Looking for group think, extrapolation of extreme silliness, linear thinking, and belief in absurd models?
Then look no further than Fed presidents, their advisors, and academia loaded charlatan professors.
Today’s spotlight is on Marvin Goodfriend, a former economist and policy advisor at the Federal Reserve’s Bank of Richmond, and Ken Rogoff, a chaired Harvard economics professor, a one-time chief economist at the International Monetary Fund.
Case for Minus 2% Rates
Goodfriend says the Fed Might Need to Cut Rates to Minus 2 Percent.
The U.S. Federal Reserve might need to cut interest rates to as low as negative 2 percent, far lower than levels other global central banks have tested, a former Fed economist said.
That’s what would likely be needed to engineer a recovery if the U.S. economy were to fall into a recession in the next couple of years, Marvin Goodfriend, who was an economist and policy advisor at the Federal Reserve’s Bank of Richmond from 1993-2005, told CNBC’s “Squawk Box” on Thursday.
Goodfriend, who is currently a professor of economics at Carnegie Mellon University, pointed to data on the eight recessions in the U.S. since 1960.
“In eight of those recessions, the Fed had to push the short rate 2.5 percentage points below the long term rate. Today, the 10-year rate in the U.S. is 1.5 percent,” he noted, saying that would indicate that during the next recession, the Fed would need to cut rates as low as minus 1 percent at a minimum.
“In five of those recessions, the Fed had to push the federal funds rate 3.5 percentage points below the 10-year bond rate,” he said. “So if that happens this time around, we would have to push the federal funds rate to minus 2 percent.”
Linear Thinking Idiocy
Goodfriend extrapolates what the Fed did in the past with what the Fed might need to do in the future. Not once did this mentally-challenge wizard stop to ask:
- Did the Fed really “need” to do what it did before?
- Did excessively low rates create any bubbles?
- Why do we need a Fed in the first place?
- Who does the Fed serve?
- Can the economy be managed like a cook following a recipe to bake a cake?
- Isn’t the fact that the Fed “needed” to do this eight times indicative of a major problem in and of itself?
James Grant Blasts Ken Rogoff in Wall Street Journal Op-Ed
Please consider Hostage to a Bull Market by James Grant.
If there is a curse between the covers of this thin, self-satisfied volume, it doesn’t have to do with cash, the title to the contrary notwithstanding. Freedom is rather the subject of the author’s malediction. He’s not against it in principle, only in practice.
Ken Rogoff is a chaired Harvard economics professor, a one-time chief economist at the International Monetary Fund and (to boot) a chess grandmaster. He laid out his case against cash in a Saturday essay in this newspaper two weeks ago. By abolishing large-denomination bills, he said there, the government could strike a blow against sin and perfect the Federal Reserve’s control of interest rates.
In a deep recession, Mr. Rogoff proposes, the Fed ought not to stop cutting rates when it comes to zero. It should plunge right ahead, to minus 1%, minus 2%, minus 3% and so forth. At one negative rate or another, the theory goes, despoiled bank depositors will stop saving and start spending. According to the worldview of the people who constitute what Mr. Rogoff fraternally calls the “policy community” (who elected them?), the spending will buttress “aggregate demand,” thus restore prosperity.
This is a big can of worms that the author has pried open. He assumes, first and foremost, that falling prices are a calamity. It is not such a calamity that many Americans don’t spend most of the weekend seeking them out. Still, the policy community wants nothing to do with them.
And the policy community, especially in Europe, has had its way. More than $13 trillion of sovereign debt (German, Japanese, Swiss) is quoted at a yield of less than nothing. In Denmark, the banks pay homeowners to take out a mortgage. In Switzerland, depositors pay the bank to accept their francs.
Negative rates? You rub your eyes and search your memory. You can recall no precedent. And if you consult the latest edition of “A History of Interest Rates” (2005) by Sidney Homer and Richard Sylla, you will find none. A recent check with Mr. Sylla confirms the impression. Today’s negative bond yields, he says, are the first in at least 5,000 years.
As for the campaign for zero cash in the service of negative interest rates, Mr. Rogoff’s brief is best seen not as detached scientific analysis but as a kind of left-wing crotchet. Strip away the technical pretense and what you have is politics. The author wants the government to control your money. It’s as simple as that.
A Simple as This
Grant says it’s as simple as politics. Rogoff wants the government to control your money.
Clearly Rogoff wants government to have control of your money. But it’s not as simple as that. These guys are economic lunatics who actually believe negative interest rates will help the economy.
Negative Interest Rate Theory 
A currency crisis awaits.
Mike “Mish” Shedlock
The FED comments around negative interest rates are pure fantasy. They are examples of “Magical Thinking” described by psychiatrists of people who are delusional. A basic consideration is this: Why would anyone put money into any investment that gurantees less than what you put into it?
No rational person would do so. So exactly who is doing so? Negative interest rates portend a black swan event on the horizon. Very little critical thinking in the media has brought out the meaning of negative rates on investors. Discussion in main stream media most often centers around stimulating demand. The exact opposite is the case with negative rates. Savers hang on to cash, push risky investments and look to gold and silver as outlets as the madness continues.
” Why would anyone put money into any investment that gurantees less than what you put into it?”
Yawn this silly argument yet again. A squirrel spends the summer and fall collecting nuts. He collects 100 nuts. In the winter he only eats 80 nuts because some of them spoil, are stolen or just gets lost. His return is -20%.
Should the squirrel say in the summer and fall “I spend 1 hour a day getting nuts to eat for today and another 10 hours collecting nuts to save….since my return is -20% why don’t I just work 1 hour a day and then kick back and relax the rest?”
