The negative unnatural rate of interest

David Andolfatto points out that US five-year real interest rates are now negative. Nick Rowe discusses the possibility that the so-called “natural” real interest rate could be negative, referring us to Frances Woolley’s discussion of the drag demographics might exert on real returns. (I’ll respond to Rowe and Woolley specifically in a little appendix to this post, but I want to start more generally.)

When we observe negative real rates, they are often attributed to something abnormal. Perhaps it is “depression economics” which has driven interest rates underground, or, as Andolfatto rather charitably considers, a misguided tax and regulatory regime.

I think this aberrationist view is quite wrong. I don’t think you can make sense of the last decade without understanding that the so-called real interest rate has been trying to fall through zero for years. Only tireless innovation by the men and women of Wall Street prevented negative rates long before the traumas of 2008. A deep cause of the financial crisis was a simple expectation: That lenders ought to earn a “decent” real, risk-free yield even while a variety of trends — skyrocketing incomes for the 0.1%, the professionalization of investing, leverage-induced risk aversion, China — were creating Ben Bernanke’s famous savings glut. The market response to a global savings glut ought to have been sharply negative real interest rates for low risk savers. But as a society, we resent and resist that capitalist outcome. It is well and good for markets to drive the price of undifferentiated labor asymptotically towards zero. But God forbid that “savers” not be paid for supplying a factor that turns out not to be scarce. Instead, an alphabet soup of financial innovations was conjured to transform bad lending into demand for low risk money, and thereby support its price. Now those innovations have failed, and the fact of negative real interest rates is plainly before us. But we are still, desperately, resisting it.

There is no such thing as a “natural” anything in economics. Economic behavior is human artifact and artifice. When economists call anything “natural” — the natural rate of interest, or of unemployment — you should recall Joan Robinson’s famous quip:

The purpose of studying economics is not to acquire a set of ready-made answers to economic questions, but to learn how to avoid being deceived by economists.

The word natural is always used to hide the constructed context in which an outcome occurs, to disguise human institutions as immutable facts and thereby exclude them from controversy. What was the “natural” real rate of interest in 2006? According to TIPS yields, 5-year real interest rates were about 2.5%. But those rates were observed under the institutional context of a structured finance boom which transformed a lot of loose credit into allegedly risk-free lending demand. Was that rate “artificial” then? Today those same rates are -1%. Is this “natural”?

Ultimately, the words are meaningless. The level of interest rates that prevails in the market will be the result of a mix of institutional choices and economic circumstances. For now, we are in a bit of a pickle, because if we are “conservative” — if we stick with familiar institutional arrangements — we end up with outcomes that are violently disagreeable to our cultural prejudices. In social terms, a negative real rate of interest means that prudence is a cost, not a virtue. Caution is a greater vice than spending what you have and hoping for the best. Savers must be punished for their thrift.

In a sense, this is perfectly “natural”. Current spenders assume risks of future deprivation that current savers are unwilling to accept. Why shouldn’t spenders be paid to bear that burden? Transforming present resources into future wealth is uncertain and difficult work. Savers’ expectation of a positive real interest rate amounts to a demand for time travel cheaper-than-free. Why should such unreason be accommodated? The sense of entitlement carried by savers in our society would put any welfare queen to shame.

So, are negative real rates the way to go? Should we just tell savers exactly what we tell laborers? The price of the factor you supply has fallen. This is capitalism, quit whining and deal with it!

Maybe. But maybe not. In theory, a sufficiently negative rate of interest could restore a full employment, noninflationary equilibrium. I think that’s the market monetarist solution.

But it might not work out so well. Debt is a particular and problematic institution. If savers must pay borrowers for the privilege of carrying forward wealth, it matters in the real world whom they pay and how well those people do their jobs. Borrowers can always default, even after they have contracted loans at negative interest rates. If we try to restrict lending to only very creditworthy borrowers, we’ll find that real interest rates have to fall sharply negative to induce spending by people who would otherwise be inclined to save. If we allow more liberal credit standards, we’ll observe higher notional interest rates, but only as prelude to widespread defaults. We’ve seen that movie and it isn’t entertaining.

Ideally, a special class of borrowers, entrepreneurs, would invest borrowed funds in projects precisely designed to meet savers’ future consumption requirements. But in a sufficiently unequal society, the marginal saver may have vastly more wealth than is necessary to endow her own future consumption (including proximate bequests). There may be lots of ways to turn today’s resources into “future wealth” in a general sense, but goods and services in excess of what today’s lenders will be able to consume or reinvest in future periods are worthless to the people who set the price of money. The marginal productivity of investment may remain high technologically even as its marginal productivity to existing lenders turns sharply negative. (More accurately, both the marginal present and future dollar may have no consumption value to a lender, but in a accounting terms the value of a present dollar is fixed, while the relative value of a future dollar is flexible as long as there is inflation or some other means of circumventing the nominal zero bound.) It is the marginal productivity of investment to existing lenders that sets a floor beneath market interest rates. If we posit satiable consumption and sufficient inequality, market interest rates can approach -100% even while technologically fruitful projects go unfunded, because the projects would be of benefit only to people with little to offer the marginal lender.

The horizons of the future are broad, and lenders can invest in speculative future consumption like traveling to outer space rather than throw away money on nonproductive, low risk projects. People who seem now to have little to offer potential lenders might come up with new goods and services that savers will desire in the future. But debt is not the right instrument to fund speculative outlays, most of which will not be repaid. It would be an answer to the problem of negative real interest rates, if today’s risk-averse lenders would finance an exuberance of uncertain ventures. The majority would fail, but rare successes might be more valuable to lenders than certain negative returns on risk-free loans. This would require big changes on the part of current lenders and the institutions through which their funds are channeled. Rather than regulate a risk-free interest rate or scalar cost of capital, we’d need to find ways to encourage exploration, idiosyncratic judgment calls, and equity finance. It is foolish to presume that negative real interest rates alone will inspire a golden age of speculative investing.

If we rely too heavily on negative real interest rates to spur the economic activity, my prediction is that we will see a lot of false dawns and social strife. Savers of modest means are harmed and outraged by low market interest rates and use the political system to try to raise them. Regardless of macro models or market outcomes, we have a cultural bias against negative real rates. We hold prudence dearer than profligacy. We don’t work to teach our children to spend their allowances. We work to teach them to save. More people are willing to spend incautiously than are able to husband savings carefully. If we were to cast away the norm that saving is praiseworthy and spending decadent, rather than getting contingent, market-price-regulated spending/savings behavior, we might end up with a culture incapable of saving. We want most people to face a positive real interest rate, not because that is the price that equilibrates a market, but because positive real interest rates reward behavior we wish to uphold as a virtuous.

