Interest Rate Dilemma

[uscitizen]

Right now, they can't. In the future, when the excess is cleared away and the economy is healthier, they will.

Yep the artificially low interest rates that kept the economy going for the Bush years is a major problem now since NOW it cannot be raised without making the recession effects worse.

Bush used up one of our tools to fight a recession.
If you go into a recession with normal or high interest rates, lowering them will boost the economy. But if they are already near zero when the recession starts........

So it's Bush and not Bernanke? BS.

He then served as Chairman of President George W. Bush's Council of Economic Advisers before President Bush appointed him to be Chairman of the United States Federal Reserve on February 1, 2006.

Ben Bernanke - Wikipedia, the free encyclopedia

actually it was Bernanke's predecessor who caused it all and Bernanke just followed along like Obama is a 3rd Bush term.

 

[Widdekind]

What do you mean by "naively"?

i'm not an accredited economist -- i can justify the "pq + PQ" terms, from accessible definitions, whilst the "S" term "seems to work", since Savings competes for Money, against other Goods & Services

The S shouldn't really be there since savings equals investment in equilibrium.

Remember Y = C + I (closed economy real resource constraint)
Savings is defined as income not consumed
S = Y - C = I

If pq is (nominal) consumption demand, PQ is (nominal) investment demand, just label them C and I instead.
PY = C + I
MV = C + I (by the equation of exchange)

"Savings" can be accounted for by many means, e.g.

• increased Savings reduces the "Velocity" of Money (which is "hoarded" in banks)
• Savings resembles buying "Bonds" from banks, and "Bonds" are Commodities, with Prices & Quantities (PSQS = S)

in all cases, "Savings" exerts deflationary pressures, on "Consumer" & "Investor" markets (by competing for cash)

 

[DSGE]

i'm not an accredited economist -- i can justify the "pq + PQ" terms, from accessible definitions, whilst the "S" term "seems to work", since Savings competes for Money, against other Goods & Services

The S shouldn't really be there since savings equals investment in equilibrium.

Remember Y = C + I (closed economy real resource constraint)
Savings is defined as income not consumed
S = Y - C = I

If pq is (nominal) consumption demand, PQ is (nominal) investment demand, just label them C and I instead.
PY = C + I
MV = C + I (by the equation of exchange)

"Savings" can be accounted for by many means, e.g.

increased Savings reduces the "Velocity" of Money (which is "hoarded" in banks)

Not necessarily. An increase in the demand to hold liquid money reduces velocity. Otherwise saving in the form of interest bearing deposits, stocks, bonds, etc, all leave monetary velocity unchanged. Nominal spending remains unchanged in equilibrium since those savings are used for investment. It's an increase in the demand for liquid money which exerts deflationary pressure.

Savings resembles buying "Bonds" from banks, and "Bonds" are Commodities, with Prices & Quantities (PSQS = S)

Not sure what this means...

in all cases, "Savings" exerts deflationary pressures, on "Consumer" & "Investor" markets (by competing for cash)

Not in all cases. Only in the case where the demand for money changes.

 

[Widdekind]

...An increase in the demand to hold liquid money reduces velocity. Otherwise saving in the form of interest bearing deposits, stocks, bonds, etc, all leave monetary velocity unchanged. Nominal spending remains unchanged in equilibrium since those savings are used for investment. It's an increase in the demand for liquid money which exerts deflationary pressure.

from another thread, just as "P x Q" is a short-hand notation, for a long series of (p x q)'s, for every Commodity in the economy, i.e.:

"P x Q" = (p1 x q1) + (p2 x q2) + ...​

so "M x V" is a short-hand notation, for a (shorter) series (m x v)'s, for different "kinds" of Money, e.g. "fast & liquid" M1, "slow & frozen" (?) M2,

"M x V" = (M1 x V1) + (M2 x V2) + ... + MS x 0​

naively, "Savings" (not the best choice of term) is that "kind" of Money, which is "frozen solid", i.e. "buried in backyards", i.e. "removed from economic activity", hence VS = 0. Such "viscous" or "super-slow" Money cannot contribute to Supply & Demand "P x Q"; and so (tends to) exert deflationary pressures on an economy. "Savings" would not include typical bank deposits, which swiftly serve as basis, for new loans, of credit.

In the "short-hand notation", M x V = P x Q, what i've called "Savings" represents "Money de facto withdrawn from circulation", resulting in a decrease of the LHS of that equation, demanding, in turn, an equal decrease, in the RHS, i.e. deflationary pressures, on Prices & Quantities.

