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.
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.
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
lonergan’s suggestion that central banks need to “aime their firepower directly target consumer spending and corporate investment” supposes that central banks should regulate inflation in this way – this is even worse tha using short term interest rates.
it moves beyonf the failed argument that “inflation is a monetary phenomenon” and into another leap in the dark that “inflation is a consumer spending and corporate investment phenomenon”.
the Bank of England’s and the ECB’s sle goal is the control of inflation – unlike te Fed’s which includes conditionalities aroud growth and employment.
central banks are wandering more and more into the realm of taxation and income redistribution – this is a clear failure of policy and their mandates. the BoJ is worse as it has targeted share market investments to own one quarter (will be one third next year) of listed japanese equities via ETF purchases – exactly like the cross shareholdings of japanese companies that preceded the crash in the Nikkei from 39,000 in 1991 (25 year anniversary this year of this peak).
inflation is a profit phenomenon (includes iterest rates and rents). no profit growth = n inflation, distorting/lowering income from corporate borrowings to investors, does not increase LONG TERM profitability – it only encourages SHORT TERM speculation for long term misallocation of capital to distortion of implied default rates (spreads do not change much ,but nominal levels do).
Spartacus Rex said:
Put my excess “savings” into silver miners last December. The results so far YTD are pretty sweet.
Jon Sellers said:
The federal reserve has no mechanism for targeting consumer spending and business investment. how could that happen? Over-indebted consumers with low-paying jobs and little hope for a pay raise aren’t going to spend. And over-indebted businesses with poorly-paid customers aren’t going to invest.
Jon S, you are completely correct – over-indebted consumers, be they private or corporate, are going into the early stages of Rapid Testicular Withdrawal Syndrome.
From right now, until such time as the Fed says: “OK, you mothers are going to get some FED HELP, and we are going to PAY every last mother to borrow and spend the cash!”, there is not a single peep or corporate who is going to invest in anything at all.
This will appeal to the elite, who PERSONALLY are not liable for a lot of debt/credit. Whatever the sheeple do, wallowing around in their fetid fields of borrowings in excess of net worth,
I am just astounded that people voted for this shit?
No, interest rate policies are not self defeating.
Actually they work exceptionally well.
Without low rates, we would not have unending asset inflation as it relates to financial assets. Paper assets flip from owner to owner at higher and higher prices without the underlying value rising even a little. In fact, it’s not uncommon for it to fall while the value of the paper asset rises and sells for higher and higher prices.
Stock buy backs using borrowed cash, at almost non-existent rates of interest, allow executives to receive higher compensation from their employers for having rising stock prices. Again, low rates work very very well.
Governments can borrow for day to day expenses, including the interest due on previously issued debt, at rates far far far below what the financial markets would otherwise expect. Interest rates for government borrowers would be much much much higher if they were based on the value of the capital to the owner who earned it, as opposed to the owner of the capital who printed some up.
The upper 1% is richer than ever and has more influence than ever before. Low rates have allowed this to transpire. Low rates work!
The fact rates no longer provide income for insurance companies that finance pensions and annuities is irrelevant. Those constituencies are not a priority. In fact, their needs don’t even appear on the scale. They are invisible. So are oldsters like me who wan to make some interest so I can go out and buy things. I don’t count and neither do you. We are the cost outweighed by the benefits.
So yes, low rates work, they work well, and will continue to work as long as the upper 1% want them.
CDR, the article did not imply that the ZIP don’t work at all, but they do not work for the overall economy. The extreme demographic minority of the so-called 1 %ers, corporate CEOs, and stock market speculators benefit, yes, but at the expense of the working middle class, retirees and pensioners, and classes of previous financial strong hands. BTW, you left out fixed rate mortgage holders, but those savings are often offset by much higher revolving account debt rates. During the next inevitable financial crisis, all but the 1 %ers will prove to be weak reeds to lean on, and the inflated amount of debt will still be owed.
Respectfully, you assume low rates were intended to benefit the masses. Perhaps that was a consideration and a hope. Naive economic theory states benefits to the people would result from low rates.