The difference between a 1% interest rate and a -1% interest rate is 2 percentage points. That is the same difference as between a 5% rate and a 3% rate. There’s nothing magical about crossing into negative territory.
This is the stupidest thing I’ve heard in a long time. Your squirrel analogy makes no sense, and doesn’t have anything to do with explaining the pros/cons of negative rates. It’s purely nonsensical.
The squirrel isn’t “investing”, it’s saving food to survive the winter. The acorns it stashes are not expected to grow in number over the next year, they are expected to be drawn down over the winter. If the squirrel kicks back in the fall and only works 1 hour a day, it will starve and die in the winter. And regardless, that doesn’t have anything to do with negative rates.
Mish is right, negative rates are stealing money from people, pure and simple. There is an enormous difference between 1% and -1% interest. 1% is offensive and ugly, while -1% is outright theft.
Mish: The lunatics seem to have escaped the asylum, and have inserted themselves between us and a prosperous retirement….
Keep up the pressure, thanks.
Ron
>
Well no, it’s much worse than just “the lunatics have escaped the asylum”. The lunatics are now in charge of running the asylum. Those “experts” never see the unintended consequences, just as The Bernank did not see his housing bubble popping.
Mish,
If the economy gets real bad, the Fed could offer negative 15 year home loans and pay borrowers to buy homes!!! What a great campaign slogan: free phones, free Health Care, free College Tuition, and home loans that pay you to borrow!!!!! There’s a winning candidate!!!
” These guys are economic lunatics who actually believe negative interest rates will help the economy.”
Really Mish, sometimes you are too kind. Just like the gang at Jekyll Island were trying to do something altruistic for the United States.
Agree or disagree with the bitcoin community, we’ve observed this as well – they want to limit and control money. Ken Rogoff actually wants things like bitcoin banned because they’re obstacles for banning the next currency, gold. In fact, in a recent interview he vented that “these people keep creating more obstacles.”
All of us will either stand for freedom of choice – you use whatever you want as money – or they’ll try to fragment all of us and divide and conquer. And remember, that Kenny Boy was an IMF guy – this is how they really think. Make no mistake: they want absolute control of your money, which translates into absolute control of your labor.
If a negative 2% will save the economy
A negative 10% would be even better.
If they print their own currency, they can set their own interest rates and reserve requirements too… until people quit wanting their currency, which has become a genuine concern.
The real travesty is that this fool is an academic and polluting young minds. Ordered more silver today. Bring on the negative interest rates…..I double dog dare you.
“The real travesty is that this fool is an academic and polluting young minds.”
Exactly my thought. Pray tell me – Of what use is any learning when it is delivered by an idiot.
The young minds if they had some sense should boycott his classes…
Imagine taking on major debt to pay for college tuition, only to hear such garbage from idiot professors. No wonder Obama wants everyone to go to college. Obviously it’s much easier to control a society of mostly fools.
Progress is going where we have never gone before…even if it is off the cliff. People committed to progress know no limits and will never be satisfied with the way things are or were. They will improve us out of existence while never accepting responsibility for any of it, as after all, they only had the best of intentions. If only these well meaning geniuses were only putting themselves at risk with their grand schemes, it might be entertaining. As is, they threaten the world in their destructive attempts to save it.
Your comment reminded me of Anton Chigurh’s comment, “If the rule you followed brought you to this, of what use was the rule?” which seems a fitting question to ask the FED or any central bank.
A few years ago, the MSM was talking about how the Fed might run out of bullets. I guess NIRP would then equate to ,”time to install the bayonet”.
Indeed. Let’s try negative raises for Harvard professors. Say, ~2% per year?
Good idea but just to be clear, that would not be a 2% reduction in pay; they would have to pay to be employed as professors.
Amen!
What they don’t point out is that gov employees get a guarantee pension. This equates to no skin in the game for them. F$$k them. Citizenry being place onto a Financial Omaha Beach is unacceptable and let’s hope that somebody figures a way, if we do come to neg rates, to rid these cockroachs of their idiot rhetoric. These guys make dumb and dumber look smart!! Harvard, Carnegie prestige ain’t what it use to be.
-2% = we will pay you to use our money.
It amounts to a tax, imposed by an entity with no taxation authority,
A gentleman from Harvard and redneck from Texas A&M were at the sinks in the men’s room. The gentleman from Harvard looks to the redneck and says, “At Harvard I was taught cleanliness is next to godliness.” The redneck replies, “At Texas A&M I was taught not to pee on my hands.”
“A currency crisis awaits.”
Boy, howdy! Best stock up on TP before the rush. The “Animal Spirits” will clean out the stores, car dealers and be camped out at home builders sales offices when this grand Fed experiment hits the streets.
Until then, I guess the only truly solvent bank is The Bank of Serta.
They’re just desperate to get people to stop having children. Their endgame is depopulation, preferably but not necessarily by the least violent means.
Wrong, their endgame is control by whatever means possible. They are incentivizing western societies to not reproduce while importing millions of unskilled, uneducated immigrants by any means possible, while telling us we NEED them…seeing as how we have failed to reproduce enough people to sustain our economy (and entitlements). We are being replaced with ignorant and compliant people easily indoctrinated to the top down controlled society that our leaders so greatly crave….as that is largely from which they came.
http://2.bp.blogspot.com/_K6IxDwgzpKk/SS-uCGUHR9I/AAAAAAAABzM/uo621B7pZeU/w1200-h630-p-nu/groupthink%5B5%5D.jpg
I have money to spend and also money to save. The saved money is necessary to backstop unstable employment and the spent money is necessary to pay expenses. It really doesn’t matter what the interest rates are as the ratio spent to saved is not a part of that decision. The low interest rates only serve to inflate the value of assets purchased in order to save money.
