Huh, negative interest rates

[Whomp]

I might be being a dummy, but how can debt service be at 10%? Are my mortgage payments that atypical?

I edited it. It is debt payments as a per cent of disposable income.


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[Cutlass]

You're nitpicking. Using monetary policy to stimulate the economy is more monetarist than Keynesian, though it doesn't detract from Jehoshua's general points, which is that continually increasing debt to end the crisis will lay the foundations for another one. Debt is the problem. Though it is not just public debt however.

I'll respond to Jehoshua's point later, when I have more time.

More to my point, "continually increasing debt" is not a Keynesian program. "Continually increasing debt" is what happens when you refuse to use a Keynesian program! It is not an accident that dept as a percent of GDP in the US did not increase while Keynesians held influence with elected Washington. Debt as a percent of GDP only increases when Keynesians have no influence on policy.

 

[El_Machinae]

Oh, ha, okay. From that perspective, 10% seems insane. I just have zero stomach for getting my debt level that high.

 

[Terxpahseyton]

More to my point, "continually increasing debt" is not a Keynesian program. "Continually increasing debt" is what happens when you refuse to use a Keynesian program! It is not an accident that dept as a percent of GDP in the US did not increase while Keynesians held influence with elected Washington. Debt as a percent of GDP only increases when Keynesians have no influence on policy.

Now you are being awfully simplistic. Growth simply was a lot higher back then and it isn't clear to me at all that this was merely so because of Keynesian policies.

 

[El_Machinae]

Back when?

 

[dutchfire]

Oh, ha, okay. From that perspective, 10% seems insane. I just have zero stomach for getting my debt level that high.

Spending 20-30% of one's income on rent seems to be pretty usual though.

 

[El_Machinae]

That's why I balked when I thought the number referred to mortgages. The interest portion of my mortgage is currently 'obviously' higher than 10% of my income. Anyone paying rent is effectively in the same situation, and all the ones I know are gonna be paying more than 10% of their income.

 

[Whomp]

Spending 20-30% of one's income on rent seems to be pretty usual though.

Well, in the US it peaked at 13.5% in 4Q 2007. It was 12%+ most of the 2000's which is above normal.


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[Jehoshua]

I'm not sure I buy your US household narrative. Household balance sheets look better than they ever have in the US and debt service (debt payment as a per cent of disposable income) is around 10%.

My point isn't that households are rampantly getting into more debt, but rather that they aren't borrowing. Ergo the amount of credit (borrowed money floating around the sector) is remaining flat since people are prioritising paying off debt (which has as you rightly point out, decreased since six years ago) rather than going into more debt and spending money on whatever it is that Americans spend their money on.

Here's a helpful chart showing debt by sector.

Spoiler :

-

@Cutlass, I agree with you that the rampant spending of cash during the good time was not the result of Keynesian policy (which advocates saving pennies in the good times). I never said it was, and indeed if governments had been more prudent we'd be in a better position. My comments as they pertain to Keynesianism (speaking broadly rather than pure forms) is solely about its influence on policy post-financial crisis with regards to stimulus and debt-spending. All this is an aside from my main point though.

 

[dutchfire]

That's why I balked when I thought the number referred to mortgages. The interest portion of my mortgage is currently 'obviously' higher than 10% of my income. Anyone paying rent is effectively in the same situation, and all the ones I know are gonna be paying more than 10% of their income.

Is Whomp's figure of 10% with or without interest payments? I'm not so clear on (English) financial terminology.

 

[Whomp]

Is Whomp's figure of 10% with or without interest payments? I'm not so clear on (English) financial terminology.

Debt service includes interest payments.


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[Terxpahseyton]

Back when?

50s and 60s and I guess partially 70s would be the era of Keynesian policies in the US, I think.

 

[El_Machinae]

Can you show a graph with superior growth in those periods? I am not sure what you mean?

 

[Terxpahseyton]

http://www.prometheusmi.com/2013/01/24/hoisington-and-hunt-fourth-quarter-report-2/

 

[El_Machinae]

Oh, you meant compared to the last decade. Oops, I misread.

 

[Tahuti]

More to my point, "continually increasing debt" is not a Keynesian program. "Continually increasing debt" is what happens when you refuse to use a Keynesian program! It is not an accident that dept as a percent of GDP in the US did not increase while Keynesians held influence with elected Washington. Debt as a percent of GDP only increases when Keynesians have no influence on policy.

You think too much in terms of schools of thought - a mistake I made as well by using the term 'monetarist' here. Something roughly correlative to Keynesianism or Monetarism will hold sway depending on the interests of voters and special interests, though the Keynesianism vs. Monetarism to name one example isn't really a thing outside of academia.

 

[Cutlass]

Now you are being awfully simplistic. Growth simply was a lot higher back then and it isn't clear to me at all that this was merely so because of Keynesian policies.

You could debate that if you want. But I was speaking to the deficits. The US federal government just very rarely ran any significant peace time deficits until after Keynesian economics lost pretty much all political support in the US. 95% of all the US federal debt has been created by people who specifically and deliberately rejected Keynesian economics, and who designed and implemented programs that they knew were contrary to Keynesian prescriptions.

So you can't blame the debt on Keynesians. It was done by others.

You think too much in terms of schools of thought - a mistake I made as well by using the term 'monetarist' here. Something roughly correlative to Keynesianism or Monetarism will hold sway depending on the interests of voters and special interests, though the Keynesianism vs. Monetarism to name one example isn't really a thing outside of academia.

