Huh, negative interest rates

[Hygro]

Well you've certainly made a case for replacing private debt financed consumerism with higher wages, but what Jehoshua wrote still needs explaining. I'm curious to see how he defends his claim.

I notice your general argument has shifted from a few months ago.

 

[dutchfire]

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.

The ECB wants to influence the economy, but they only interact with the banks. This is problematic, since you can't really rely on the banks. It would be nice if the ECB could interact directly with the consumers. If the ECB determines that the money supply should be increased by 100 billion euro, they could just give every EU citizen 100 euro.

 

[Hygro]

The ECB wants to influence the economy, but they only interact with the banks. This is problematic, since you can't really rely on the banks. It would be nice if the ECB could interact directly with the consumers. If the ECB determines that the money supply should be increased by 100 billion euro, they could just give every EU citizen 100 euro.

Yeah, same problem with the Fed. In the US it'd be easier (not politically, but mechanistically). The Fed could do like the Bank of England and work more directly with consumers. Say, open accounts for everyone directly via their Social Security numbers, and do what you said, just deposit money straight up. They could lend directly at low rates, and here's my best ever idea, the interest paid would be distributed equally among everyone. This keeps money from leaving the system and sort of "pays" everybody for publicly lending money (and therefore weighting the balance of finance) to that person/firm.

 

[Tahuti]

I notice your general argument has shifted from a few months ago.

That is rather likely, even to my own admission.

 

[Jehoshua]

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.[/QUOTE]

You didn't actually explicate anything at all about Keynes other than to assert he was a great economist . Anyways my point isn't about Keynes personally, but about what our central banking folk are up too. My sole point which pertained to Keynes was that negative interests rates probably reflects a Keynesian influence within the economic priesthood, and their indebtness to Keynesian thought (albeit obviously what they do isn't pure Keynes and I never said it was anyway) in the assumption that one must increase liquidity and credit-flow in the market in hard times to get through the doldrums.

Why?

Kaiserguard said it well. Basically debt cannot go on ad infinitum since eventually you have to pay it back (otherwise its just lost money for whoever loans the cash to begin with)

 

[El_Machinae]

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.

This looks fair. If we've learned anything lately, it's the knowing how to avoid the longtail risk is going to become important.

Now, debt is sustainable as long as there's growth. It's infinitely sustainable. What you're saying is that it's not sustainable if the majority of growth investments fail to deliver. That seems to be true, too.

Now, as I found out in the money thread, we've apparently already bought into a system where the majority of loans fail to deliver growth (majority of total dollars lent, I mean), but a wicked portion of those loans expect to be non-growth. There's tremendous buffer in the system (obviously). We can also see how some inflation can really help kickstart after the horror scenario mentioned in paragraph one. It's a shame that modern inflation systems are so regressive ...

 

[Mise]

From zirp to nirp...

Italy is now more creditworthy than USA according to five year spreads.

Well, that's because bond yields are a function of more variables than simply "creditworthiness", right? They're also a function of central bank policy and growth expectations.

So actually I don't accept that "Italy is now more creditworthy than USA according to five year spreads", because I don't think that 5 year spreads show that. I think they show the combination of several different factors, and when you strip out other factors such as GDP growth and central bank activity, I'd imagine that, actually, 5 year spreads show that Italy is less creditworthy than the USA.

 

[Whomp]

Well, that's because bond yields are a function of more variables than simply "creditworthiness", right? They're also a function of central bank policy and growth expectations.

So actually I don't accept that "Italy is now more creditworthy than USA according to five year spreads", because I don't think that 5 year spreads show that. I think they show the combination of several different factors, and when you strip out other factors such as GDP growth and central bank activity, I'd imagine that, actually, 5 year spreads show that Italy is less creditworthy than the USA.

Yeah, we should have sarcasm font.

I hear you and I'm sure the repo market does as well. Fascinating to watch that spread go from 5% over UST two years ago to lower today.

 

[Mise]

Ahh I see, fair enough!

 

[Tahuti]

This looks fair. If we've learned anything lately, it's the knowing how to avoid the longtail risk is going to become important.

Now, debt is sustainable as long as there's growth. It's infinitely sustainable. What you're saying is that it's not sustainable if the majority of growth investments fail to deliver. That seems to be true, too.

Well yes. We should actually purposefully produce a steady deflation rate to discourage debt.

 

[El_Machinae]

The problem is that deflation leads to vastly lower growth than inflation, and transitioning between inflation and deflation causes short-term pain in the form of real losses. An incredible portion of economic growth comes from economic surplus (an effect of trade). Deflation discourages trade.

So, it's a one-time cost to have things just be more sucky on the off chance that it will reduce longtail risks.

