Low Interest Rates Help Borrowers, but Hurt Savers
Mark Calabria at the Cato blog makes an overlooked, but excellent point about the graph above:
"One of the direct results of the Federal Reserve’s zero interest rate policies (red line above) has been a massive reduction in interest income going to households (blue line above). Since 2008, household interest income has fallen by about $400 billion annually (MP: From $1.4 trillion to $1 trillion). That’s $400 billion each year that families have not had to spend.
Now of course you can also argue that families' interest expenses have also fallen, and that would be true, but that just serves to illustrate that much of monetary policy is not about creating wealth, but re-distributing it. Since interest payments are one person's expense and another’s income, Fed driven changes in the interest rate should not increase household income in the aggregate."
MP: It's an important point: every credit transaction involves a borrower and a lender, or we could say the quantity of credit supplied by savers has to equal the quantity of credit demanded by borrowers. When expansionary monetary policy forces short-term interest rates to approach zero (or even negative like current TIPS yields), it's great for borrowers but bad for savers, but the overall net effect on the economy has to be zero. That is, low interest rates involve a transfer of wealth from net savers to net borrowers, but no net increase in wealth.
Conversely, when contractionary monetary policy raises short-term interest rates, it's great for savers but bad for borrowers and transfers wealth from net borrowers to net savers, with an overall net wealth effect of zero.
Bottom Line: We should stop pretending that monetary policy that lowers interest rates is good for the overall entire economy, and recognize that it's only good for 50% of the economy and bad for the other 50%. What is more important than low or high interest rates is stable interest rates, which is maybe a case for inflation targeting.
"One of the direct results of the Federal Reserve’s zero interest rate policies (red line above) has been a massive reduction in interest income going to households (blue line above). Since 2008, household interest income has fallen by about $400 billion annually (MP: From $1.4 trillion to $1 trillion). That’s $400 billion each year that families have not had to spend.
Now of course you can also argue that families' interest expenses have also fallen, and that would be true, but that just serves to illustrate that much of monetary policy is not about creating wealth, but re-distributing it. Since interest payments are one person's expense and another’s income, Fed driven changes in the interest rate should not increase household income in the aggregate."
MP: It's an important point: every credit transaction involves a borrower and a lender, or we could say the quantity of credit supplied by savers has to equal the quantity of credit demanded by borrowers. When expansionary monetary policy forces short-term interest rates to approach zero (or even negative like current TIPS yields), it's great for borrowers but bad for savers, but the overall net effect on the economy has to be zero. That is, low interest rates involve a transfer of wealth from net savers to net borrowers, but no net increase in wealth.
Conversely, when contractionary monetary policy raises short-term interest rates, it's great for savers but bad for borrowers and transfers wealth from net borrowers to net savers, with an overall net wealth effect of zero.
Bottom Line: We should stop pretending that monetary policy that lowers interest rates is good for the overall entire economy, and recognize that it's only good for 50% of the economy and bad for the other 50%. What is more important than low or high interest rates is stable interest rates, which is maybe a case for inflation targeting.
45 Comments:
Unrealistically low rates is bad for every one. Hedge Funds now short T-Bills to effect carry trades and have driven up commodity prices for us all. Copper, oil and even coffee have risen without shortages due to speculation in futures markets that low rates loose money will cause inflation. This is a carry trade that would not work at 1.5% but works at 0.005%. This has forced marginal families living on fixed income below the poverty line.
I am suprised that no one seems to see that this is occcurring. 1.5% is low enough, 0.005% is absolutely dangerous and irresponsible and shows shallow thinking by the Fed.
Funny you should post on this today. Ben Bernanke today during his testimony before the Senate Banking & Finance Committee made the very same point.
They are subsidizing debtors and screwing savers. That's called government intervention.
I do wonder how important the Fed Funds rate actually is. It is only one rate and while other market rates may be partially based off of it, surely market participants know that the FF rate is being monkeyed with and so adjust their other rates accordingly? I wonder if the FF rate isn't just a big dial that does a whole lot of nothing these days.
Low prices for apples hurt sellers and help buyers. High prices for apples hurt buyers and help sellers. Therefore changing prices of apples merely redistribute wealth. Therefore the government should keep apple prices constant?
