It’s rare that I agree with economic theories written up in mainstream media. But this is one of those times, at least partially.

In an opinion article on the Financial Times, writer Eric Lonergan says Interest Rates are a Spent Economic Force.

I picked up that link in a Tweet, but failed to capture to the Tweeter.

Here are the two key paragraphs.

The idea that lower interest rates raise demand is based on the view that households attempt to smooth their consumption over time. This assumed relationship has little empirical support and there are good reasons, particularly when rates are extremely low or negative, to doubt it. High existing debt levels, or poor creditworthiness, are more realistic constraints on spending than higher interest rates.

And what of savers? Lower rates have a depressing effect on household incomes, through reduced interest on savings and pensions. It is likely that in relatively wealthy economies — with rising healthcare costs, increasing longevity and uncertainty over pension funding — households respond to lower income on their savings by trying to save more. … The relationship of spending to lower interest rates may well be the reverse of that assumed by policymakers. If consumers do not respond to lower rates by spending more, this places an additional onus on the corporate sector.

Nearly Correct

I removed one muddled sentence to make the second paragraph read as clearly intended by context.

I endorse the above paragraphs, but also note Lonergan’s conclusion does miss the mark by a bit.

Lonergan’s Conclusion

Mr Carney is right: the traditional use of interest rates has run its course. For central banks to continue playing a role in preventing recession and raising growth, they will need to rethink the entire premise of monetary policy and aim their firepower directly at consumer spending and corporate investment. Expecting further cuts in interest rates to work is wishful thinking.

The scattergun approach is not hitting the target.

Interest rate policy has indeed run its course (if one agrees it ever had a course, but I don’t).

Spot on: “Expecting further cuts in interest rates to work is wishful thinking”

However, it’s certainly debatable if interest rate cuts ever did anything but kick the can down the road while blowing a series of repetitive bubbles.

Nonetheless I give Lonergan credit for at least noting the counterproductive nature of central bank actions right here right now.

Mike “Mish” Shedlock