As interest rates decrease, increased amounts of money will be necessary for savings and drawn out of the economy.to pay for inflated asset prices. Even if the saved money happens to find productive assets that will cause an increase in deflation due to increased capacity in the economy because of the investment. So the lower interest will serve to produce increasing deflation rather than the inflation they are seeking.
Anyway – seems pretty clear to me. I don’t understand why the Fed is able to push the zero interest idea at all to anyone.
I would add that increasing asset prices takes money out of the economy by shifting money generally from spenders to savers. And savers will just reinvest the money into some other asset instead of spending it in the real economy.
So yes, deflationary.
This is very scary. The intelligentsia is closing in on us. The brain trust who are in the same insider club as the lawmakers and the money changers. They are making the game plan for total control over our lives. Now they are floating canary in the mineshaft by taking it public through their nonsensical commentary to determine if the idiot masses will buy into it. And we will though our apathy until it’s too late Once they control our money they go us by the short hairs. What can you do? In one word….resist.
Resist? Don’t you understand, these people have degrees. As it is, Professor Rogoff just happens to be a grandmaster in chess, too.
That settles it! We do whatever the chess player dude tells us is the right thing for us, …and that is that!
Quote of the Day, from Democrat Harry Truman:
“You can’t get rich in politics, unless you’re a crook”.
Timely advice inasmuch as the Clintons entered the White house in 1993 with a net worth of less than a million $$, and now they are worth over $111 million according to “Money Nation”.
http://moneynation.com/hillary-clinton-net-worth/
Here Here!
Research the net worth of those in Congress. Do any of them live in ordinary lower middle class neighborhood with schmucks like us? ha. Go figure.
They know on which side their bread is buttered and who put it there.
Trust me. They don’t answer to us. They string us along to appease us. Don’t listen to what they say. Watch what they do.
You fail to understand. The Clintons believe in entitlement. They believe they are entitled to wealth and power and will do whatever is required to obtain both. The LAW is only for the little people. Those who rule over us ARE the law. It’s pretty obvious looking at the FBI that some animals are MORE equal than others.
What a name, “goodfriend”. In his Jackson Hole speech, he “suggested” a discount be applied to money=cash coming and going from bank accounts. How long before the executive branch decrees this? So far, it’s not been possible to be too paranoid about what the Deep State elites intend to do. That’s not going to change.
Step one: train your policy experts at MIT, at Harvard, at Princeton, that banks don’t create money when they lend. That bank lending is not an important source of new money into an economy. That banks going insolvent means nothing because banks simply intermediate between patient savers and impatient borrowers. That saving the banks if by some weird external shock coincidence makes them accidentally insolvent is everything because banks coincidentally run the payment system.
Step two: Since banks don’t matter unless some nasty externality makes them insolvent and then they do matter; use monetary policy to save your banks no matter what and blame the external shock for your insanity. Pay interest on reserves that you give banks by the $trillions. Manipulate the yield curve lest it invert and hurt your precious banks balance sheets. Buy equities and private bonds lest banks be forced to admit their insolvency. God forbid any government runs fiscal deficits thus pumping money into Main Street. The paying down of bank loans this will unleash will shrink bank balance sheets and bank profits and banks will fall. And always remember while twisting the economy into pretzel knots to ensure no banker pain of any kind, banks don’t matter to any macroeconomic theoretical analysis because they simply intermediate between savers and borrowers. This is Rogoff. This is Krugman. This is Summers. And thus we are screwed.
+1.
It is better to save the banks, at whatever cost, than to have the government help the working man. Otherwise the working may begin to think that the government can provide help, and he won’t necessarily have to rely on the ownership class for his bread.
Sadly, many of us see the inevitable collapse, even though we know not when or how it will take place. Worse still is that after studying this mess for years now, I don’t think anyone really knows how to prepare for it really, at least not so as to preserve any real savings or assets. Our problem is not one really of economy, but of governance. We face an all powerful government that can at any moment, simply change the rules. They can impose a transaction tax on gold that would nullify its hedge value against an inflating dollar. They can digitize the dollar to stifle any hording of cash. they can tax real property (or imaginary property for that matter) to sap off any remaining value that negative rates and monetary policy have not already extracted.
The only safe course is to remove one’s self from the economy, minimizing our economic footprint to an absolute minimum. This, of course, will only precipitate an even faster economic collapse. There appears nothing we can do to escape this.
Trump’s policies I believe “might” reinvigorate our economy with lower tax rates and a little optimism in the rule of law, but I honestly believe that congress will do all in their power to impede any real reform he might attempt to impose, and it’s not just America that is in trouble. It’s the whole damned world.
It is pretty obvious that most leaders in government and the corporate/banking centers would prefer to burn it all down rather than see reform take away all that they have stolen, manipulated and murdered to achieve. For them, what we are proposing is mutiny on the high seas. They have mismanaged their charge and abused their crew and even though all appears lost, they will throw every single one of us overboard before EVER surrendering their positions of power.
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Well said !
” The only safe course is to remove one’s self from the economy, minimizing our economic footprint to an absolute minimum. ”
I’m doing this now.
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+1000 Mad!!!
To extract oneself from this mess is sound if you can. Most however will never get out of debt to do so. Many are now running out to get the water resistant Apple phone, even though Samsung has one over a year old. Gotta keep paying for the latest and greatest phone.