What about substitution effects?
So you buy cheap money and invest it somewhere it will make more money than you are paying. It's a win-win situation. I am in no hurry to pay off my fixed-rate 3.625% mortgage even though people are trying to tell me retirees should not have a mortgage payment.
My only problem was the bank low-balling the appaisal for the mortgage while the tax assessor was high-balling the assessed and taxable value for the property tax. If you follow the appeal process to the letter without giving up you can win there, too.
No one is forced to lend money--ergo, interest rates are in large part market rates. People sniveling about buying Treasuries could spend the money or invest in something else.
In Japan interest rates have been near zero, and they have had minor deflation for 20 years. That is what a tight money policy brings. Their industrial production has also fallen by 20 percent and stocks and property are off by 80 percent in last 20 years.
Despite what you read, the Fed is not "loose" now. It is passively tight. There is no demand for money, so rates are at zero. We are doing a Japan.
The Fed has to move aggressively to sustained quantitative easing, and transparent targets for nominal GDP growth. A balanced federal budget would help too.
Milton Friedman, Allan Meltzer, John Taylor and Ben Bernanke all advocated sustained and active QE for Japan. If you get any more conservative than these guys, you wear jodhpurs and jackboots.
Yet partisan shibboleths and scaremongering is running so high--and the right-wing has irrationally embraced the gold standard---that these fine fellows now hide (Friedman would not hide, but he has passed away).
Some GOP solons are calling for states to issue gold coins, the replace US currency. This is the new GOP monetary policy.
States seek currencies made of silver and gold
By Blake Ellis @CNNMoney February 3, 2012: 10:53
Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, more than a dozen states have proposed using their own alternative currencies of silver and gold.
NEW YORK (CNNMoney) -- A growing number of states are seeking shiny new currencies made of silver and gold.
Worried that the Federal Reserve and the U.S. dollar are on the brink of collapse, lawmakers from 13 states, including Minnesota, Tennessee, Iowa, South Carolina and Georgia, are seeking approval from their state governments to either issue their own alternative currency or explore it as an option. Just three years ago, only three states had similar proposals in place.
"In the event of hyperinflation, depression, or other economic calamity related to the breakdown of the Federal Reserve System ... the State's governmental finances and private economy will be thrown into chaos," said North Carolina Republican Representative Glen Bradley in a currency bill he introduced last year."
Yes, I like those Tennessee silver doubloons.
"Since 2008, household interest income has fallen by about $400 billion annually (MP: From $1.4 trillion to $1 trillion). That’s $400 billion each year that families have not had to spend."
Low interest rates induce demand. That $400 billion annually was spent instead of saved.
Without the additional spending, output and employment would be even worse.
Monetary policy has been compensating poor fiscal policy.
The U.S. government needs to cut spending, cut taxes, and deregulate enough to jolt the economy into a self-sustaining cycle of consumption-employment (where consumption generates employment and employment generates consumption, etc.).
Then the Fed can raise interest rates to slow the expansion and maintain sustainable economic growth.
here was my take after the last FOMC meeting:
the Fed's apparent intention in keeping rates near zero is to encourage borrowing, & as they've even explained "operation twist", was to bring longer term rates down as well, providing some rate relief to the housing market...to that extent they've been successful, as we've noted new record low mortgage rates several times this past year, and as Treasury rates fell immediately after this weeks meeting, with the 5 year note hitting another new record low...but there are potential downsides to a long term commitment to near zero interest rates...if one was thinking about borrowing for a business expansion or a mortgage loan but unsure of economic conditions, the Fed's commitment to keeping rates low likely encourages potential borrowers to wait until improving conditions are more certain, which could in itself tend to prolong a slump...another problem with low rates is that those who are retired & living on fixed income will have less to live on, and that reduces demand accordingly...and we've seen that those approaching retirement are more likely to delay retirement because their savings will no longer generate enough cash flow for them to live on, and thus there are less job openings for young people with the labor force participation rate for seniors at record highs...and low rates exacerbates the problem with public pension funds...funding for most of them is predicated on a return of 7% or more, and they're already in bad shape after 2 years of losses...this week returns for 2011 on the two largest were reported at 1.1% for CALPERS & 2.3% for CALSTRS; both of those plans assume a 7.75% return...& in arguing for changes in worker contracts, mayor Bloomberg claimed that NYC's pension fund was $8 billion in the hole...there have been reports that even with normal return expectations, government worker pension funds are underfunded by $3 trillion, so we'll likely see another crisis with those on the horizon...
