflation without hyperinflation. There is no war or upheaval in Venezuela and Argentina today. Yet both are experiencing double digit inflation.

 

[TakeAStepBack]

Thankfully, your opinion on this is the absolute fringe left minority. Everyone with any sense of economic law knows this is exactly what we dont need, and that it has extremely hazardous implications. After that, all i really have to add to this "discussion" is..

Toro and I both work for the financial industry. We actually live and breath this stuff.

You..do...what..again?

Pushing keys in the basement and helping users get a new keyboard makes you believe you have an understanding of monetary policy and macroecon?

 

[Kimura]

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.

.

The asset bubbles were due to the private sector going into deficit, as well as various degrees of control fraud.

Take a look at the Yen. It's been one of the best stores of vale for decades, and they run the world's largest deficits, the largest QE, and lowest interest rates. And the Japanese Central bank has been trying to inflate to no avail. It's very hard to generate a sufficient inflation.

Also, monetary policy, as we define it has done squat in regards to aggregate demand, so we're at the mercy of Congress to close the output gap.

Asset bubbles occurred because the cost of capital was mispriced. The Fed influences the cost of capital and was the primary cause of the Housing Bubble.

The story of Japan isn't over. That we haven't had inflation doesn't mean that the end game is good.

The Clinton surpluses caused the first recession of the 21st century. His surplus resulted in the domestic private sector increasing its debt load to finance consumption. This resulted in private sector instability.

Secondly, even with the surpluses, interest rates were still HIGHER, and the surplus provided no buffer for the crash that followed. This surplus is what caused the private sector to assume huge debt loads for consumption. The trade deficit massively increased under Clinton, so the only other sector that could pick up the slack was private consumption which fueled the dotcom/housing bubbles. We should also note that household savings disappeared under Clinton.

Japan can continue ZIRP indefinitely if it so chooses.

The FED can continue QE indefinitely. We can continue to expand the balance sheet with paying interest on the IOR as well as POMO. There is no end game. Again, we're talking accounting adjustments and changing the composition of assets held by the public.

 

[Kimura]

Thankfully, your opinion on this is the absolute fringe left minority. Everyone with any sense of economic law knows this is exactly what we dont need, and that it has extremely hazardous implications. After that, all i really have to add to this "discussion" is..

Toro and I both work for the financial industry. We actually live and breath this stuff.

You..do...what..again?

I'm a bond trader for UniCredit Group.

I also have an MS in Economics. My interests are primarily in macro and and various facets of labor theory. I'm basically a Minskyite at heart.

 

[Kimura]

Thankfully, your opinion on this is the absolute fringe left minority. Everyone with any sense of economic law knows this is exactly what we dont need, and that it has extremely hazardous implications. After that, all i really have to add to this "discussion" is..

Toro and I both work for the financial industry. We actually live and breath this stuff.

You..do...what..again?

Pushing keys in the basement and helping users get a new keyboard makes you believe you have an understanding of monetary policy and macroecon?

So says the guy who doesn't even understand basic accounting principles. Shouldn't you be on a college campus handing out End the Fed flyers?

 

[JimmieD]

The FED can continue QE indefinitely. We can continue to expand the balance sheet with paying interest on the IOR as well as POMO. There is no end game. Again, we're talking accounting adjustments and changing the composition of assets held by the public.

What happens if the Fed runs out of bonds to buy? There isn't an infinite amount of bonds in existence.

MMT strikes me as neither Modern, Monetary , or Theory. It seems chartilist and fiscal. It's not theory in that for some bizzare reason it's founded on an accounting identity (C+S+T+X=C+I+G+M). It doesn't seem to me to be very rigorous or wise to take an accounting identity and formulate fiscal or monetary policy from it. And an accounting identity is anything but an economic model. It seems this accounting identity usually ends up used as justification for some already a priori ideas and beliefs. If allowed by those who don't know what a statistical, economic model looks like, I could use this accounting identity to justify just about any policy I wanted.

It also seems to me to have a particular take on how the Treasury, Fed, Congress, and the banking system could operate, not how they in fact do operate. For example, MMT lobs the Fed and Treasury together as the "governement" and calls the government a currency issuer - which it could theoretically do (setting aside possible consequences of such an act). However, the Treasury actually operates as a currency user with the Federal Reserve as it's bank. Money is created when credit is created by the banking system (be it the Fed, a commercial bank, or investment bank). The Treasury could theoretically create money by pure deficit spending, but in fact it issues bonds to cover the outlays. In effect, it borrows from the banking system and it's the banking system that creates new net financial assets (a bond and a deposit). The loan from the banking system is what creates money by creating new deposits, the Treasury does not do it by fiat. I guess in theory the government could take over the banking system and do it all by fiat, but that may have some really bad unintended consequences that aren't captured in an accounting identity.

 

[TakeAStepBack]

It seems chartilist

That's because it is.

 

[TakeAStepBack]

Toro and I both work for the financial industry. We actually live and breath this stuff.

You..do...what..again?

Pushing keys in the basement and helping users get a new keyboard makes you believe you have an understanding of monetary policy and macroecon?

So says the guy who doesn't even understand basic accounting principles. Shouldn't you be on a college campus handing out End the Fed flyers?

You want to prove that assertion?

 

[Sallow]

Thankfully, your opinion on this is the absolute fringe left minority. Everyone with any sense of economic law knows this is exactly what we dont need, and that it has extremely hazardous implications. After that, all i really have to add to this "discussion" is..

Toro and I both work for the financial industry. We actually live and breath this stuff.

You..do...what..again?

Pushing keys in the basement and helping users get a new keyboard makes you believe you have an understanding of monetary policy and macroecon?

And still no answer.

Cheers mate.

 

[Sallow]

Thankfully, your opinion on this is the absolute fringe left minority. Everyone with any sense of economic law knows this is exactly what we dont need, and that it has extremely hazardous implications. After that, all i really have to add to this "discussion" is..

Toro and I both work for the financial industry. We actually live and breath this stuff.

You..do...what..again?

I'm a bond trader for UniCredit Group.

I also have an MS in Economics. My interests are primarily in macro and and various facets of labor theory. I'm basically a Minskyite at heart.

That really wasn't addressed to you.

I may not agree with you..but you seem to know what you are talking about.

 

[Kimura]

Toro and I both work for the financial industry. We actually live and breath this stuff.

You..do...what..again?

I'm a bond trader for UniCredit Group.

I also have an MS in Economics. My interests are primarily in macro and and various facets of labor theory. I'm basically a Minskyite at heart.

That really wasn't addressed to you.

I may not agree with you..but you seem to know what you are talking about.

Sorry about that, I'm on an iPad.