Another good example of this is people buying the latest and greatest video card for their computer system for 100 to 200 dollars above MSRP. People are nuts. There are suckers born every minute. The biggest example of this is the new tiny house shows.
Basically people think they can live in 100 to 400 square feet of space. The worst part of this is they are paying upwards to 500.00 per square feet of space for a tiny house. What a racket!! This does not include the land. Go buy a camper trailer for 14 grand instead of 60k. Gotta love those composting toilets. I guess it is convenient to sit on the toilet while you cook supper. Mad the majority of people live on credit and it will not change anytime soon.
My only advice is to buy tangible assets if you can and get out of the debt based system. I think even though it is being discussed, the outright taking of our labor may cause serious problems in the USA. People may finally get out of the house and riot, otherwise the USA would already be under negative interest rates.
Thus the reason Hillary and many others want to confiscate our firearms.
“The only safe course is to remove one’s self from the economy, minimizing our economic footprint to an absolute minimum.”
MOST importunately, minimize your DEBT footprint.
My theory is that with having hit the limits with NIRP (to the point where people might prefer holding cash) the central bankers are desperate and are using these academic stooges as cover to explore its acceptance and implementation feasibility. Having successfully done away with 500 euro notes, the next focus is 100 dollar notes. Thus enter this rat from Harvard. The other rat is from CMU (earlier the Fed). BTW, this is Goebbels at his best!
IMO, it is all about human psychology. When inflation is positive, say 6%, while interest rate is 4%, the real return is negative 2% (India has worked like this (negative real rates while getting high positive nominal interest rate for a long time as Dr.Raghuram Rajan was trying to explain). But unfortunately human psychology being what it is and inflation being largely invisible to the naked eye, it becomes easy to implement negative real rates (as it is largely invisible to our mind) and rob people. But at 0% the same negative 2% is all too visible to the naked eye making it too obvious and compelling to the human mind and hence becomes extremely difficult to rob people, without a suitable cover.
Hence the use of propaganda from academic stooges to float theories which essentially gives a free pass to these central bankers and banksters to rob people at their free will. It is in people’s interest to nip such efforts in the bud instead of allowing our present day Goebbels (academics and “intelligentsia”) to give a free pass to the central bankers to become the Hitler of our times and allow ourselves to be Cypressed. THE TIME TO KICK THE CENTRAL BANKERS OUT IS NOW!
Let’s hope that Janet has more sense than to annoy the voters with negative bank accounts and a ban on cash. Many voters prefer to pay for inexpensive items with cash, and would complain to their representatives.
Time to surround the castle (Federal Reserve) and bring on a siege! Nobody in or out until this sh*t stops.
Withdraw some cash from your bank. Only buy the bare essentials. Starve these bast*rds.
Vote Trump.
Bring back Volcker.
Bring back Volcker? LMAO, at the impossibility of it all.
Hells Bells, not even Shedlock’s believes in so much as restoring Glass-Steagal.
Rioting? Hardly a chance and that goes for the assorted forms of “Occupy Wall Street” manner of foolishness, too. I’m sorry, but this already way too far gone if they are talking about neg rates for the US.
“You can always count on Americans to do the right thing – after they’ve tried everything else.” – Churchill
We are in the trying phase still. The right thing is to a complete overhaul of the existing system. Too many things wrong with it for band-aid to make the system work again. I
Change the system is precisely what TPTB ARE doing. This is not systemic failure due atrophy, entropy or hubris. It’s controlled demolition. Thus, the connecting dot in all the collapse is this is an old-fashioned class conflict. Same old same old. And the solutions are same old same old as well. “Changing from within” at this stage is merely a fool’s errand.
One good thing about the banning of physical fiat, a.k.a. “cash”, is that it’ll make it absolutely clear that we are enslaved to a government-privileged usury cartel of depository institutions, e.g. banks and credit unions, since then the citizens will not be able to use their nation’s fiat AT ALL!
As for negative interest rates at the central bank:
The MOST a risk-free deposit should return is 0% otherwise someone is getting welfare proportional to deposit size.
Yet the poor should not be charged interest as even Calvin admitted (iirc) so:
1) All citizens should be allowed accounts* at the central bank.
2) Individual citizen accounts should be negative interest-free up to a certain amount, say $250,000 US or less.
3) Other accounts may be charged negative interest but no account should ever pay positive interest.
*Since these accounts are inherently risk-free that means government provided deposit insurance should be abolished as welfare for the banks and indirectly for the most so-called creditworthy, the rich.
“I would rather be governed by the first 2,000 people in the Boston telephone directory than by the 2,000 people on the faculty of Harvard University.”
– William F. Buckley
I’ll just turn my money into gold and cash and “keep it under a mattress somewhere”. Zero percent interest is better than negative interest. I have the ability, means, knowledge, desire and intent required to protect and retain this personal treasure of mine too. At least from typical criminals. If one day the G-men come calling for my money though … well, not much I can do about that. I guess that would be the end of the world as we know it regardless.
I’ll just turn my money into gold and cash and “keep it under a mattress somewhere”.
I fear that strategy, though alluring, is like playing checkers with an opponent who is playing chess.
“well, not much I can do about that” is not the solution. It’s an example of mental fatigue with problem solving. The structure of evolution is problem-solving. Solve one and another appears of a nature always challenging our weakest points of character, intelligence, resources. Until we simply give up. Which, is what your “not much I can do about that”, suggests.
Something to think about – when interest rates go negative, the federal debt becomes a “Profit Center”. So, let’s go for negative 10% – the government will get an extra $2 trillion a year in “negative” income!
The Lord giveth and taketh away.