Quote from Mark Perry: "What is more important than low or high interest rates is stable interest rates, which is maybe a case for inflation targeting."
Why? The problem with an unstable interest rate is that it's completely arbitrary, because it's based on the whims of bureaucrats.
Interest rates are the market values of people's time preferences (i.e., a price). So when bureaucrats set and manipulate the interest rate, they are simple creating a price control, and when they set the interest rate at zero they are trying to set everybody's time value to zero. Nobody has a zero time preference.
Quote from Mark Perry: "What is more important than low or high interest rates is stable interest rates, which is maybe a case for inflation targeting."
Why? The problem with an unstable interest rate is that it's completely arbitrary, because it's based on the whims of bureaucrats.
Interest rates are the market values of people's time preferences (i.e., a price). So when bureaucrats set and manipulate the interest rate, they are simple creating a price control, and when they set the interest rate at zero they are trying to set everybody's time value to zero. Nobody has a zero time preference.
Seeking,
I don't think you understand the carry trade. In a carry trade, one borrows in one country (with a ow interest rate) and lends in another (one with a high interest rate). The carry trade is nothing more than a currency bet, but there is no shortage of morons who think it's arbitrage. To call it arbitrage, one would have to ignore interest rate parity, but I digress.
Another version of what's referred to as a carry trade is borrowing at the short end of the curve and lending at the long end of the curve. That's the trade every bank is involved in and since the curve is usually upward sloping, they make money - and it's why the Fed has to be careful how much it fiddles with the long end of the curve, lest the damage the TBTF's prospects.
I don't understand why you think either of those trades affect commodity prices.
Big Ben has been effectively printing money, so commodity prices will rise because of that and supply/demand issues.
The real interest rate is negative and, as Bob Higgs points out so well, we are taxed on nominal capital gains. The government is stealing from all of us, but the Fed is undoubtedly favouring borrowers with this interest rate manipulation.
It's not shallow thinking on the part of the Fed. It's an organ of the government and, as expected, it is employed in the service of the government and political cronies. I am at least as disgusted as you, but I am not surprised.
Sprewell,
The FF rate is a target rate. The effective FFrate is the rate at which banks actually lend to one another and it is quite often different from the target rate. The Fed has the ability to act in the market to manipulate the rate toward it's target.
Banks lend at a premium to their own borrowing rate, so the FF rate does effect the rate at which you borrow quite directly.
And that's before we get into the Fed's manipulation of the interest rate curve through open market operations....
low rates also allow the governement to justfiy borrowing more because rates are so low. Circular govenmment financing at its finest.
such low rates have a second issue though. it's not just a zero sum wealth issue.
low rates encourage marginal spending and debt assumption.
people tend to think of debt in terms of monthly payment, not dollar value.
this creates a debt trap. people run up debt during easy money (like the tripling of US consumer debt from 1999-2007) and then tehy are stuck.
if rates go up, they get buried.
notions they did not have to worry about this were enhanced by the monstrous moral hazard of the "greenspan put". the fed has been firmly on the side of borrowers and bailed them out over and over. this makes them borrow more and makes the next bailout bigger until we arrive here.
the fed is locked into ZIRP because they have no choice. this is the disaster they made by always seeking to drive and protect more borrowing and consumption spending. it's the fallout from a fed targeting growth.
you have lenders that will not lend to any but the most creditworthy. mortgage rates may look very low, but try getting those rates with even a 750 credit score.
if i were a bank and fearful of the fed's next move toward QE and a debasement of the currency, i sure would not want to lend for 30 years at 3.5%.
this is the mess that low rates and growth targeting makes.
no CB has ever been able to target growth successfully for any length of time. they always blow themselves up as we have.
the banks that have been big successes and endured (bundesbank, singapore, US fed under volcker) all targeted low inflation, not growth.
we got the roaring 80-90's in the us after the dire 70's by doing this.
going back to print and pray has been a disaster.