Our current negative real interest rates are not an aberration, but a product of longstanding and continuing trends. However, since neither those trends nor the negative rates are conducive a decent and prosperous society, it is foolish to refer to them as “natural”. We need to alter the circumstances under which full-employment requires that lenders pay borrowers to spend. We need to reshape “nature” until the new natural rate is positive. We need to understand the circumstances that lead investors to accept negative real returns rather than finance new ventures. We have to think about issues like income and wealth inequality, the structure of labor markets, institutional investor incentives, financial risk-aversion and deleveraging. We need to transform existing institutions, or invent new ones.


Appendix: Persistently negative real interest rates might have many causes. Nick Rowe and Frances Woolley tell stories that are essentially technological: Suppose we can bake a lot of bread today, but no so much bread thirty years from now. But we’ll need bread thirty years from now, and bread cannot be stored. Then no matter what we do with our surplus of bread, no matter who consumes and who saves, we’ll end up with a shortfall of bread in the future. Whatever we try to save, we’ll not recover. Institutional innovation can’t help us out very much, other than to arrange an allocation future pain.

But technological incapacity is not the only possible cause of negative real interest rates, nor I think the relevant cause at the moment. Unequal distribution can drive interest rates negative as well.

Suppose that land to grow wheat is scarce but labor to farm and bake it into bread is abundant. Land-owners and laborers are paid their marginal products, which at the limits of land scarcity and labor abundance means that land-owners receive approximately all the bread and laborers receive approximately none of it. Suppose that people prefer a bite of bread now to a bite of bread later, but that in each period, no individual can eat more than twice what their share of total output would be if total output were evenly divided. Land owners at full gluttony can eat no more than a small fraction of potential output, and they cannot store the surplus. Technology and population are stable, but land owners face negative real interest rate. There are laborers who would be glad to borrow the surplus bread, but they have no capacity to repay. The real interest rate on the bread lending market would be -100%.

In this economy, if a government were to tax land owners in every period and redistribute total production by lottery, so that each individual receives a per capita share of production in expectation, but variable amounts in practice, a wheat lending market would arise in which people receiving lower-than-average shares borrow from lend to people receiving greater than average shares at a positive real interest rate determined by agents’ time preference. Technology and population remain perfectly stable, but positive real interest rates arise as a function of institutional choices.

To be clear, I don’t think that the bread economy I’ve described is a remotely useful model of our actual economy, or that stochastically equal redistribution is remotely desirable public policy. But in response to Rowe and Woolley, while it is certainly true that technological limits can force real interest rates negative, it does not follow that observed negative real interest rates reflect technological limits. Observed interest rates are a function of distributions and institutions as well as technology, and it is perfectly possible that institutional innovation could cure observed negative real rates, if in fact we want them to be cured.

Update History:

  • 8-Nov-2011, 2:25 p.m. EST: Changed “loose lending” to “loose credit” to avoid repetition of the world “lending”.
  • 11-Nov-2011, 1:35 a.m. EST: With respect to who borrows from whom. See scratch-and-update in second to last paragraph. Many thanks to commenter ferd for pointing out the error.
 
 

94 Responses to “The negative unnatural rate of interest”

  1. Dammit Steve, I was going to write something about this and you have expressed it better than I ever could have hoped to. This has made my lunch break!
    Cheers,
    Richard.

  2. tales writes:

    The term “equilibrium” might join the word “natural” in your dustbin. Seems like some countries have experienced negative real rates for extended periods, especially those lacking social retirement safety nets that reduce the need to save.

    Appendix: Sounds like an easy way to get rid of our wheat bellies.

  3. Bob Dobalina writes:

    Sorry for a minor derail, but would SRW or a kindly reader point me to the earlier SRW piece(s) that essentially argued that savers weren’t particularly virtuous, and are in fact subsidy recipients? I can find the article in the NY Observer (“The Evils of Saving”) but I could have sworn there was another, meatier article somewhere on Interfluidity.

  4. JW Mason writes:

    Fascinating stuff. Reminds me of Keynes:

    The most stable, and least easily shifted, element in our contemporary economy has been hitherto, and may prove to be in the future, the minimum rate of interest acceptable to the generality of wealthowners. (Cf. the nineteenth-century saying quoted by Bagehot, that “John Bull can stand many things, but he cannot stand 2 percent.”) If a tolerable level of employment requires a rate of interest much below the average rates which ruled in the nineteenth century, it is most doubtful whether it can be achieved merely by manipulating the quantity of money.

    And

    When the accumulation of wealth is no longer of high social importance, there will be great changes in the code of morals. We shall be able to rid ourselves of many of the pseudo-moral principles which have hag-ridden us for two hundred years, by which we have exalted some of the most distasteful of human qualities into the position of the highest virtues. … The love of money as a possession … will be recognised for what it is, a somewhat disgusting morbidity, one of those semicriminal, semi-pathological propensities which one hands over with a shudder to the specialists in mental disease. …

    We shall inquire more curiously than is safe to-day into the true character of this “purposiveness” … [which] means that we are more concerned with the remote future results of our actions than with their own quality or their immediate effects on our own environment. The “purposive” man is always trying to secure a spurious and delusive immortality for his acts by pushing his interest in them forward into time. He does not love his cat, but his cat’s kittens; nor, in truth, the kittens, but only the kittens’ kittens, and so on forward forever to the end of cat-dom. …

    I see us free, therefore, to return to some of the most sure and certain principles of religion and traditional virtue-that avarice is a vice, that the exaction of usury is a misdemeanour, and the love of money is detestable, that those walk most truly in the paths of virtue and sane wisdom who take least thought for the morrow. We shall once more value ends above means and prefer the good to the useful. We shall honour those who can teach us how to pluck the hour and the day virtuously and well, the delightful people who are capable of taking direct enjoyment in things, the lilies of the field who toil not, neither do they spin.

  5. [...] Return Of Secular Stagnation Steve Randy Waldman has a characteristically interesting post on interest rates. He starts from the observation that real rates are now negative — lenders [...]

  6. JW Mason writes:

    One thing I wonder about is this:

    What was the “natural” real rate of interest in 2006? According to TIPS yields, 5-year real interest rates were about 2.5%. But those rates were observed under the institutional context of a structured finance boom which transformed a lot of loose lending into allegedly risk-free lending demand.