If the gov/fed can giveth money to individuals thru tax and social welfare programs why can’t they taketh away from individuals by means of negative interest rate cash confiscation? Money center banks get their vigorish for providing mechanisms.
This is a brave new world where savers are punished and profligate are rewarded. How can this be you ask? Well look at our various levels of government which continually run deficits. Follow the leaders.
When the government deficits get unmanageable they default. At the top level the dollar gets devalued as the final thumb in the eye to selfish savers.
Don’t know if Orwell coined it but Spending is a virtue and saving is a vice.
I am a saver myself, but I certainly don’t feel that that makes me more moral than the profligate. The profligate simply have a higher risk threshold than I do. They are willing to suffer consequences that I would not.
I’ve known some profligate folks who ended up very well in their lives. Mostly because they were lucky and smart. I’ve known some that went through excruciating losses and stress.
I am a saver myself, but I certainly don’t feel that that makes me more moral than the profligate. Jon Sellers
I ‘ve read the entire Bible and I DON’T see excessive* saving praised but rather CONDEMNED (Matthew 25:14-30) – even usury (but presumably only from foreigners) is to be preferred.
Instead, INVESTMENT, including generosity to the poor is the Biblical ideal. Nor is excessive frugality or overwork praised either since the God of the Bible is Himself generous and gracious to those who trust in Him.
*Beyond legitimate liquidity needs.
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There is a story the Bible tells… how God told King Solomon that God would give him anything he wanted. King Solomon only asked for the wisdom to govern God’s people. God was impressed that Solomon did not first seek wealth and power like other kings. So God gave Solomon wisdom… along with more wealth and power than any other king.
The book of Proverbs contains the wisdom of King Solomon.
” Wealth gained hastily will dwindle, but whoever gathers little by little will increase it.” – Proverbs 13:11
” A good person leaves an inheritance for their children’s children, but a sinner’s wealth is stored up for the righteous. ” – Proverbs 13:22
” Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.” – Proverbs 21:20
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What you’ve quoted in no way refutes what I’ve said.
“The profligate simply have a higher risk threshold than I do.”
That is ok.
“They are willing to suffer consequences that I would not.”
They do not suffer the consequences because they get bailed out by the Fed. Why the hell should the saver, who had waited for the housing bubble to burst so that he can purchase a house at a much lower price get screwed because the Fed wants to put a floor on the prices and does not allow the housing to find its own level. Also in the guise of helping the economy the saver is the one who is sacrificed by the Fed. This is what is NOT OK. The Fed should be stripped of the ability to bail out the profligates, screw the savers, blow bubbles and poison the system with moral hazard. Now that ZIRP is not working these guys want to do NIRP. The insidious scoundrels! In fact, as Mish says often, we would be better off without these self-appointed saviours of our economy. Courage to act, my foot! Courage to gouge the savers and go beyond their brief is more like it! In fact if the savers can come together and slipper these scallywags I think it is at least a good beginning at serving them their just desserts for the damage they have wrought.
Why the hell should the saver, who had waited for the housing bubble to burst so that he can purchase a house at a much lower price get screwed because the Fed wants to put a floor on the prices and does not allow the housing to find its own level.
One of the moral (not to mention economic) mistakes of the Austrian economists is to assume one wrong, deflation, is the proper response to another wrong, government subsidized inflation.
Andy, please explain why deflation caused by natural (not government forced) economic forces is a “wrong”? I happen to like deflation.
@Andrew, IMO, it is not a moral or economic mistake, it is just allowing things to take its course and not meddle. Like a bubble ultimately finds a pin, a fall ultimately finds a buyer, someone will find the price the low enough and would be brave enough to buy it. If he is wrong let him lose money. If he is right and prices rise let him make money. Just allow it to happen on its own and just keep away from meddling is all I am saying. I would not read more than that into it.
it is just allowing things to take its course and not meddle. kpl
Too late for non-meddling. Government privileges for private credit creation drive borrowers into debt as surely as they cheat non borrowers too.
The solution is Steve Keen’s “A Modern Jubilee” combined with de-privileging depository institutions, e.g. banks and credit unions.
please explain why deflation caused by natural (not government forced) economic forces is a “wrong”?
Except our money and credit system is not natural.
Seems everyone wants to talk about a system that doesn’t exist, or one that should exist, or could exist if only… Let’s focus on the system that does exist. Banks create our money supply by lending credit money into existence. Or government creates new money by deficit spending. That’s it. Period.
This is not likely to change because too much institutional inertia prevents change. So either think up ways to work with that system or wait for French Revolution type collapse and restructuring to a new system.
“Except our money and credit system is not natural.” ~ Andy
That in no way answers my question. I think you have no answer so you are dodging it.
I think you have no answer so you are dodging it. cj
Even 100% private banks with 100% voluntary depositors might create boom-bust cycles to some extent so there might be SOME deflation for you to profit from – but only from 100% private banks with 100% voluntary depositors. Or use a private money supply like Bitcoin with built-in deflation if you please.
But as for fiat, the monetary sovereign should ALWAYS run deficits, however small at times, so that the amount of fiat in the economy ALWAYS increases, however slowly at times.
Why? Because deflation rewards risk-free money hoarding. But progress REQUIRES taking risks with money so rewarding risk-free money hoarding is ANTI-PROGRESS!
Banks create our money supply by lending credit money into existence. peterblogdanovich
Yes, “loans create deposits” when it comes to banks and supposedly liabilities for fiat, 1-for-1. Except, due to government privileges such as deposit insurance for depository institutions, those liabilities are largely a SHAM wrt the general population.