QE and low rates are all trickle down economics. The phrase is out of fashion and intellectual snobs poo pooh it. But that was the original thought behind both. Raise the prices of financial assets. Make people feel wealthy. Get them borrowing against the value of inflated asset prices. Just like pre-2008 again.
Along the way, the upper 1% noted life was getting better for them exponentially by these policies. They ramped up the whispers to those who control the details and got them to institutionalize the theory into a common everyday belief.
Politicians noticed borrowed money is free money to current spenders. Somebody someday much later will have to pay it back. Today it’s a gift. Then low rates and QE made it infinite and free. They are the backstop. They see it as a wonderment.
This is what we now have.
Low rates are a gift and an entitlement for the upper 1% and free spending politicians now. This is their new normal and what they will fight to keep. Low rates work amazingly will for them.
Low rates work! Just not like you and I would want. But, as I said, we don’t matter.
The resulting economic gains make it easier to support the cost and effort of controlling the underlings, flunkies, and the like who are allowed to look like they call the shots. This includes the FOMC and most elected officials.
If the masses somehow figure out how to prosper with low rates … great. The upper 1% will look upon it as ‘cute’. They’re not necessarily trying to steal from us, they are just looking out for themselves. We don’t matter. We’re just ‘there’.
Low rates will continue until there is either a catastrophe that can not be back filled promptly or an influential faction of the upper 1% decides higher rates are useful.
James Greenberg said:
Across the world the central banks have raced to the bottom lowering interest rates only to find little relief from the slow economic growth that has haunted their economies for years. Regardless of what you call this, the “Federal Reserve Nightmare” or the “Yellen conundrum”one thing is clear, the box Ben Bernanke made when he painted both himself and the Federal Reserve in a corner remains.
To make matters worse little has been done to address our structural problems and make America more competitive, this will massively thwart growth going forward. It must also be noted that America imports around five hundred billion dollars more from other countries every year than they export. The article below explores the dilemma before us.
In China, lower interest rates drive up the savings rate because in order to hit savings targets you have to save more. Similarly, now with an aging population in the U.S., low yields and low asset returns will either force higher savings by older workers or lower consumption in retirement. Not to mention low interest rates prop up home values, which depresses home ownership among younger workers, which raises the age of first marriage, which depresses fertility rates. Low and negative interest rates also create fear over current economic conditions, as well as an expectation that these low rates will eventually end and it won’t be pretty.
The Fed and other central banks also overweight the wealth effect, chasing derivatives of the real economy. Their own actions also influence this derivative, to the point where in Japan, the stock market is increasingly becoming a derivative of central bank policy and not the economy.
The lower interest rates have increased the savings rate for anyone that is or can get out of debt. In Krugman-speak, this may increase a “savings glut”.
Of course there really isn’t such a thing as a savings glut. But since the lunatics are running things I can only guess at what the remedies will be. They won’t raise rates as long as the Krugmans and Bernankes are alive, so I expect the strange notion of lowering interest rates and raising tax rates to continue, with the rate of economic decline increasing.
I do hope that people realize that the MSM is doing the prep-work for Helicopter money, which is what the referenced article really is. The quote “aim their firepower directly at consumer spending” is exactly that. Since manipulation via interest rates no longer works … HELICOPTER MONEY !!!
The interest rates are not aimed at the consumer. The consumer is being used as an excuse for what they are doing. They want to prop up the big banks and the stock market. The people and things that it is meant to benefit are benefitting. pension funds that depend on high market returns, debtors, those making bond offerings (cities, airports, hospitals) can pay lower rates, and people are now happy to receive the low rates. The notion that what is being done is done for the stated reasons is absurd.
Who knows when this will all come crashing down…
China shares hit seven-month high; world yields keep falling
Price controls on consumer goods didn’t work in the 1970s… price controls on savings doesn’t work now. Neither had the effect on inflation the “experts” forecast and promised.