I remember Goldilocks
and right now the economy is once again not too hot and not too cold
Inflationists always want it to be hotter, and they complain bitterly and goldbugs always say it is too hot
so what else is new?
morganovich: "if i were a bank and fearful of the fed's next move toward QE and a debasement of the currency, i sure would not want to lend for 30 years at 3.5%."
Fannie Mae bought my mortgage last year before the ink was dry. From what I understand, that is normal now (at least in this area). I guess the bank/credit union made their money from the origination fees and from keeping the loan servicing.
also worth considering:
this ZIRP is often credited with driving the low mortgage rates, but i do not think that is true.
no sane bank would lend for 30 years at 4%.
the interesting thing is: they aren't.
they are turning about and selling what they originate to freddy and fannie (which is to say, the US treasury) as fast as they can. F+F are 85-90% of the market. that means they are pretty much 100% of the conforming market.
the fact that NO ONE is willing to keep that trash on their books is quite telling. it tells me that low rates are being driven by a price insensitive buyer, not cheap money. (though the amount of money this injects into the system through a sneaky non-fed "back door" is gigantic, it's stealth QE)
but consider the issue:
the treasury is controlled by the federal government whose actions can be dictated by the same people who borrowed the money. talk about moral hazard.
this is going to be a disaster.
and what happens when rates rise and the ARM's move? defaults go wild, and "readjustment" gets voted on again.
seems the trick is to borrow and be on the side that gets to do the kicking instead of save and be the guy who gets kicked.
that hardly sounds like the way to encourage sound fiscal behavior.
every government policy we seem to have from the tax code to interest rate policy seems to favor current consumption and debt accumulation at the expense of savings.
it's small wonder we have become a nation of debtors with a savings rate incapable of driving our economy or supporting ourselves.
"I guess the bank/credit union made their money from the origination fees and from keeping the loan servicing."
it's actually worse than that.
your bank gives you a loan at 4%.
fannie buys it at 3.5% or some such.
this is an immediate gain for the bank (think of it like a bond) AND they get servicing and origination fees AND they get their money back to lend again.
F+F are 90% of the market. that means they ARE the market. it's federal loan subsidy on a truly epic scale. it's one of the largest entitlement programs going.
it's also a massive form of QE as it injects huge money into the system but does not require the fed, thus putting money supply growth in the hands of elected politicians, not the fed, a recipe for disaster if ever there was one.
man i'm glad i have dual citizenship.
i do not like where this is heading.
giving the pigs the keys to the slophouse does not end well.
It should also be noted that Banks did not proportionately pass on the savings they received from ZIRP to consumers. ZIRP is an ongoing backdoor bank bailout. The spread they are receiving on all types of loans increased dramatically. I discuss this here, along with some charts.
http://www.wallstreetrant.com/2012/02/some-commentators-still-clueless-that.html
Some people give the Fed too little credit.
Ever since the Fed had to tighten the money supply in the early 1930s to stop foreign outflows of gold (since the U.S. was on the gold standard), which worsened the Great Depression, it has increasingly improved in raising U.S. living standards, by smoothing-out both long-wave and short-term business cycles.
Monetary policy has been appropriate in this recovery. It was fiscal policy that failed.
"That is, low interest rates involve a transfer of wealth from net savers to net borrowers, but no net increase in wealth."
Not if the transfer is from non-balance-sheet-contrained actors to balance-sheet-contrainted actors. All balance sheets are not the same, all saving/spending patterns are not the same, and everyone's liquidity preference is not the same.
Just because it doesn't have a stock effect now doesn't mean it won't have a flow effect in the future. A net transfer of debt from a leveraged entity to an less-leveraged entity will tend to increase Aggregate Demand, leading to increases in overall income.