    The conventional view would be that structured finance should push market interest rates down, not up, by increasing the apparent liquidity of various assets. Certainly it would be more Keynesian, I think, too say that the “natural” rate of interest (i.e. the hypothetical rate that would exist in a world without liquidity constraints) has been very low or perhaps negative for decades, and that it is the scarcity of liquidity that produces market rates above that. Securitization (etc.) helps push the market rate down toward the “natural” rate, just not far enough (or reliably enough.) Maybe I’m misunderstanding you or just confused, but I’m having trouble seeing the story in which the absence of financial innovation would have resulted in a lower TIPS yield in 2006.

  7. vlade writes:

    Steve, you’d write more often.

  8. [...] Today’s influidity post, a discussion on whether the “natural” level of real interests rates can be negative could be interpreted as academic arcana at first glance. But it’s not, or at least might not be.  Mr Waldman writes: [...]

  9. Yancey Ward writes:

    Aren’t we just trying to substitute a negative interest rate for the aborting the losses inherent in any saving/investment process.

  10. JKH writes:

    J.W. Mason,

    Structured finance allowed for leveraging up of super senior yields – which were rated close to risk free?

  11. [...] Steve Randy Waldman, “We want most people to face a positive real interest rate, not because that is the price that equilibrates a market, but because positive real interest rates reward behavior we wish to uphold as virtuous.”  (Interfluidity) [...]

  12. Peter K. writes:

    Very interesting post and points in the direction of a “Grand Unified Theory” with which I’ve been wrestling. I tend to agree with Krugman’s response to your post. The point being with both of your posts is that even if we get back to full employment and bring the deficit down via higher taxes and further reform of the health care sector (i.e. move our country towards international norms), we will have these long-term secular issues.

    Conservatives like Steve Forbes and Austrians will point to Greenspan keeping rates low as the original sin, but he was doing so in response to a weak economy. They disregard Bernanke’s Global Savings Glut and the trade deficit. As a counterfactual, what would have happened had Forbes been Fed Chair and interest rates had been higher? No housing boom, but probable a slump because the extension of credit was making up for lost demand? Along with Greenspan’s low rates you had deficit spending by Bush, via tax cuts, two wars, and Medicare Part D. I would argue not the most productive way for the government to run up debt.

    With the housing market in the dumps (and we don’t want another bubble there) and exports and business investment up again, we need government deficits to make up the difference (but Republicans are blocking it.)

    Krugman argues the savings glut is originating abroad because the Chinese are manipulating their currency to keep their export sector humming and their economy growing. This is driving down the cost of U.S. debt. They are making insurance payments via negative rate loans to the U.S. which also is keeping our consumer market alive so they have someone to export to. Instead of paying those negative rates to the US, they could be paying their workers more so they could consume what they’re producing (but then the one party state might not last). A rising yuan would do this, but then it would make the U.S.’s exports more competitive.

    China is fighting inflation by reducing credit, when they could just let the yuan rise (I guess they have been somewhat.)

    http://www.nytimes.com/2011/11/08/business/global/chinas-businesses-find-loans-are-harder-to-get.html?_r=1&scp=1&sq=china%20inflation&st=cse

  13. [...] Wall Street Turned Income Inequality Into GoldPosted on November 8, 2011 by Militant1 in MotherJonesSteve Randy Waldman has a post today which, to simplify a bit, suggests that we’re seeing negative real interest [...]

  14. [...] Interfluidity and also Paul Krugman on stagnationist ideas and negative real rates of return; Krugman gives an [...]

  15. [...] Steve Randy Waldman, “We want most people to face a positive real interest rate, not because that is the price that equilibrates a market, but because positive real interest rates reward behavior we wish to uphold as virtuous.”  (Interfluidity) [...]

  16. RueTheDay writes:

    The historical meaning of the term “natural rate of interest” was that it was the hypothetical rate of interest that reflected pure time preference in the absence of money and credit (i.e., a barter economy). It was the subject of a very intense debate between Hayek and Sraffa, a debate which Sraffa won hands down and which ultimately led to Hayek ceasing to write on pure economics entirely. In a nutshell, Sraffa’s argument was that in an n-commodity economy, there would logically have to be n natural rates of interest (reflecting the time preference relative to each commodity, e.g., 6 spears today in exchange for 7 spears tomorrow) and thus the concept of a single natural rate of interest unsullied by the existence of money was impossible. This sounds simple and obvious, but the implications are quite profound.

  17. JKH writes:

    SRW,

    Excellent.

    I find it difficult to separate the problem of negative real rates from that of the structural situation at the zero nominal bound. It’s hard to imagine a similar discussion if nominal rates were 5 per cent and inflation were 8 per cent. The Fed would just increase rates. In general, the degree to which negative real rates would be a problem in positive nominal rate territory would be mitigated by the likelihood of the Fed’s option/obligation to respond to the accompanying inflation rates by increasing real rates through conventional nominal tightening.

    Conversely, at the zero bound, the degree to which zero nominal rates are a problem is a reflection of monetary policy failure to that point, which is exacerbated additionally to the degree that the Fed is powerless to decrease real rates further by conventional nominal rate easing, for a given rate of inflation.

    So it seems to me you’re mostly discussing a zero bound specific structural problem, and by implication the policy to deal with it.

    At the end of the day, the Fed sets the short term real risk free rate, subject to a lower bound for that real rate equal to the sign-inverted inflation rate (i.e. the deflation rate), given that inflation rate. In conventional monetary policy terms, the Fed runs out of room in both nominal and real terms at the lower real bound, for a given rate of inflation.

    But to the degree that the Fed can influence the future inflation rate through monetary policy, it can target the inflation rate and the real rate, and move real rates lower from there. For example, NGDP targeters suggest that such influence is possible via aggressive QE. Others simply want to target higher inflation via the same QE.

    In this context, whatever the effectiveness of QE specifically, I think you’re saying that monetary policy is a blunt instrument, in this case if not more generally. It may force what turn out to be unintended/undesired consequences in terms of capital allocation and risk. I think you’re saying that such a policy to get traction might require a material drop in the prevailing negative real rate, to the point where related investment decisions and credit criteria might be forthcoming but highly risky.

    Alternatively, fiscal expansion could increase the supply of private sector saving, thereby mitigating downward pressure on the real interest rate and possibility avoiding the type of dislocation that you suggest might be result in the case of monetary policy. It could increase saving without necessarily putting the type of pressure on new investment credit allocation that you identify as a risk with monetary policy.