Price controls on wages (unions, minimum wage,etc) are self defeating. Price controls on agriculture products cause south american countries to hate US trade and farm protection policies. Rent control leads to rich people getting cheap rent and increased homelessness.
Or to cut to the chase… government price controls are always and everywhere self defeating.
Anyone who ever operated a lemonade stand figured this out by first grade — much faster than the government “experts” and media pundits.
Michael Morris said:
For a long time I have questioned the idea that super low interest rates spur more spending. Savers are those on incomes provided through financial investments will attempt to cut costs even more in an environment where their returns are severely impacted by low rates.
It is quite amazing that this low interest rate narrative which supposedly boosts the consumer is still accepted on face value.
— “It is quite amazing that this low interest rate narrative which supposedly boosts the consumer is still accepted on face value.”
The tyranny of left wing academia. There is no diversity of political opinion in academia, you must support safe spaces and neo-Keynesian policy to get tenure. But do not challenge endless 8-10% tuition hikes.
Mission Accomplished said:
Gotta love the attempt to spin ‘running headlong straight into a brick wall’ as some sort of reasoned policy requiring further reflection by the wise brick wall runner intos.
Ron J said:
“Expecting further cuts in interest rates to work is wishful thinking”
Japan proved the math, yet every other country has taken the same course and is failing as well.
A fixed money, say gold, records a transaction and carries its worth unaltered into the future. It is a frozen record that is exchanged into the future at the choice of the holder. There is no time reference but the decision of the holder to exchange the memory of the past into the offer of the present so as to manage his own future, often his very survival.
Timing is everything. The ability to coordinate between people is an immense progress in terms of organizational effectiveness. Timing also has its practical limits as there are a finite number of people in any calculation, with a finite time available in comparison to the return they seek needed to maintain themselves.
The voluntary contribution of people’s time is transformed into money. If that money is a representation of people’s time that can be adjusted, it follows that the timing of people can be taken over by those who control that money. It follows that the total coordination and understanding that existed between individuals can be controlled, as either a unit is whole, or it is corrupted.
‘ Someone shaved off a fraction of our earnings’ is corrupted. It is corrupted because the time taken to realize and express this comes out of the time of the individual. It is time stolen. The future of the individual has become corrupted also, just as the effect has changed his present it will obviously have changed the direction of his future, not even counting the reduction in earnings he now holds.
When the value of a money is represented by only its timing, which is the case under FRL fiat, and that timing is placed into the hands of a select few, there is no imagining what they will do with the memory and existence of other people that they are then able to empower themselves of.
We should dread that this is allowed.
You might conclude that our macroeconomic pundits and Ivy League intellectuals have mis identified which macro variables are important. Hmmmm. If short term interest rates are unimportant what else could it be? Gee. Steve Keen keeps pointing out that the correlation between unemployment and the slope of total private debt since 1990 is -0.93. Nah. Doesn’t mesh with our theories. Or as Keen now jokes: it takes special training to not see these obvious correlations.
This all forgets the real elephant in the room guiding FED interest rate policy (or should I say non-interest rate policy as they are committed to keeping rates at, or near, zero). And what’s that elephant, well, actually at last count there were approximately 19 trillion of them sloshing around Washington DC…
I can only speak for myself. I’m saving because I have 3 kids to put through college and I have no idea how much it will cost. My kids can borrow, but I don’t want to have them graduate with a weight around their neck.
Tony Bennett said:
“If consumers do not respond to lower rates by spending more, this places an additional onus on the corporate sector.”
Setting aside the arguement that CEOs (with compensation tied to stock price) pursue financialization (buybacks and dividends) rather than capex to gin up stock.
Richard Fisher (while still president of Dallas FRB) years ago (before rate hike talk) gave a speech highlighting that low rates and FOMC’s penchant for long view guidance that rates will stay low allowed businesses the option to sit on hands. If a business KNOWS that rates will still be low in 2 years, why invest in capex NOW? Better to wait and see how economy fares (and pursue financialization instead).
So, low rates have spawned “Bubbles” in the Fed’s effort to create a wealth effect. But are they really bubbles? We can’t know that unless or until they pop.