"it has increasingly improved in raising U.S. living standards, by smoothing-out both long-wave and short-term business cycles."
this is not true at all.
all that benefit came from abandoning gold, not the fed.
the fed was a BIG part of this recent blow up because they tried to do just what you describe and failed horribly.
they took an easy bubble to clean up (equity funded productive assets) and tried to "smooth it" and created the hardest bubble to clean up (debt funded non productive assets). they held real rates negative and drove the largest debt accumulation in history while cutting the forex value of the dollar in half.
now they are at it again, trapped by their previous stupidity in a ZIRP policy that is fueling an end game bubble of federal debt and financial system dependency.
the fed did well when it focused on price stability. trying to smooth the business cycle has been an epic failure. this is a disaster.
Morganovich, obviously, you don't even have a rudimentary understanding of central banking, along with the data.
The Fed prevented a deep depression in 1973-82 (similar to the 1930s), and engineered one of the greatest eras of prosperity from 1982-07.
The recession that began in Dec 2007 was caused by the biggest oil shock in U.S. history (bigger than the Arab oil embargo), and it turned out, monetary policy was too restrictive in 2007 (the opposite of your belief).
The Fed doesn't care how many booms and busts take place in asset markets. It cares about sustainable growth (of goods & services) through price stability.
When politicians force banks to lend to people who aren't creditworthy, there's almost nothing the Fed can do, because it doesn't micromanage the economy.
It directs the economy with its crude tools, including dealing with positive and negative shocks, e.g. in recent years: Y2K, 9-11, technology shocks, oil shocks, a massive "creative-destruction" process, etc..
Duh!
"They are subsidizing debtors and screwing savers. That's called government intervention."
Lets see, If I borrow money to go buy a backhoe, and do work with it to repay the money and then save some when the loan is paid off, then I am a big bad subsidized DEBTOR.
But if I do nothing but put my money in the bank, if I am willing to sit onit an next to no payback, then I am an investor and a "job creator" that should never get screwed over.
When politicians force banks to lend to people
Funny, I never met a politician when I was begging the bank for money.
"The Fed doesn't care how many booms and busts take place in asset markets. It cares about sustainable growth (of goods & services) through price stability"...
O.K. peak then why is the printing money?
'The problem with printing money and promising to do so for years ahead of time is that the negative consequences of inflation only happen after a delay. As a result, it's difficult to know if a policy has gone too far until years down the road at times. Unfortunately, if confidence in the dollar is lost, the consequences cannot be easily reversed.'...
Juandos, do you believe inflation will accelerate with so much slack in the economy, e.g. a $1 trillion a year output gap, or what year do you believe the output gap will close and cause economic strain?
Hydra, you didn't have to meet a politician to buy a house with no income, credit, or money.
And you didn't have to meet a politician to live in that house for free for years.
"Juandos, do you believe inflation will accelerate with so much slack in the economy, e.g. a $1 trillion a year output gap, or what year do you believe the output gap will close and cause economic strain?"...
Yes I think there is a chance that there could be inflation but not due to slack in the economy peak...
I think people will actually lose faith in its value...
I'm guessing that domestic debt will be a major reason why...
Juandos, I agree with Taylor's statement below. I've stated before monetary policy is now constrained by the 2% inflation target, and fiscal policy (which is also now constrained by budget deficits) has been offsetting monetary policy.
"We have to get away from all these temporary things--rebates, monetary policy, quantitative easings, we have to get back to a strategy like we had in the 1980s--monetary policy and fiscal policy. I believe that will get the strong growth...There is a lot of evidence that that kind of policy works. Steady as you go, getting the tax rates down and keeping it there, not doing all of these temporary stimulations."
So, I don't believe a QE3 is appropriate.
I think, fiscal policy, or the ineffective and negative policies from the Administration and Congress, forced the Fed into the quantitative easings.
"I've stated before monetary policy is now constrained by the 2% inflation target, and fiscal policy (which is also now constrained by budget deficits) has been offsetting monetary policy"...
Yeah I know you have peak but fiscal policy doesn't really seem to be constrained by budget deficits since there was yet another call to raise the debt limit back in the middle of January...
BTW you might find this Zer0 Hedge article on firearms and Financial Crimes Enforcement Network worth a read...
Its short...
"But if I do nothing but put my money in the bank, if I am willing to sit onit an next to no payback, then I am an investor and a "job creator" that should never get screwed over."
That's right.
Where did the bank get the money to loan you for the backhoe? Did some one put it in their savings account?