So tell me Peter, how can we have honest accounting with liabilities that are largely a sham? We can’t; therefore we can’t have honest capitalism with government privileges for depository institutions, a.k.a. “banks.”
Or government creates new money by deficit spending. peterblogdanovich
Let’s not forget the central bank also creates new fiat for the banks via interest on reserves (IOR), the Discount Window and Open Market Purchases – more privileges for the banks and the most so-called creditworthy, the rich.
That’s it. Period. peterblogdanovich
So help me God, I won’t roll over for a cartel of counterfeiters and neither should you.
Whenever I hear about government stupidity I have to post this ditty…
” If they were merely stupid, they would occasionally make a mistake in our favor.’ This phrase struck me so forcefully that I have often used it since.”[10]”
https://en.m.wikipedia.org/wiki/James_Forrestal
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Does anyone else think it synchronistic that negative interest rates are being pushed at the same time as Muslims and their “no interest” Sharia law ??
http://www.usatoday.com/story/money/business/2014/10/11/shariah-compliant-islamic-financing-usa-europe/16828599/
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Seems like they can’t let deflation happen as long as there’s a minimum wage, as wages need to drop with asset prices. But that can’t happen without politicians changing the law, and what’s the chance of that happening…
From Mish’s questions:
1.Did the Fed really “need” to do what it did before?
2.Did excessively low rates create any bubbles?
3.Why do we need a Fed in the first place?
4.Who does the Fed serve?
5.Can the economy be managed like a cook following a recipe to bake a cake?
6.Isn’t the fact that the Fed “needed” to do this eight times indicative of a major problem in and of itself?
#2 No.
#5 Possibly but anyone whose ever baked knows no two cakes ever comes out the same way, recipe’s are more outlines than about strict precision control.
#6 When the fed changes interest rates what it is ultimately doing is changing the money supply. Is it a ‘major problem’ that the money supply has to be changed? Is it a major problem that when you’re driving a car you sometimes push way down on the gas and other times just lightly tap the gas?
Working on that analogy it might be better if you could just tap on the cruise control and drive the entire way with the same amount of gas at all points. But we know unless you are driving on an empty road with no stop signs or lights, you will have to stop and go along your trip.
#6 may make sense to ask if you think the ‘normal’ is perfect smooth growth without any boom or bust behavior in the economy. Do we have any reason to imagine that is how an economy should normally behave or to believe an alternative policy arrangement can create such a state?
When nominal rates are positive, lowering rates stimulates borrowing which effectively increases the money supply. When nominal rates are negative banks are punished if they do not lend but if banks fear lending is a bad idea because they are being coerced into lending they might refuse. It’s a psychological argument not a math argument. This IMO is why negative rates won’t work.
Other than stimulating private credit expansion nothing a CB does can expand money supply. Only the fiscal authority can do that.
Keep in mind except for direct lending, no central bank ‘lowers interest rates’. What they do is decide to buy (or sell) a type of bond until the price of that bond changes to reflect the interest rate they are targeting.
So to say a central bank cannot increase money supply when interest rates are negative is silly. The Central Bank looks at, say, the 3-month Treasury bill and instructs their traders to purchase bills on the market until the price rises to a point where the interest rate is -2%. The central bank is by definition increasing money supply because it is printing money and putting it in the hands of those who are selling off bills in the market. Whether or not banks want to lend is irrelevant there. All you can say if banks just don’t want to lend is that those who sell the bills will take that ‘printed’ money and deposit it into their bank accounts where they will sit. Money supply is still higher no matter what.
Exchanging digital cash for bonds is not generally considered changing the supply of money. Fiscal deficits definitely add money to an economy. Bank lending adds money. CB operations: QE, Twist, etc. no, no change in money supply.
False, unless you consider the 3 month Treasury bill part of the money supply (which it isn’t) or the other securities purchased in various QE’s (30 year bonds, MBS’s, etc.) part of the money supply too.
More rigorously, ‘money’ carries the trait of being liquid. If I have $1000 in the form of ten $100 bills in my pocket, that is about as liquid as I can be as it can be used for almost any transaction (some places don’t take cash but in less than a day I can deposit that $1000 into a checking account and write a check or swipe a card for such places).
$1000 in the form of a 3 month treasury bill is much less liquid. Most transactions are unavailable to me unless I first sell that bill for money….
You also haven’t demonstrated why banks wouldn’t want to lend in a negative rate environment. Rates to borrow are almost always higher. If the 3 month rate is negative 2%, a bank may be able to borrow for -1.90%. If it loans that out for -1% it will make profit just as if rates are 1% it can profit by loaning out at 1.9%.
Actually there is arguably one way CB’s can create money that is proposed by Eric Lonergan. Private entities; corporations, insurers, pension funds, etc. issue zero coupon infinite duration bonds purchased by the CB. This is equivalent to changing the money supply. However critics will point out that this is tantamount to the CB openly declaring it intends to remain insolvent forever. Critics will say the CB should write down these never to be paid bonds and those losses automatically remit to Treasury. Treasury then must decide to print bonds to cover the loss (definitely inflationary) or to tax to cover the loss (definitely deflationary). It is interesting that our CB’s are sort of doing this now though the private issuers are not yet at zero coupon and infinite duration. It does make a valid point however that we are moving closer and closer to exactly this. Interesting times.
1. I assume such infinite duration bonds would still have coupon payments which means you’d still have a normal asset that has a price that goes up and down with market trading.
2. If not, then you’re essentially talking about the CB just printing money and giving it to corporations as a direct subsidy. IMO it is more democratic if the gov’t itself just ran a deficit budget and choose through elected representatives how to use the funds.