 

[DSGE]

from another thread, just as "P x Q" is a short-hand notation, for a long series of (p x q)'s, for every Commodity in the economy, i.e.:

"P x Q" = (p1 x q1) + (p2 x q2) + ...​

so "M x V" is a short-hand notation, for a (shorter) series (m x v)'s, for different "kinds" of Money, e.g. "fast & liquid" M1, "slow & frozen" (?) M2,

"M x V" = (M1 x V1) + (M2 x V2) + ... + MS x 0​

Yeah, if you know vectors then they make the sum stuff easier. P = [p1,p2,...], Q = [q1,q2,...], and the RHS is just the inner product, P·Q.

But that doesn't work for the LHS. It doesn't make much sense putting in all these measures of the money supply, especially since you'd be double counting a whole bunch money. What happens on the LHS is you pick some aggregate which you call "money". So M is a scalar, just the quantity of money (for however you've defined 'money'). And V is just solved by taking P·Q/M.

naively, "Savings" (not the best choice of term) is that "kind" of Money, which is "frozen solid", i.e. "buried in backyards", i.e. "removed from economic activity", hence VS = 0. Such "viscous" or "super-slow" Money cannot contribute to Supply & Demand "P x Q"; and so (tends to) exert deflationary pressures on an economy. "Savings" would not include typical bank deposits, which swiftly serve as basis, for new loans, of credit.

In the "short-hand notation", M x V = P x Q, what i've called "Savings" represents "Money de facto withdrawn from circulation", resulting in a decrease of the LHS of that equation, demanding, in turn, an equal decrease, in the RHS, i.e. deflationary pressures, on Prices & Quantities.

Yeah, so what you're talking about there is "the demand for money", in econ jargon. Stuff like time deposits (which are included in M2), aren't exactly "frozen". They serve as a medium of exchange. You might be thinking maybe that the "money in a time deposit just sits there", but that's not true. Since you've made clear that you won't attempt to withdraw your deposit in a period of time, the bank doesn't actually have to hold any reserves against it. So they can lend out more of that money than had it been a demand deposit.

The kind of "savings" where money doesn't enter the stream of spending is just money that is held as liquidity. That is, the demand to hold money and not spend it. Or just what econ calls "the demand for money".

 

[Widdekind]

..."the demand for money", in econ jargon.... The kind of "savings" where money doesn't enter the stream of spending is just money that is held as liquidity. That is, the demand to hold money and not spend it. Or just what econ calls "the demand for money".

the US employs paper money; Classical economies employed specie money (e.g. gold, silver); prison economies employ cigarettes as money (in movies). Different media of exchange have different "demands for those monies" ? E.g. gold & silver can be withdrawn from circulation, and "deposited" into jewelry, ornamentation, electronics; cigarettes can be withdrawn from circulation, and "smoked"; paper can be withdrawn from circulation, and "used as wallpaper" (hypothetically). But cigarettes are more likely to be smoked (easy), than specie turned into jewelry (hard-but-desired), than paper used as kindling (easy-but-undesired). So, different forms of "money" have different "demands" for them ?

 

[Widdekind]

"the demand for money", in econ jargon... The kind of "savings" where money doesn't enter the stream of spending is just money that is held as liquidity. That is, the demand to hold money and not spend it. Or just what econ calls "the demand for money".

So, "demanded money" is dollars specifically ear-marked for non-use. E.g. you have money in your wallet; during your day, you spend some of that money, "freely", i.e. "you see something 'good', you buy it". None of those dollars are "demanded money"; only when you get down to your last few dollars, and you start to hesitate to spend those dollars, because you want to hoard them, as "precaution" against sudden-and-un-fore-seen events...

only then do the dollars start to have "low velocity", and represent your desire to actually carry around the physical "product" of printed money.

Again, dollars that you "spend without special thought" are not "demanded money"; they have "high velocity"; but dollars that you "hoard for rainy days" are dollars that you attribute artificial "extra value" to -- psychically, you treat your $10s as $20s, and wouldn't spend them, unless somebody offered you "extra value" for them, in some "special deal".

Perhaps the word "Savings" causes confusion ?