 

[Tahuti]

The problem is that deflation leads to vastly lower growth than inflation, and transitioning between inflation and deflation causes short-term pain in the form of real losses. An incredible portion of economic growth comes from economic surplus (an effect of trade). Deflation discourages trade.

So, it's a one-time cost to have things just be more sucky on the off chance that it will reduce longtail risks.

When the economy grows, who really profits from it? Do you not think we live good enough?

 

[El_Machinae]

When the economy grows, who really profits from it?

That's a really good point, but I flip the question when I consider it.
When the economy shrinks, who really loses out? I mean, granted, I've accepted the presence of longtail risks causing suckitude. I'm just not sure that intentionally causing a problem is a viable solution.

Do you not think we live good enough?

Er, no. Not at all. Is there some level of malaria-caused deaths you find acceptable?

 

[GamezRule]

It was my understanding that Supply Side Economics and Monetarism were both fundamentally derived from Keynesian principles. Primarily the principle that the way to encourage economic growth is to increase aggregate expenditures. A true Keynesian will want to do this directly through government spending. A Supply Sider wants to do this indirectly through lowering taxes to increase consumption and economic investment. Monetarists want to do this indirectly through manipulating the money supply to increase economic investment and to a lesser extent consumption. All three methods can be effective.

Since we're talking about Supply Side Economics, let's talk about Reagan. The main reason Reagan's tax cuts failed is because the massive tax cuts to the upper class were offset by smaller tax increases to the middle and lower class. Since the middle and lower classes have a much higher propensity to consume, aggregate demand fell even though taxes were lowered overall. However, not only were the Reagan Tax Cuts offset by more powerful (but smaller overall) tax increases, but also spending cuts.

Unfortunately, taxes are now to low for any significant tax breaks to do anything other then just bankrupt the Federal government.

 

[Tahuti]

That's a really good point, but I flip the question when I consider it.
When the economy shrinks, who really loses out? I mean, granted, I've accepted the presence of longtail risks causing suckitude. I'm just not sure that intentionally causing a problem is a viable solution.

The people who chiefly lose out during economic shrinkage are the ultra-rich and low-wage workers who are employed by indebted corporations. In the latter case this is worrying because they are deprived of income.

Er, no. Not at all. Is there some level of malaria-caused deaths you find acceptable?

Well, in the West such is pretty rare.

 

[El_Machinae]

The people who chiefly lose out during economic shrinkage are the ultra-rich and low-wage workers who are employed by indebted corporations. In the latter case this is worrying because they are deprived of income.

It's the low-wage worker I am most worried about.

Well, in the West such is pretty rare.

Yes, but that was an analogy for all the things in the West I'd like to eliminate and a reminder that we still need rapid global growth.

 

[Tahuti]

It's the low-wage worker I am most worried about.

Good thing we agree then!

Yes, but that was an analogy for all the things in the West I'd like to eliminate and a reminder that we still need rapid global growth.

Can we completely iron it out? I fear that any attempts to do so will actually compound the problem.

 

[Hygro]

You didn't actually explicate anything at all about Keynes other than to assert he was a great economist . Anyways my point isn't about Keynes personally, but about what our central banking folk are up too. My sole point which pertained to Keynes was that negative interests rates probably reflects a Keynesian influence within the economic priesthood, and their indebtness to Keynesian thought (albeit obviously what they do isn't pure Keynes and I never said it was anyway) in the assumption that one must increase liquidity and credit-flow in the market in hard times to get through the doldrums.

Well, see, that's point. Keynes was an economist of both the scientist and the doctor variety. The ECB is, in your words and my agreement, run by theocrats. Great economics follows a Keynesian tradition, but terrible economics adopts the trappings of it. And that's one reason why it's not actually Keynesian because it's not actually scientific, as evidenced by this is the wrong interest rate, i.e. that their policy is supposed to work via an incentive mechanism, a mechanism most good macroeconomists, try to avoid relying on since that's a) usually a cop out and b) often wrong. But lower interest rates are supposed to affect employment because they change the volume of profitable loans, pretty different.

Kaiserguard said it well. Basically debt cannot go on ad infinitum since eventually you have to pay it back (otherwise its just lost money for whoever loans the cash to begin with)

Good thing the sovereign debt issuer has infinite money. I went on a spree a few months back explaining how all of this works. Then after I was a bit burned on the subject you started making these debt claims. Terrible timing on both our parts

 

[Borachio]

I don't know why people talk about money as if it's a real thing. It's really just a convenient way of conducting some specific human relationships.

 

[Tahuti]

I don't know why people talk about money as if it's a real thing. It's really just a convenient way of conducting some specific human relationships.

And it largely is. However, try explaining interest exclusively in terms of human relationships. That'd end up a bit awkward, if you manage at all.