    I think you’re saying we need better fundamental investment policy to get out of the trap of resorting to goosing real rate negativity through monetary policy. Fundamental investment policy reform makes sense. But expansionary fiscal policy may be sympathetic in the interlude.

  18. Nick Rowe writes:

    Steve: On the appendix. Technology is a *necessary* condition for negative real interest rates, but not sufficient. Any good that can be costlessly stored cannot have a negative own rate of interest. And if that good is being stored in equilibrium, then the own rate of interest on that good, net of transactions costs, must be zero. If the landlords in your story could costlessly store bread, the real interest rate on bread would be zero. (The landlords in your Ricardo/Malthus story seem to be satiated, by the way. Unless they expect not to be satiated in future, they would give their excess bread to charity in return for a nice smile and tip of the hat from the grateful peasantry. Better than letting it mould.)

    I like to think in terms of the Irving Fisher diagram. There’s an intertemporal PPF, and an intertemporal indifference map. The equilibrium (gross) real rate of interest is the slope of the budget line that is tangent to both at the point where the PPF kisses the highest I-curve. (This can be extended to multiple time periods and multiple people if you add dimensions, in which case it becomes a diagrammatic representation of the A-D theory of the rate of interest.) If there is costless storage of a particular good, the slope of the PPF in that particular dimension cannot be less than -1.

    In a world of negative real interest rates, capitalist/saver/rentiers would slowly impoverish themselves. Their income would be negative. The Marxian rate of surplus value would be negative. Maybe Sraffians and Kaleckians would be complaining about workers exploiting capitalists?

    And land would have a value exceeding infinity (pace mathematicians), because the present value of land rents would not converge to any finite number in the limit as time goes to infinity. My old high school economics teacher once said that the real rate of interest could never drop to 0% (he implicitly meant forever) because if it were then it would be profitable to bulldoze the Rocky mountains flat and convert them into productive farmland that paid rents forever. (This was before the days of environmentalism!)

    A world with negative real interest rates (forever) is a very strange place. Flows can trade for flows, and stocks can trade for stocks, but stocks and flows cannot be traded for each other. They are incommensurate.

    Way back, I wrote a post on this: http://worthwhile.typepad.com/worthwhile_canadian_initi/2010/01/infinite-equilibrium-asset-prices.html

  19. Nick Rowe writes:

    BTW: “natural”, as in natural rate of interest and natural rate of unemployment, doesn’t mean policy can’t change it. It means *monetary* policy can’t change it. A “natural rate model” is a model in which certain real variables have a long run equilibrium independent of monetary policy. The natural rate of interest is a theoretical concept that is only defined in such a model.

  20. jcb writes:

    “Savers’ expectation of a positive real interest rate amounts to a demand for time travel cheaper-than-free. Why should such unreason be accommodated? The sense of entitlement carried by savers in our society would put any welfare queen to shame.”

    Take that, Adam Smith!

  21. tylerh writes:

    The “natural rate of interest” is NOT a ” human artifact and artifice”, but a direct consequence of the Second Law of Thermodynamics.

    Directly put: the future is uncertain, so payment tomorrow SHOULD be generally be worth something different than payment today.

    The way a “natural rate of interest” is captured in any given society is a ” human artifact and artifice”: both Fed Funds rate and the black market rate for Zimbabwean dollars are mediated through human volition.

    One should never conflate these two very different applications of the concept of “interest rate.”

  22. [...] Negative interest rates are [...]

  23. [...] Randy Waldamn has an interesting post on negative rates of return. Krugman relates it to China which brings me around to an idea that I [...]

  24. Andy Harless writes:

    We want most people to face a positive real interest rate, not because that is the price that equilibrates a market, but because positive real interest rates reward behavior we wish to uphold as a virtuous.

    This begs the question, “Why do we wish to uphold it as virtuous?” I would suggest that a large part of the answer is that it has been optimal in the past. That is, typically, historically, people have had a greater tendency to be too impatient rather than too patient, so it has been advantageous to encourage patience rather than encouraging impatience. The ethic, I would argue, exists primarily because it was, at one time, useful. It may (who knows?) be useful in the future. But today, in aggregate at least, it is not useful. I don’t see any underlying moral basis for this ethic apart from its former usefulness. (If one wants to go into morality for morality’s sake, there are plenty of passages from, at least, the Christian Gospels to suggest that saving is not necessarily a morally preferred behavior.) Why should we continue to honor an ethic that is fundamentally utilitarian in origin after its utility has run out?

  25. Steve Roth writes:

    Congrats on the Krugman link. I see two problems with his thinking:

    1. In that post, at least, he ignores the effect of private lending on AD. The rate at which funds flow in/out of the pool of financial holdings through the real economy is certainly affected by many things, but a darned important one is the growth/shrinkage of that pool due to private debt issuance and retirement.

    2. He has many times stated that purchases by the well-off are sufficient to maintain the aggregate demand necessary to support productive enterprises (which in turn hire people). I heard him say that very thing in answer to a question at a book-tour lecture. He may be right, but my somewhat well-studied intuition says he’s not. He thinks he proves his point by showing a picture of the savings rate, but what I wanted to see as proof was the consumption amounts at different wealth levels.

    Great line by skeptonomist in Krugman comments: “A theory of savings/investment that doesn’t recognize who has the money is pretty useless.”

  26. mattski writes:

    Great line by skeptonomist in Krugman comments: “A theory of savings/investment that doesn’t recognize who has the money is pretty useless.”

    Yeah. That puzzles me too.

  27. Anton writes:

    You are right that there is nothing” natural” about economics but then again you base your argument on pre-conceived views on what is “right” or virtuous as you say (saving) and what is not ( spending). Economics is not a hard science, surely, but it is also not religion either and therefore we should not be using moralistic views to prove what “ought” to have happened in economics. Economics is a social system, so we need to understand how the system works, get rid of years of theoretical dogma, and make conclusions based as much as possible on experimental reality. We need to understand that what matters for society is not the amount of saving or spending but the availability of resources in terms of labor, productivity of labor (technology) and natural resources. The capital in a fiat monetary system which the USA operates at the moment is not a constraint for progress – the interest rate is only a means of redistributing the resources in the most efficient way. In that sense, you can sense that we have a redistribution issue. From your point of view saving is morally right and borrowing is not, but what if you look at it from the point of view of a saver who by saving takes (someone else’s) income out of the system (because the savers chooses not to consume 100%of his/herincome)?

  28. Anton writes:

    Apologies, i should have started my comment above with the sentence that I complete agree with Andy Harless’ comment from earlier on not mixing morals with economics!