• "demanded money" = (true) Savings, i.e. "money saved under mattresses for rainy days"
• "(so-called) Savings" = (private) Loans to Banks, i.e. "Bankers borrow your money, use it, and give you a 'loan-shark cut' of the profits"

So, perhaps "Savings = demand for money" could be clarified, from "private Loans to Banks" (private loan-sharking?) ? That Banks have developed such "iron-clad" reputations, so that people psychically-if-errantly equate "in a Bank deposit" with "under the mattress", causing confusion, in "Diabolical details":

• what Bankers mean -- "hey, man, can i borrow $50 ?"
• what Bankers say -- "hey... so, i'll ::quote-fingers:: "Save" your money for you"

 

[Widdekind]

(i'm still confused)

According to Wikipedia, people (tend to) hoard cash, when they expect an adverse future, e.g. war. Whilst that may be true, for specie money (e.g. gold, silver); is that false, for paper money? Who hoards paper money, when they think tanks will soon roll in? Wouldn't most people "stock up", "hoarding" soup cans, bullets, water, iodine (and perhaps gold), i.e. wouldn't they go into "survival mode", as if they were "going on an extended camping trip"? Who brings paper money, out into the wilderness?

J.M.Keynes developed his Liquidity Theory in the 1930s AD, under the gold-standard. Perhaps paper money "behaves" fundamentally differently, from specie money ?

"putting the pieces together" (in my terms), Interest-rates (I) and (true) Savings (S) are inversely related, i.e. I x S ~ constant

"interest [rate] ... is a reward for parting with liquidity [i.e. money "valued as an asset" in-and-of-itself]... "

"the lower the interest rate, the more money demanded (et vice versa)"

but above, (true) Savings increases, when cash is hoarded, when the future is expected to be adverse, i.e. "war => S++ => I--", i.e. "dark-future => Savings up, Interest down". But, that seems totally backwards !! If the future looks bleak; then the future is highly discounted, i.e. "war => I++ => S--", i.e. "dark-future => everybody dumps cash for survival necessities".

something seems woefully awry -- naive intuitive expectation, that Interest-rates reflect "discounting" (of the future), imply that bleak futures correlate with high Interest-rates (which "attract money out of hiding", "extracting" money from hoards, e.g. "under mattresses", back into the "stream of spending", to buy survival necessities), and high-Interest rates with less hoarding (of paper money) ("true Savings", e.g. "under mattresses, buried in the back-yard").

if i understand; then "demand for money" resembles "minimum account balances", i.e. people choose to keep a certain minimum amount of cash on hand. The use of credit-cards reduces "demand for money". "Black Markets", conversely, are "cash only".

 

[DSGE]

..."the demand for money", in econ jargon.... The kind of "savings" where money doesn't enter the stream of spending is just money that is held as liquidity. That is, the demand to hold money and not spend it. Or just what econ calls "the demand for money".

the US employs paper money; Classical economies employed specie money (e.g. gold, silver); prison economies employ cigarettes as money (in movies). Different media of exchange have different "demands for those monies" ? E.g. gold & silver can be withdrawn from circulation, and "deposited" into jewelry, ornamentation, electronics; cigarettes can be withdrawn from circulation, and "smoked"; paper can be withdrawn from circulation, and "used as wallpaper" (hypothetically). But cigarettes are more likely to be smoked (easy), than specie turned into jewelry (hard-but-desired), than paper used as kindling (easy-but-undesired). So, different forms of "money" have different "demands" for them ?

Yep. There's no reason that there should be only one "demand for money" that's always constant. At different times the demand for money will be different. If there's uncertainty and lack of confidence about the future people will want to hold more liquid money; just in case, say, they loose their job and need access to lots of liquidity. Different kinds of money might have more wild swings in money demand. Take cigarettes and fiat paper money for example. There's nothing you can do with paper money. Can't eat it, can't burn it for warmth. It only functions as money. Cigarettes on the other hand function also as a consumption good. So with cigarettes money demand can change because of a desire to hold liquid money, or because the desire to smoke cigarettes has increased.

 

[DSGE]

"the demand for money", in econ jargon... The kind of "savings" where money doesn't enter the stream of spending is just money that is held as liquidity. That is, the demand to hold money and not spend it. Or just what econ calls "the demand for money".

So, "demanded money" is dollars specifically ear-marked for non-use. E.g. you have money in your wallet; during your day, you spend some of that money, "freely", i.e. "you see something 'good', you buy it". None of those dollars are "demanded money"; only when you get down to your last few dollars, and you start to hesitate to spend those dollars, because you want to hoard them, as "precaution" against sudden-and-un-fore-seen events...

only then do the dollars start to have "low velocity", and represent your desire to actually carry around the physical "product" of printed money.