3. How would the CB be ‘insolvent’? The Central Bank incurs no liability when it prints money to buy an asset so even if some bond it purchased ended up defaulting, it wouldn’t put the CB in a position of insolvency.
This is why CB’s post currency they issue as a liability on their balance sheet. Some argue this is nonsense and CB’s can’t ever be insolvent in any usual sense of the word. This is obviously true. Government can always print more money and so they are never insolvent. Same for their CB. It’s just accounting convention. On the other hand wether the CB plays games carrying bad paper on its balance sheet forever or Treasury deficit spends money into existence it doesn’t fool anybody. Or does it?
Let’s follow it carefully. The 3 month rate is 1%. The CB wants it to be 0.9%. Their trader starts buying some 3 month bills and after buying $10B worth the rate falls to 0.9%.
Step 1. CB trader bids on bills and trader for the owner of the bills sells for $10B.
Step 2. CB creates $10B and deposits it into the bank of the selling trader. The CB balance sheet now has $10B in assets (3 month bills) and $10B in liabilities (the bank account of the bank of the selling trader).
The liability in step 2 can be changed as needed into different types of liabilities. For example, the actual person selling the bills may have a different bank so he has his broker transfer the funds to that bank account. The Fed debits the liability “deposit of bank A” and credits another liability account, “deposit of bank B”. Or the person may tell his bank he wants actual cash. $10B cash can be printed which increases the liability of ‘currency in circulation’ and decreases the deposit liability.
Or the liability can be destroyed by undoing the previous transaction. If tomorrow rates fall to 0.7%, the Fed’s trader will start selling some of the bills to increase rates back up. In that case currency or bank deposits are transferred back into the Fed and the Fed removes the bills from its asset account.
I think what you are discussing is the question of what happens if an asset becomes worthless? Say Trump is President and in a fit of silly declares the gov’t will default on 3 month bills due January. $1B of those bills are due in Jan. What would happen?
Well normally January would have come, Treasury would have taxed $1B and used it to retire $1B of the bills (or borrowed $1B from the market by issuing new bills). In that case the Fed’s liabilities would have fallen by $1B as taxpayers transferred to the Treasury and the Treasury forwards $1B to the owner of the bills (the Fed) in January. Now the Fed’s liabilities don’t fall because cash circulating doesn’t get collected and sent back to the Fed.
This wouldn’t be any different than what happens with any business debt. When an asset turned out to be worthless, a business will decrease the asset and debit not the balance sheet but the income statement.
The Fed actually has an income statement since it earns revenue and has expenses. In 2015 it showed about $98B in profit (http://www.latimes.com/business/la-fi-federal-reserve-profit-20150109-story.html). It sends profit off to the Treasury. So what would the Fed do if some of it’s assets ended up in default:
1. Nothing, just carry the asset forever on the assumption that sooner or later the person on the other side will make good on it.
2. When it has profits from other assets and activities, use that opportunity to write off assets that have gone bad.
3. In the case above, it could perhaps impound profits. Instead of sending $98B back to the Treasury it could impound the $1B President Trump tried to ‘default on’ to pay the bills it owns. Sort of like how your landlord is going to take any unpaid rent out of your security deposit before refunding anything to you.
I’m not seeing how you are raising a practical or even theoretical problem with Central Banks.
I’m focused on non government backed bonds. The ECB is buying private issued debt. This can easily default. The loss and the treatment of that loss on the ECB balance sheet is what I’m talking about. Same for BOJ. This is what people mean when they say CBs are in uncharted territory. Not speculation about Treasuries defaulting on sovereign debt. Fundamentally when economists describe banking as a transformation process where people who need liquidity can trade with people who don’t they are technically correct only if you can ignore the possibility of bankruptcy and default on banking system credit.
How would a private company going bankrupt and defaulting on its bonds be different from the case I described above? The only difference is that the CB loses the ability to use that particular bond to pull money out of the economy.
When a CB monetises government issued sovereign debt the only effect is to perhaps change the yield on the debt since the CB sets the price it pays for the bond. That same bond could be purchased not by the CB but simply enter the economy as a newly created asset which is used to collateralize a loan from a bank for the purchase of the bond. This too creates new money and expands the money supply. The bank posts an asset (the newly issued bond) and a liability (the cash to buy the bond in a demand account of the borrower). The key is the creation of new collateral when Treasury issues the bond. In a fiat money system the government cannot default on that bond because it can print through the CB or roll over debt by swapping bonds of one duration for another so the spread on the loan can be very small. Political hystrionic is not a meaningful risk of default.
When a private entity issues a bond and that bond is purchased by the CB things are different. This is a distribution of public money to a private entity. Default risk is not zero so a low yield may be a gift to the issuer. Yes it’s money creation but it’s also a transfer of new wealth to the corporate issuer. Of course when government deficit spends to finance a new bridge, or a war, the recipient of that money is also first to receive new money. To the extent politics is involved both the bond issuer and the bridge builder are crony capitalists getting new fiat money first as its created.
1. When the Central Bank buys, it buys as any other market participant would. It’s traders go to the market, looks at the bid and ask prices and takes the best option. If the Central Bank wants the 3 month rate to fall, it will create money and buy 3 month bills but each purchase it will go for the best deal possible, getting as many bills as possible for each dollar created just as any other market trader will do when they are in a buying mindset. That would also apply for buying stuff other than Treasury debt, like corporate bonds. So the corporation isn’t getting anything special.