  29. Doc Merlin writes:

    Or the interest rate could be completely artificial instead, and a result of price fixing by the fed?

  30. Steve Roth writes:

    “Savers’ expectation of a positive real interest rate amounts to a demand for time travel cheaper-than-free. Why should such unreason be accommodated?”

    Agreed. Stop printing t bills, just print dollar bills.

  31. Doly writes:

    People here are talking about the land of negative interest rates as a very strange place that nobody has seen before, but the average poor person lives there every day. When there is positive inflation (most of the time), the real interest rate for saving cash in a bank account is negative. Beyond a certain threshold, it makes sense to invest the money in an interest-bearing savings account or bonds, but below that threshold, the interest doesn’t pay for the banking fees and/or the loss of liquidity.

    One of the commenters says that the land of negative interest rates is a strange place. Only from the point of view of somebody who isn’t poor. Marx was quite observant when he noted that the conventions about who owns things are nothing but conventions, and often run against our instincts. For poor people, the things that their instincts tell them they own (their home, the product of their labour) behave in very strange ways from the point of view of a capitalist. From a certain point of view, you could say that poor people pay for the privilege of owning land, and are regularly exploited by the managers that work for them: they take away the product of their labour and pay them less than its market value.

    In the real world, poor people live in the land of negative interest rates, that encourages them to spend whatever money they have, while wealthier people are encouraged to save. Wouldn’t it make more sense if it was the other way around? Prudence is most useful to poor people, while wealthier people should be encouraged to spend. Such a state of things would naturally push towards reducing financial inequality. This would effectively be the opposite of a capitalist system.

    Interestingly, Japan, that for quite a while has had interest rates close to zero, and with a capitalist system that is recent enough its inhabitants don’t have too many prejudices about how the system should work, is a country with rather low income inequality.

  32. Dan Kervick writes:

    … Regardless of macro models or market outcomes, we have a cultural bias against negative real rates. We hold prudence dearer than profligacy. We don’t work to teach our children to spend their allowances. We work to teach them to save. More people are willing to spend incautiously than are able to husband savings carefully. If we were to cast away the norm that saving is praiseworthy and spending decadent, rather than getting contingent, market-price-regulated spending/savings behavior, we might end up with a culture incapable of saving. We want most people to face a positive real interest rate, not because that is the price that equilibrates a market, but because positive real interest rates reward behavior we wish to uphold as a virtuous.

    I’m not sure that the cultural norm valuing prudence over profligacy, or saving over spending, can explain an aversion to negative interest rates. Even in a situation of negative real rates, wouldn’t saving one’s surplus and exchanging it at a negative rate still dominate over the gluttonous consumption of it? One might not receive the contract one would have preferred for the exchange of one’s current surplus for a future delivery of some good, but even that disappointing return is better than no return at all.

    Suppose I and my neighbor possess apple orchards that only produce apples in even years. If I consumed 1000 harvested apples this year, up to satiety, and then exchange 1000 surplus apples for a promise of 900 apples to be delivered to me in the next harvest season, when my trees will be barren, that is surely better than my neighbor who consumed all 2000 of his apples this year, the last 1000 at rapidly diminishing marginal value past the point of satiety, and who as a result has no surplus to exchange at even a negative rate of interest. I will at least have a 900 apple income next year, and will only have to acquire 100 more to reach satiety, while my neighbor will have no apple income at all, and will have to buy or borrow 1000 apples. So it’s not as though my neighbor’s profligacy has been rewarded.

    The aversion to negative rates seems to have more to do with some sense of cosmic justice, according to which savers should not just do better than profligates in relational terms, but should be rewarded by the gods by in absolute terms by growing more wealthy each year. Being hit with a negative rate of interest is like being hit with whirlwinds, scabs, locusts or boils. It doesn’t seem fair. But the unfairness doesn’t lie in the profligate doing better. The profligate is like the person who is also attacked by scabs, but didn’t even save any anti-itch ointment.

    I also find it confusing to think about the questions of quantity vs. value in connection with negative interest rates. Suppose I have only two options for some surplus quantity Q of apples that I currently possess: I can exchange them now for a certain lesser quantity Q’ of apples to be delivered one year from now; or I can keep the whole quantity Q of apples I have now and do whatever I can with them (juggle them; throw them at trees for fun, etc.) If I am willing to make the exchange at all, that must be because the value for me now of receiving Q’ apples next year exceeds the value for me now of having Q apples now. Otherwise I would just hold onto my crummy extra apples. Negative rates of interest only make sense conceptually if we are considering the same types of goods, whose quantities are commensurable, and are measuring those rates of return in terms of quantity, not value.

  33. anon writes:

    “Maybe. But maybe not. In theory, a sufficiently negative rate of interest could restore a full employment, noninflationary equilibrium. I think that’s the market monetarist solution.

    But it might not work out so well. Debt is a particular and problematic institution. If savers must pay borrowers for the privilege of carrying forward wealth, it matters in the real world whom they pay and how well those people do their jobs. Borrowers can always default, even after they have contracted loans at negative interest rates. …

    Aren’t you neglecting rational expectations and portfolio choice here? If negative real rates make borrowers more likely to default, then this ipso facto makes ‘debt’ more like equity and pushes rates higher, except for the very safest kinds of debt (which is independently useful as a medium of exchange, ala money). Moreover, portfolio choice implies that risky equity will always trade at a discount compared to debt, so negative real rates on debt can usefully incent equity investors. Setting a floor on real rates would amount to a distortion placing equity borrowers at a disadvantage.

  34. rogue writes:

    “Land owners at full gluttony can eat no more than a small fraction of potential output, and they cannot store the surplus. Technology and population are stable, but land owners face negative real interest rate. There are laborers who would be glad to borrow the surplus bread, but they have no capacity to repay. The real interest rate on the bread lending market would be -100%.’

    SRW, this observation seems too close to Marx’s prediction that capitalists capturing more of the surplus value will eventually experience falling profit, while workers become more exploited. It seems the world has been in this place before, and we need to save capitalism from destroying itself.

  35. JKH writes:

    Don’t see why Krugman says you missed the trade deficit/China effect.

  36. Michael Chini writes:

    1. As a saver I think this blog post is demonstrative of failed economic thinking. Savings “entitlement” is non existent. But the flip side is that should we embrace a monetary system that BYPASSES savings of money and instead places newly printed money in FRONT these will be at $50 loaes of bread in no time.

    2. Savings forms the VERY BASIS OF CAPITAL FORMATION. Since you have all forgotten economics 101, let us refresh. Without capital, there can be no expansion of credit.