Perhaps the Fed allowed the bank to create it out of thin air. If so, there is no new wealth created. Consumption without production doesn't create growth. It's a fairytale Keynesians tell their children at bedtime so they won't stay awake worrying about the economy.
peak-
you really don't get this at all. you seriously could not be more wrong.
"The Fed prevented a deep depression in 1973-82 (similar to the 1930s), and engineered one of the greatest eras of prosperity from 1982-07."
what? what the hell are you babbling about? the 70's were a disaster characterized by very high inflation. remember the "grand malaise"? yeah, that was the 70's.
to break it, the fed had to hike rates and cause a recession. THAT ushered in an era of prosperity. that was inflation targeting, not attempts to control the business cycle.
you are either totally deluded or literally know no history at all.
then you speak of a recession in 2007? what? that didn't happen. there was no recession in 2007.
you seriously just seem to be making up random garbage and tossing it out.
you've already lost this argument about 9 times and now you just seem to have contracted some form of economic tourettes.
no successful central bank anywhere has ever managed to control and soften the business cycle.
as soon as they start targeting growth as a goal, you get bubbles, massive debt accumulation, and deep busts. possibly with hyperinflation as in places like argentina or hungary.
i've actually written papers on this. for you, with your staggering ignorance of fact and theory to try and paint me as the one who does not understand central banking is hilarious.
you need an education, not a bullhorn peak.
also:
let's look at the track record of the activist fed, shall we?
1958's recession looked a great deal like this last one.
identical gdp drop, employment losses of 5.4% vs 6%.
now let's look at recovery.
trough employment to full recovery?
9 months in 1958, 36 and counting now and we are not even half way there.
the two slowest job recoveries since ww2, yup, the last 2, the 2 with the most activist fed.
if that's "steering the business cycle" then the driver needs some serious lessons.
and while you seem to think assets bubbles do not have "real" effects, tell it to the families drowning in debt and buried under upside down mortgages.
read the fed transcripts from 2006-7? they didn't see that coming at all. in fact, they were jubilant about how wonderful things were.
http://www.federalreserve.gov/monetarypolicy/fomchistorical2006.htm
these are the guys you think can see, much less steer a business cycle?
the guys who said:
"Again, I think we are unlikely to see growth being derailed by the housing market, but I do want us to be prepared for some quarter-to-quarter fluctuations,” Bernanke says. He identifies housing as a crucial issue, but adds that he agrees “with most of the commentary that the strong fundamentals support a relatively soft landing in housing."
any fed mission premised on the FOMC having any idea what is going on in the economy, much less what to do about it is doomed to fail, as it has in every country with a CB that's tried it.
the only policy that works is "keep it simple stupid".
you need a truly independent central bank that has one mission: target inflation.
the german bundesbank and the volcker fed were excellent examples of this and got excellent results.
we lost fed independence and simplicity of mission under greenspan. from that we got the longest string of linked bubbles in world history (and i say this as a student of bubbles), the slowest recovery from recessions since ww2, and a decade 2001-11 of subpar growth even if you believe the official numbers that resulted in the most rapid debt accumulation in US history and a wicked housing bust that's going to take a decade to clean up and damn near took the financial system down.
worse, we are now compounding the mistakes again and setting up for the next one.
that's what growth targeting and business cycle management get you.
the fact that you cannot see the enormous pile of evidence right in front of you astounds me peak.
Hydra, you didn't have to meet a politician to buy a house with no income, credit, or money.
=================================
Yeah, and I was never able to get the bank to give me money on those terms, either.
"Funny, I never met a politician when I was begging the bank for money."
that doesn't even make sense hydra.
the CRA forced banks to lend to low income buyers and to do so at prime rates. banks that failed to meet quotas were sued into compliance and threatened with charter revocation.
why would that cause you to "meet a politician"?
you don't meet a politician to get labor day off either, but they made the rule that causes it.
Morganovich, I have degrees in economics, and passed the comp exams in Money & Central Banking and International Trade.
You make so many false assumptions that, of course, your conclusions are wrong.
You can thank the Fed later (after the "white noise" and when relevant factors are included).