Again, dollars that you "spend without special thought" are not "demanded money"; they have "high velocity"; but dollars that you "hoard for rainy days" are dollars that you attribute artificial "extra value" to -- psychically, you treat your $10s as $20s, and wouldn't spend them, unless somebody offered you "extra value" for them, in some "special deal".

Perhaps the word "Savings" causes confusion ?

• "demanded money" = (true) Savings, i.e. "money saved under mattresses for rainy days"
• "(so-called) Savings" = (private) Loans to Banks, i.e. "Bankers borrow your money, use it, and give you a 'loan-shark cut' of the profits"

So, perhaps "Savings = demand for money" could be clarified, from "private Loans to Banks" (private loan-sharking?) ? That Banks have developed such "iron-clad" reputations, so that people psychically-if-errantly equate "in a Bank deposit" with "under the mattress", causing confusion, in "Diabolical details":

• what Bankers mean -- "hey, man, can i borrow $50 ?"
• what Bankers say -- "hey... so, i'll ::quote-fingers:: "Save" your money for you"

Yep, that's pretty much right. And yes the term "savings" causes lots and lots of confusion. Econ should just get rid of it altogether.

 

[DSGE]

(i'm still confused)

According to Wikipedia, people (tend to) hoard cash, when they expect an adverse future, e.g. war. Whilst that may be true, for specie money (e.g. gold, silver); is that false, for paper money? Who hoards paper money, when they think tanks will soon roll in? Wouldn't most people "stock up", "hoarding" soup cans, bullets, water, iodine (and perhaps gold), i.e. wouldn't they go into "survival mode", as if they were "going on an extended camping trip"? Who brings paper money, out into the wilderness?

Yeah I don't know why war is in there. Also for especially big wars countries have had a tendency to pay for them through monetizing government debt, creating lots of inflation. If you expected that you'd obviously hoard real goods.

J.M.Keynes developed his Liquidity Theory in the 1930s AD, under the gold-standard. Perhaps paper money "behaves" fundamentally differently, from specie money ?

"putting the pieces together" (in my terms), Interest-rates (I) and (true) Savings (S) are inversely related, i.e. I x S ~ constant

"interest [rate] ... is a reward for parting with liquidity [i.e. money "valued as an asset" in-and-of-itself]... "

"the lower the interest rate, the more money demanded (et vice versa)"

but above, (true) Savings increases, when cash is hoarded, when the future is expected to be adverse, i.e. "war => S++ => I--", i.e. "dark-future => Savings up, Interest down". But, that seems totally backwards !! If the future looks bleak; then the future is highly discounted, i.e. "war => I++ => S--", i.e. "dark-future => everybody dumps cash for survival necessities".

This is another example of the confusing nature of the term "savings". It's easier to just not use the term. Instead, when talking about the stuff that's put in the bank - the kind of savings where you're foregoing liquidity and earning an interest premium - maybe call that the "supply of loanable funds" (investment demand would then be "demand for loanable funds", which together determine the interest rate). So when the future is expected to be adverse, they hoard money, which means they decrease the quantity of funds they're willing to loan, which means the interest rate rises. So that's consistent with your intuition, thought it's a bit more complicated. If, for example, the future is so bleak that investment demand falls more than the supply of loanable funds, the interest rate will fall.

if i understand; then "demand for money" resembles "minimum account balances", i.e. people choose to keep a certain minimum amount of cash on hand. The use of credit-cards reduces "demand for money". "Black Markets", conversely, are "cash only".

Yep. Pretty much.

 

[Widdekind]

...stuff that's put in the bank - the kind of savings where you're foregoing liquidity and earning an interest premium... call that the "supply of loanable funds" (investment demand would then be "demand for loanable funds", which together determine the interest rate)

so Interest-rates (I) reflect "loan supply vs. loan demand", i.e. (relatively) high demand for borrowed loans permits lenders (e.g. banks) to "charge more" (I++); (relatively) high supply of borrowable loans permits borrowers to "shop around" (I--)

in "war-time", if everybody is "spending every penny on stockpiling"; then loan supply "evaporates", tending to increase Interest-rates (unless compensated, by "evaporating" loan demand, i.e. "total market collapse"). (naively, "prison economics" would represent a "high discounting, high time-preference, high Interest-rate" Black Market.)