In the early 80’s when the Dow ran from under 1000 to over 4000, and everyone was crying bubble, did they really expect all that money devaluation to go into reverse and drive the market back to 1000? When home prices went from $30k to $60k at that time, did anyone expect them to go back to $30 or less? Sure, in 07 home prices got a bit ahead of themselves, but they are back again, and have exceeded those earlier levels.
So, here at the mid point of the Fed’s grand experiment, we await the “Wealth Effect” to begin doing it’s work in stirring “Animal Spirits” thereby goosing velocity resulting in the age old “You snooze, you lose” phenomena of ‘spend it before prices leave the station.’
The jury is still out on the “Bubble” meme. Wait until the after the election, when Mrs. Keynesian opens the flood gates all the way, and shows the errant pundits how it’s done. We are no where near the “Crackup Boom” here. The Fabian Socialists are only just getting started. They have another couple generations to go before they completely consume the seed corn and are finally discredited. If they don’t choose the scorched earth option, that is.
,,,guess what I mean to say is, stop trying to place the economy into cycles and then attempting to time them. Instead, consider short term to mean 6 or 8 years, not 18 months.
Tony Bennett said:
“In the early 80’s when the Dow ran from under 1000 to over 4000, and everyone was crying bubble”
Economy was primed for growth then.
Baby boomers just hitting their stride in the work place and consumption. Now?
Double digit interest rates. Now?
Deficit spending (and debt to GDP) smaller. Now?
Reagan tax cuts. Now?
That is not going to stop the clowns at the central banks from trying… In fact the jokers live by the mantra “if it does not work DO MORE OF THE SAME”…
Most macro research is funded directly or indirectly by the printing press. Conflict of interest prevents impartial research. The banking committee is relying on research biased by this conflict of interest, thus its activity is nonsensical.
In addition, most of an entire generation of college students have been propagandized by required macro courses promulgating this biased research. Printing is confiscation, and the special interest groups that have figured out how to slowly confiscate people’s stuff with the printing press want to keep the gravy train going.
1. As the interest rate goes down, people dependent on fixed income (pensioners) have less to spend, which affects demand since their marginal propensity to spend is high.
2. People who are about to retire (baby-boomers) have seen hyper-inflation in the value of assets they will need to generate an income stream, so they will pinch pennies to save/invest.
3. That leaves people who cannot save because they don’t have enough income. They are supposed to apply for loans at low interest rates, but of course these are the people who are already tapped out and who are the first to be rejected when creditworthiness becomes more conservative.
4. Then there are the wealthy & institutions, who have free money at their disposal to speculate but who will re-invest any windfalls into financial instruments, since these generate better total returns than investments in [not] expanding business in an economy that is not growing.
5. Existing businesses see their income shrink as newer business compete at a much lower cost of capital than when they financed their capital stock.
If the economy is running well, capital is plentiful and interest rates will be low. The causality cannot be reversed — like wetting the streets to make it rain.
Stuki Moi said:
The only useful direction for the Fed to aim their firepower, with firepower to be taken literally, is right at their own temples.
Too much attention to the FED, which works at the direction of the Congress and White House. Not enough attention on structural issues such as taxes and regulations, which are also under the direction of the Congress and White House.
What surprises me is that GOP has not explicitly told everyone paying the Obamacare penalty to the IRS, which is by definition a tax, that they will get back the $395 individual penalty paid in April 2016 as a tax credit. And also tell the taxpayers that they will not pay the Obamacare tax/penalty of $695 to the IRS in 2017. That is an extra $1,000 into the pockets of a lot of millennials and other taxpayers. People who want Obamacare can keep it, those who do not will have freedom to find alternatives without the IRS being used as a cattle prod to force spending that boosts the health care sector at the expense of the rest of the economy.
GOP, Trump included, is too focused on business, or so it seems, to notice this great populous ploy which would boost individual spending power (consumers) in ways that FED interest rate and monetary manipulations are incapable of doing. Mystifies me that individual taxes of key demographics are ignored by politicians.