Morganovitch,
I have to side with you with regards to Peak. (ABout my only credentials are a lifetime in business/finance and dropping out of LSE after two years when I was forced to take the required courses in Samuelson. KISS therefore really appeals to me.
Question: What, (or where) is "the next one"?
("worse, we are now compounding the mistakes again and setting up for the next one.")
peak-
well then you certainly didn't seem to retain much.
you repeatedly make grandiose and outlandish claims (like the fed doing a great job in the 70's) that are so unsupportable as to be absurd.
such facts as you do provide prove to mostly be just flat out wrong.
you lack any understanding of inflation, the role of assets bubbles in a real economy, how negative real rates drive debt and accommodating fed policy drive moral hazard.
you have provided literally ZERO valid evidence for your outlandish claims, just repetition.
the most successful periods for economic grwoth (the 80's and the pre bubble 90's in the US) were driven by inflation targeting, not business cycle managment. that was volcker.
greenspan wrecked it, gave us a massive bubble and a decade of low/no growth depending on whose inflation numbers you use. that's what biz cycle management gets you. low/no growth and more bubbles. massive debt accumulation that will take a decade to dig out from.
look at the success of the bundedbank. look at how the ECB is failing (as it began to ignore the rules on inflation).
the evidence it literally ALL against you.
there has never been a CB that has been able to mitigate the business cycle, only those that have wrecked economies trying.
sure, you can do it in theory, but in practice it NEVER work. it asks too much of central bankers.
if you think the 70's were a success for the fed, you are seriously so deluded and ignorant of history, i don't even know what to say to you.
they are the case study of what NOT to do. it was so out of control that volcker had to deliberately cause a deep recession to get money back under control. (and in so doing ushered in 20 years of prosperity)
cactus-
at present, we are running up a massive bubble in in federal debt. the fed is buying it and the banks are buying it at high leverage because there is nowhere else to go under ZIRP. they sell all their mortgages immediately to freddy and fannie (90% of the market) who are using tresury money to do it, thus, deficit funding a jump in the money supply (which is scary as that means elected officials can print money and the history of non independent control of money is not good).
with negative real rates, debt is heading back up at the consumer level when it needs to come down.
the whole economy is now hooked on/levered to ZIRP.
thus, the fed has basically tossed the steering wheel out the window.
they cannot raise rates and have painted themselves into a corner.
inflation is much higher than CPI reports, and if the fed keeps this up, it's going to explode and they will not be able to stop it without triggering another housing crisis and massive federal deficits as rates hike. do the math of refunded govvies 200bp higher. it's not pretty.
instead of letting markets and industries find a level, the fed is trying to sting everyhting along, but that's the logic of a junkie. "just one more fix".
markets and the financial sector are not healing.
we're going to see this movie again in the coming years, and it's going to be worse.
getting a whole economy hooked on negative real interest rates is outlandishly harmful, and there is really no easy way to undo it.
this is a terrible corner to be painted into and was totally avoidable, but not anymore.
this creates all manner of opportunities in asset markets, but man, i'd hate to be running a business that required big physical investment and multi year planning right now.
...it's great for borrowers but bad for savers, but the overall net effect on the economy has to be zero.
No. It is worse than that. Mark seems to have forgotten the point made by Mises. When the low interest rates come from newly created money instead of real savings a false signal is given to entrepreneurs who make investments in projects that can never be finished because of a shortage of resources. Bottlenecks appear all along the production chain as shortages of qualified individuals, raw materials, and specialty equipment drive up costs and make the economic calculations used to justify the projects invalid.
The best analogy comes from Mises who, in his book Human Action, Mises compares an economy that is experiencing an artificial credit expansion to a master builder who is hired to build a house. The problem is that the master builder is given the wrong information and there aren't enough bricks to complete the project. This is identical to what happens when rates are artificially low due to a credit expansion rather than a higher savings rate. Obviously the sooner the master build and entrepreneurs discover the error the better. The longer that scarce resources are diverted to unsustainable project the more of them will be wasted.
Low interest rates that are the result of monetary stimulus by central banks encourages entrepreneurs to fund projects that make no sense and are not economic. (See the shale gas boom for a perfect example.) In the end reality will intervene and all those who chose to ignore it will get exactly what they deserve.
Post a Comment
<< Home