    3. Money has always been irrelevant but what is NOT irrelevant is forcing people into certain paths of action through monetary policy, a mentality which I find Roth disgusting and disturbing.

    4. Finally, encouraging savings rewards frugality which irks many economists because hey….is it not better to force people to create jobs and grow economies? Of course it isn’t because we will see populations grow rapidly undr such a pretense along with insane spikes in commodities pricing.

    It seems the crowd here fancies itself as much smarter than those failed groups of money printers in the past. Well, you are actually much dumber for not having lerned the folly of the past and presume to be able to repeat it. The penalty of deth for debasement of currency still stands in the coinage act and with good reason. You print and you steal people’s decision making process along with their financial freedom and it is THIS ASPECT of negative real rates that should have the entire FOMC board in jail or worse.

  37. Peter K. writes:

    “2. He has many times stated that purchases by the well-off are sufficient to maintain the aggregate demand necessary to support productive enterprises (which in turn hire people). I heard him say that very thing in answer to a question at a book-tour lecture. He may be right, but my somewhat well-studied intuition says he’s not. He thinks he proves his point by showing a picture of the savings rate, but what I wanted to see as proof was the consumption amounts at different wealth levels. ”

    Yes Krugman has said this before and I don’t understand why people disagree with him. My intuition says he’s right. Economics isn’t a morality play. I do think that having things tilted to towards the well-off is conducive to speculative bubble-blowing. Less income inequality would be good for stability.

    Regarding China, as I understand it Waldman was saying the Global Savings Glut was calling problems and Krugman mentioned a solution would be for the Chinese to stop manipulating their currency. If they paid their workers instead of diverting it into savings, we’d have less of a glut.

  38. Michael Chini writes:

    And I must not let pass this inane comment:

    “Savers’ expectation of a positive real interest rate amounts to a demand for time travel cheaper-than-free. Why should such unreason be accommodated? The sense of entitlement carried by savers in our society would put any welfare queen to shame.”

    Um, no. Savers WORKED for their money. Welfare queens did nothing.

    At the very least, presevtion of monetary purchasing power should be paramount. If people choose not to spend, then so be it. I’m fine with an end to usury but I am NOT FINE with having to work for somthing that depreciates in an instant.

    Might as well live off grid at that point.

  39. Michael Chini writes:

    Peter k-

    The best way to cure a savings glut is to lower prices! It ‘ain’t rocket science. Hell, it ‘ain’t science at all.

  40. vlade writes:

    Actually, thinking about it for a while, I’m not sure whether the problem is with negative rates as such.
    The reason why I say that is that it takes only a very small probability of default to turn positive rates to negative (as in overall return on investment).

    That takes me to what the bigger problem might be – the insistence on treating debt (including bank deposits) as if there was no probability of default.
    Of course, the economy will work regardless of this, and if the real investment returns are nil or negative (on average), it means that removing probability of default results in zero or negative risk free real interest rate.

    Call it a law of conservation of investment ;)

  41. rtah100 writes:

    Minor question: what do you mean by “scalar cost of capital”?

  42. Nick Rowe writes:

    Michael Chini: “At the very least, presevtion of monetary purchasing power should be paramount. If people choose not to spend, then so be it. I’m fine with an end to usury but I am NOT FINE with having to work for somthing that depreciates in an instant.”

    Ironically, Michael is, if not proving, at least providing an example to illustrate the validity Steve’s point about the sense of entitlement.

    Michael: but the problem is, whose responsibility is it to ensure the preservation of the purchasing power of your savings? Suppose you lived in a world where nobody wanted to borrow from you at any non-negative real interest rate? Would you say they have a *duty* to borrow from you, even if they don’t want to? Does the government have a *duty* to borrow from you, even if current and future taxpayers might not want to borrow from you?

    Some goods (like new fridges) have a positive price; and others (old fridges) have a negative price. You have to pay people to take them off your hands. Maybe you should pay people to take your savings off your hands, if you can’t find any use for them yourself, and nobody else wants to pay you for them. Just like an old fridge.

    (The question of whether it might be *rational* for the government/taxpayers to *want* to borrow at 0% is a separate question.)

  43. Nick Rowe writes:

    JKH: “Don’t see why Krugman says you missed the trade deficit/China effect.”

    Yep. I think the key question is whether the unit of analysis here is one country (the US), or the world. If Steve is talking about the whole world, then the China/US dimension isn’t relevant. China (like a lot of other countries) is just one of many savers. There might be a particular US dimension to this problem though, in that having savings in the US is like an insurance policy for many people outside the US. Brad DeLong did a good post on this about a week ago. And that insurance motive creates negative US yield premium (ugh! there must be a better way to say that).

  44. Nick Rowe writes:

    MMTers (in this case, Functional Finance people): actually, there’s an argument you should be making here against Steve (and me). I’m going to make it for you.

    Provided the real growth rate of the economy is positive (forever), if the real interest rate is zero, and so less than the growth rate, the economy is dynamically inefficient, and the long run government budget constraint is undefined. The government can and presumably should borrow whatever it takes to push the real interest rate up to the real growth rate.

    It’s only when the real interest rate is only temporarily below the growth rate you can’t necessarily do this.

  45. Dan Kervick writes:

    Um, no. Savers WORKED for their money. Welfare queens did nothing.

    This seems to miss the point. Even if we say – for the sake of argument – that savers are entitled to keep everything they have earned, it doesn’t follow that they are entitled to a positive return on the investment of their surplus in other enterprises.

  46. Dan Kervick writes:

    At the very least, preservation of monetary purchasing power should be paramount. If people choose not to spend, then so be it. I’m fine with an end to usury but I am NOT FINE with having to work for somthing that depreciates in an instant.

    Suppose you run a completely self-sufficient, self-sustaining enterprise which supplies all of your consumption needs, and every year provides you with a surplus of certain real goods, which you prudently save. No matter what kinds of real goods they are, their value will depreciate over time.

    What you seem to be saying is that you are entitled to convert that real surplus into some savings vehicle, such as the money that is created by the public, and that it is incumbent on the public to preserve the value of that vehicle over time. To which I say, “Who made you the center of the universe?” The public’s money exist to serve public purposes. You are always free to hang onto your labor and your homespun goods. But if you want to exchange those things for some other good, you have to accept that good, such as it exists.

  47. JKH writes:

    Nick,

    Right. Steve noted it up front. Although he didn’t elaborate extensively (and he’s certainly written about it before), the China effect and the rest of the US capital account surplus is an implicit part of his overall saving story, as it relates to the US economy and US interest rates. If anything, it probably strengthens his argument, given the nature of Chinese motivations.