That isn't true either. The politically dominant 'school' of economics in the US over the past 34 years has been Supply Side Economics. And that is neither part of Keynesian of Monetarist schools.

The tools used are taxing, spending, regulations, or monetary policy. But those are tools, not theories or schools of thought on how the tools are to be used.

@Cutlass, I agree with you that the rampant spending of cash during the good time was not the result of Keynesian policy (which advocates saving pennies in the good times). I never said it was, and indeed if governments had been more prudent we'd be in a better position. My comments as they pertain to Keynesianism (speaking broadly rather than pure forms) is solely about its influence on policy post-financial crisis with regards to stimulus and debt-spending. All this is an aside from my main point though.

Keynesianism has actually had very little political influence since the financial crisis. Most of what is dominating political discourse and actions in most nations is not what a Keynesian would do or suggest doing.

 

[Tahuti]

That isn't true either. The politically dominant 'school' of economics in the US over the past 34 years has been Supply Side Economics. And that is neither part of Keynesian of Monetarist schools.

The tools used are taxing, spending, regulations, or monetary policy. But those are tools, not theories or schools of thought on how the tools are to be used.

That is however not because Supply Side Economics is deemed intellectually superior, though rather, because it is more useful to the special interests.

 

[Hygro]

http://money.ca.msn.com/investing/n...euro-zone-economy-seeks-to-force-bank-lending

Now, I knew you could effectively do so by promising inflation rates higher than payouts, but still, this is a surprise. What an interesting tangent. There's been talk of this for awhile, but I didn't know it would ever be politically possible.

The ECB gets it backward again! The put a negative rate on deposits, which takes money out of the economy. Since you can't "loan out" reserves from the banking sector since that's... not... how it works, taxing deposits might force banks to take on riskier loans which could maybe have a stimulating effect but the net change to the economy is negative.

The rate the ECB needs to send negative is the borrowing rate.¹ Now that would be ballsy. Net increase of Euros in the system by reverse interest payments (getting paid to borrow) and the ability to offer loans that require paybacks that are less than the principle.


1. Borrowing what exactly? So when a bank creates a loan, it has to have the reserves to cover the loan, which it gets by borrowing, either from other banks or from the central bank (aka the ECB in Europe, or the Fed in the USA). The borrowing is done at the "discount window" and that's the interest rate that I think is most relevant. That rate has hovered near 0 in the US, and I'm suggesting they send that rate negative. Yes I understand how backward that sounds. (Also, I am assuming EU's system works like ours.)

Where does it say anything that banks HAVE to park their money? The reason they park money is to make money. The central bank decided that to discourage banks from using them, they would create a negative incentive. The banks could hold on to their money and make nothing. Or they could loan it out or find other ways to invest it. Hopefully by doing something else it would stave of deflation. Would banks loosing money do the same thing?

All electronic money is that is legally parked is parked in the central bank. All banks hold their reserves electronically in the respective central banks they do business with. Central banks are friggin legit.

This seems to be an effect of desperately attempting to implement a keynsian solution

This is not a Keynesian solution. Keynes, a successful trader, economic policy leader and divisor, developer of statistics, and of course academic economist, had a taxi-driver's map of NYC style understanding of the economy. He understood the literal form and function of the economy, and could still turn it into an elegant undergraduate model and a reporter's narrative.

The ECB is doing it more like Laffer, on the back of a napkin, making it up as the go along, trying to remember their introductory econ courses with no idea what they're actually doing. "Hey I think lower interest rates boost Y, so let's tax money for existing via a mechanism that has the name 'interest rate' in it because that will work".

But you are (probably) correct in this: central banks probably have far less power than they want us to believe.

(perpetually increasing sovereign debt is untenable in the long run)

Why?

I'll respond to Jehoshua's point later, when I have more time.

More to my point, "continually increasing debt" is not a Keynesian program. "Continually increasing debt" is what happens when you refuse to use a Keynesian program! It is not an accident that dept as a percent of GDP in the US did not increase while Keynesians held influence with elected Washington. Debt as a percent of GDP only increases when Keynesians have no influence on policy.

Yup. Not that it probably matters much, but this is historically been the case. Caveat, the debt is nominally increasing, but as a fraction of total GDP, decreases. Actually this is quite easy to do. Keep interest rates below growth (minus interest payments) and the debt to GDP ratio can't grow.

 

[Tahuti]

Why?

Debt with interest requires economic growth (on the part of the debtors) or inflation, lest it cannot be ever expected to be paid back. If economic growth and/or inflation cannot be delivered, loans will fail.

And there will be episodes where such cannot be delivered. Debt essentially operates on threadmill: Increasingly more growth or inflation will be necessary to prevent loan failure. When loans eventually fail - by virtue of Murphy's law - deflation and economic decline will set in. Which in turn - as you know - causes more loans to fail. Workers become unemployed as entire businesses become bankrupt. Further shrinkage and deflation.

So debt is unsustainable. Economists love to talk of economic decline and deflation as if those were the problem, though the problem really is that the economy cannot withstand economic decline and deflation. We have to make economies deflation proof, not take on more debt. Debt should only be used for funding college education and starting businesses for people otherwise unable to pay, not for consumption. Established businesses that employ large amounts of workers should not be able to borrow, because the social costs of failure - which taking on debt will increase massively - are too great.