2. What you’re describing could just as easily happen on the Treasury side. Say the CB is run by Donald Trump’s daughter. She’s corrupt and decides she will use it to help her dad. So her dad’s bankrupt casino buys some Treasury debt for a price of 90, which is the current market price. The CB purchases those bills directly from him for 100. He gets the difference to help him out. In contrast when the CB is adding money to the economy it is still buying bonds from the market taking the market price. If Amazon’s bonds go up a bit in price because of that Amazon is helped but helped only in the sense that any company is helped when there’s more liquidity around than less. You cannot depict such a purchase as a transfer to a private company unless you show the CB is not using regular trading procedures.
3. Most open market purchases happen in the secondary market. When you buy a bond more often than not you are NOT purchasing it directly on it’s initial issue but are buying it from someone else who happens to want to sell it….stocks are the same. Buying a Amazon or Apple bonds or stocks are probably not putting any cash into Amazon or Apple but cash in the hands of some other investor who wants to get out of those companies.
Here:
http://www.sfu.ca/~dandolfa/what%20is%20money.pdf
Is a good review of what money is and how banking works. I prefer a Minsky type explanation of the causality question regarding banking crises and panicks. Other than that this is how the basic machinery of banking works.
I appreciate your link and I printed the 19 pages of the pdf but I think it is better form to summarize such things into the actual comments you are making.
So with that link in mind I think the key point is that the money supply is created largely by private banks not the CB and that stock of credit money rests upon a collateral supply which is a mixture of public debt assets and private equity and private debt assets. What goes wrong is banks increasingly lend against private collateral with the price of same justified by recent market price activity rather than earnings. This is an instability to the upside not to the downside. We’ve already seen that play out. Now we are in the post instability run up and CB’s are trying to stop the inevitable repricing of assets to the downside. CB’s are buying assets to do this but the greater trend is for money supply to shrink by debt default and forced private asset sales not money creation by fiscal deficits and CB policy.
OK if I’m hearing you correctly you are saying that a lot of money is created by bank loans which use previous loans as their base….Shakey Company A puts up a $1B Apple bond as collateral and gets a loan from a bank for $0.750M. The money supply is now the $1B Apple has as cash plus $0.75B Company A has from taking out the loan. If Company A can’t make any payments, the bank calls in the loan and now owns the Apple bond. The money supply has shrunk to $1B.
Issues:
1. The Fed’s purchases don’t really impact this. Perhaps Company A’s bonds will go up in price of the Fed buys some of them in a QE purchase, but either A is going to make its payments or it won’t.
2. We’ve had 8 years since the crash. A person who took out a subprime 30 year loan right before the crash is now almost 1/3 of the way through it. Most are either paying their loans or the houses have been foreclosed on and resold. So lots of loans made after the crash are going to have to be the ones that default. And why is that going to happen again? Because, well, just because it’s cool to think the world’s about to blow up? What evidence do we have that loans out there either as direct lending or through corporate bonds are exceptionally shaky and about to explode?
3. I don’t buy the argument that loose monetary policy protects those who have lots of bad loans. The 2008 crash was great for those who didn’t have a lot of inflated mortgage debt. Those were the people who made out the best, able to scoop up cheap real estate. Those that were in over their heads were locked out of mortgage markets, saw their credit scores plunge and took a long time to recover, if they did at all.
Steve Keen believes economies get trapped in a box defined by total private debt about 175% of GDP. We may be in such a box now. If private debt climbs above this debt service and debt default pushes us back. If private debt falls below this we re leverage back up out of necessity to maintain quality of life. He might be right. Other economies seem similarly trapped e.g. Japan. He also notes some are destined for banking crisis. His list is seven countries ripe for this based on total private debt to GDP ratio over 150% plus credit growth above GDP growth by 20% over five years. Suggest you read Keen and Richard Vague.
We (the US) are not in big structural trouble by the usual measures of private debt or credit (slope of private debt) expansion. Our structural problem is we are the global reserve currency provider and some other countries are in terrible shape with regard to total private debt and credit expansion in excess of GDP growth. It kind of sucks being the worlds provider of reserve currency. Hiccups in other countries will bring trouble here. China in particular is ripe for a banking crisis. Total private debt to GDP is over 300% and has grown at over 60% per year lately. Wow. Hong Kong even worse. So…Kaboom. That’s gonna hit here.
Banks lend against good collateral to credit worthy borrowers based on their historical behavior as good borrowers. Banks may not lend even with healthy spreads at negative rates because increasingly collateral offered is not considered good, or borrowers ability or willingness to repay loans is questionable. Both are true in a debt deflation. Debts are increasingly more difficult to repay as purchasing power of money is increasing and collateral is suspect as asset prices are falling.
Not seeing why this need be the case. Yes in a deflationary environment paying back your debt means that real burden is higher. But then interest rates are lower so refinancing the debt becomes easier or if you are owed money deflation means negotiating a write down of a portion of a debt becomes less painful (imagine inflation was 2% per year and you lent money to your brother-in-law at 4%. Now he is struggling in this -1% deflation environment, you can offer to cut his interest rate to just 1% and you’ll have no real loss).
Just to point out something super obvious:
“In five of those recessions, the Fed had to push the federal funds rate 3.5 percentage points below the 10-year bond rate,” he said. “So if that happens this time around, we would have to push the federal funds rate to minus 2 percent.”
During the recessions referred to here, interest rates were in another galaxy compared to today. A spread of 3.5% during those times might have been roughly 25% to 50% of the 10 year rate at the time. So now, if the 10 yr is at 1.5%, a 3.5% spread is 233% of the 10 year. Definitely not apples to apples. This is a super-weak idea on the basis of simple math. That economist should be embarrassed for having said it. It’s pretty clear that, in making such a statement, he is concerned more with helping banks, who want bigger spreads, than with anything else.
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