    I’m guessing Steve’s view is that the US capital account surplus is an important circumstantial factor in his overall argument, but not the essence of it – Krugman’s approach seems roughly the reverse, in that he views the capital account surplus as the driver of it all. I agree with Steve’s presentation.

  48. JKH writes:

    Nick,

    Re the MMTers – I’m not sure they’d describe that situation specifically in language as dynamically inefficient.

    And I’m not sure they’d interpret it as a motivation per se to increase deficits.

    But I think Scott Fullwiler’s paper on Fiscal Sustainability draws on empirical evidence that the relative relationship you suggest is likely to be the case in the long run, through cycles, which supports the idea that interest rate dynamics per se shouldn’t stand in the way of deficit spending over the long run. (Their trigger is inflation risk.)

    Plus, as you know, they view the GBC in general not as a constraint, but as an ex post accounting identity.

  49. wh10 writes:

    Nick,

    According to my understanding, I don’t think the MMTers would make the argument you are making, unless they forced themselves to view the world partially through your eyes.

    It’s my understanding MMT views interest rates as monetary, not real, variables, and that there is no real rate that sets macro equilibrium as in a mainstream view of the “natural rate.”

    Ultimately, it is the Fed that will determine rates, not govt spending.

    You sort of know all this about MMTers though. So I am curious why you think MMTers would make this argument, unless you are trying to say they could use it as a means (a mainstream-like explanation that is out of MMT-paradigm) to an end (MMT suggested policy).

  50. ferd writes:

    In the hypothetical a wheat lending market, I don’t understand why it’s said in this post that people receiving lower-than-average shares would lend wheat to people who had just lucked into a greater-than-average share? Maybe this is just a typo??

    Seems like the lending should go the other way. Today, you lucked into more-than-average wheat while I lucked into less than average, maybe winning none at all. If I’m hungry enough today, I’ll try to borrow some of your extra, promising to repay with interest from my future expected average winnings, with the amount of interest offered having to do with how hungry I am today.

  51. Elvin writes:

    I think the reason that there are negative real yields right now is because of financial repression. With the Fed setting a near zero nominal rate policy for T-bills and using QE2 to lower longer nominal yields, the whole nominal yield curve is artificially low. For the real yield curve, the market is rationally pricing in modest inflation and discounting TIPS yields appropriately compared to nominals. If real yields were positive right now, they would offer a tremendous advantage over nominal yields. The market has arbitraged this away.

    As soon as the Fed raises interest rates, negative real yields will disappear.

    As to negative interest rates for Swiss bonds a couple of months ago, they was because of non-Swiss investors believing that they would be compensated by the rise in the Swiss franc. If the expected rise in a low inflation currency is overwhelmed by foreigners believing that the currency will have a sharp rise, I can see how because of “technical” factors, a negative interest rate results.

  52. SW:
    For the first time, I think you’ve produced a post of total nonsense. We have negative real rates because the FED decided to tax savers to bail out the banks. We live in a regime of Keynes’s “stamped money”. Until the hyperinflation. Apre Zimbabwe Ben, le deluge.
    Got gold? Get more.

  53. Corn1945 writes:

    This is precisely the kind of thinking that got us into the mess we are in now.

    Negative real interest rates (or rates that are too low) are a product of manipulation by the Federal Reserve and are directly responsible for the financial bubbles we have experienced. Suppressed rates inflate asset values, enrich the already wealthy, and lead to capital misallocation. The effects are also seen in Europe, where the PIIGS gorged themselves on low interest debt they should have never had access to. The result is nothing less than total collapse like we are seeing now.

    All-in-all, this is probably one of the worst articles I’ve ever read and is a direct attack on middle-class America. It reeks of Ivory-Tower elitism, a lack of certain for the responsible in society, and a desire to extract as much wealth as possible from the American people on behalf of Ben Bernanke and his Wall Street jackals. Paul Krugman seems like a genius compared to this mental abortion.

  54. Peter K. writes:

    @39

    “Peter k-

    The best way to cure a savings glut is to lower prices! It ‘ain’t rocket science. Hell, it ‘ain’t science at all.”

    As I understand it wages are sticky so you’ll just get mass unemployment like during Great Depression (and now).

    My ideal is the post-World War II gold age of 1945-73 where pace the Goldbugs, the Fed did its job and kept the US at full employment. New Deal reforms and other policies like the GI Bill and progressive tax levels led to broad-based prosperity and economic growth.

  55. But What Do I Know? writes:

    AS someone with savings, I would love to receive a real return on them. On the other hand, I always ask myself why I’m entitled to receive more money simply for having money in the first place.

    >>>Um, no. Savers WORKED for their money. Welfare queens did nothing.<<<

    How do you know that the Savers worked for their money? Maybe you did, but there are plenty of people out there with money who didn't do anything in particular to get it (I'm talking about you, Paris Hilton). Equating "having money" with "work" really is assuming the thing you wish to prove.

  56. JP Koning writes:

    People seem to be indiscriminately lumping the ideas “negative real interest rate” and “negative natural interest rate” together.

    Surely these aren’t the same concepts?

  57. Nick Rowe writes:

    wh10. “You sort of know all this about MMTers though. So I am curious why you think MMTers would make this argument, unless you are trying to say they could use it as a means (a mainstream-like explanation that is out of MMT-paradigm) to an end (MMT suggested policy).”

    Yep. They could grant mainstream(ish) assumptions about interest rate determination, and still get MMT policy implications.

  58. Corn1945 writes:

    “My ideal is the post-World War II gold age of 1945-73 where pace the Goldbugs, the Fed did its job and kept the US at full employment. New Deal reforms and other policies like the GI Bill and progressive tax levels led to broad-based prosperity and economic growth.

    The post-World War II gold age was a result of the rest of the world being in ruins. The United States had no industrial competition at the time due to wartime destruction and capital had nowhere else to go. Hence the tolerance for the high tax rates. Even with the higher rates, the brackets were much higher than they are now (when adjusted for inflation) and “loopholes” were plentiful. Very few people actually payed those rates.

    The story is vastly different now. Other countries have better educated workforce (the US consistently ranks poorly in virtually every measure of education), lower tax rates (the US has one of the highest for corporations who can’t afford armies of lawyers and accountants to get around it), and a more business friendly climate.

    Progressive tax rates had absolutely nothing to do with it and there is no way to prove otherwise.

  59. winterspeak writes:

    SRW: Our children cannot collectively “save” unless the Government runs larger deficits, something lost on monetarists. MMT would also set the FFR at zero and leave it there. Happy?

    wh10: Nick does not understand MMT.

    NICK: MMT, being right, should not waste time on PR and lying to get column inches in the NYTimes. Professional economists have that market sewn up.

    Instead, they should spend their time making fun of the obvious and ludicrous nonsense that is monetarism. There’s lots of material to work with these days, and this is frankly too good of a crises to waste.

    The Government budget constraint is fundamentally political and connected to tolerance for inflation, and by extension, savings desire, and by extension, sovereign strength of the State.

  60. Ezra writes:

    I seem to remember deflation used to be a big concern in the late 90s among Greenspan and those in the elevated spheres of economic thought. It was used to justify keeping interest rates low, and expanding the money supply as a counterweight. Now those were the boom times, but the underlying causes of globalism and technology are still present today.

    In a way, the whole financialism bubble of the 2000s can be seen as a reaction to ward off these concerns. It’s the credit equivalent of Keynesian stimulus. It doesn’t matter what the new money is allocated to, only that the aggregate new money is increased.

    Like you say, lowing the interest rate can only do so much to encourage exploration, idiosyncratic judgment calls, and equity finance. Instead I find the trend is the opposite. Now people continue to trust even more in debt financing of investments, and less in equity financing. Look at the stalled pipeline of IPOs and the reflexive skeptical reception facing IPO companies.

    I believe a great part of this is due to the boomers (the majority of decision makers) hitting retirement age. They are no longer in the market for idiosyncratic judgment calls. I don’t think the trend can be reversed easily.

  61. [...] by Randall Wray), I think I have spotted a short story which leads you on the right path. This is Steve Randy Waldman: Suppose that land to grow wheat is scarce but labor to farm and bake it into bread is abundant. [...]

  62. Nemi writes:

    @ Nick Rowe:

    I don´t understand your argument about dynamic inefficiency. Why would the government (or anyone else) borrow because the growth is higher than the interest rate?

    If the growth rate is e.g. 3 %, and the interest rate is 2 %, and the current debt is causing interest payments at the amount of, say, 20 % of the governments “revenue” – why would it necessarily be rational to accumulate infinitely more debt?

    Or why would it be rational for a private actor? Real people do get old and might actually e.g. get sick – so with a diminishing utility of consumption (in each time period) it certainly won’t be rational to consume in accordance with your expected (mean) life adjusted income (you income might be less, your life might be longer).

    Finally, I would lend to you under real negative interest rates (if there was no alternative – and positive inflation), since I might want the money (recourses) later in my life (so there have to be liquidity).

    Also – surly the intertemporal PPF can be significantly less then -1, even for due to e.g., as you say,storage cost but also due to the risk of holding something other than money (your preferences might change and so might the price of any real good that you are hoarding).

    However – your Rocky mountains example is extremely interesting – is this a flaw in the capitalist system? As I tried to describe, I do not see why negative interest rates would be unreasonable due to “real” factors (at least not in a hypothetical world)– but as your Rocky mountains example show, the capitalist allocation of recourses really would break down.

  63. Nemi writes:

    Could not stop thinking about this.

    What if we couldn’t store any of the products that we produced, and everything was produced by flows of labor, with only land as capital. With appropriate demographics, you would have to give more of a good today than what you could expect to receive in the future – i.e. negative real interest.

    However, with negative real interest rate, the value of land is infinite, and we should (according to the price signals) produce more land (bulldoze the Rocky mountains flat) until, at least, the real interest rate is zero.

    Is it so that real interest rate cannot be (stay) negative under capitalism (or at least not more negative than some potential positive pure time preference is)? If bulldozing the Rocky mountains was the only way to increase the amount of land – it still does not seem like a rational thing to do (and yes – all the sudden we apparently needed more capital than land – but if we assume that we lived in a world where the only thing you could do was to remove them by hand, the project does not seem more reasonable).

    Confused.

  64. JKH writes:

    Kevin Drum needs to get on board with sector financial balances effects, including trade deficits pre-crisis, and budget deficits post-pre-crisis.

  65. winterspeak writes:

    kevin drum?

  66. JKH writes:
  67. John James writes:

    Thank you for your excellent observations. With information and commentary production growing, expotentially, it was a pleasure to read a cogent, comprehensive/comprehensible review of the economic/financial landscape. I particularly find resonance with your argument concerning the role of technology. To the extent I take issue with your essay, it is that it appears to be almost exclusively “Western” economy focused without sufficient recognition of the role the “developing” world plays and will play in the allocation of resources and wealth. During the short run (last 3 years +/- ), our strategy has been to recognize (we believe) that currency and interest rates are artificially priced on an active basis (Euro in particular). The logic for this is clear but, the sustainability is not.

  68. Nick Rowe writes:

    Nemi: it only works for a (potentially) infinitely-lived entity, not an individual.

    Borrow $100. Borrow again to pay the 2% interest. Your debt grows at 2% per year. But GDP is growing at 3% per year. So your debt/GDP ratio is declining at 1% per year. So, eventually, your debt becomes a vanishingly small percentage of your income (GDP). It’s like a chain letter swindle, or Ponzi scheme, except the economy grows faster than the chain letter, so there are always more and more people willing to buy into it.

  69. beowulf writes:

    To callback to something SRW wrote a couple weeks ago:
    “The market monetarists have grown in parallel with another fringe monetary theory, MMT. The two groups don’t consider themselves aligned, but I think they are two sides of the same coin. It would be great if they would combine their insights — the market monetarists with their NGDP-targeting central bank, the MMT-ers with their concern for balance sheet health and their understanding that transfers-to-be-taxed deleverage private sector balance sheets while advances-to-be-repaid do not.”

    What if, in conjunction with the Fed targeting NGDP, Tsy adopts a desterilizing policy? It could use jumbo coin seigniorage to buy back T-bonds as soon as they hit the Fed’s account. At the end of the day, when NGDP doesn’t move the needle (hey, I’d be delighted to be proven wrong) and we get around to firewalling the engines with fiscal policy, the national debt will be several trillion dollars lower than it is now.

  70. TC writes:

    JKH,

    About Kevin Drum – very much agreed. You should email me.

    beowulf,

    Good idea. MMT and MMers are both on the side of more stimulus and “full” employment. It’s huge common ground despite any differences in technique.

    I want to say it again. MM and MMT are both in favor of huge amounts of stimulus, right now, today.

    Are MMers against more fiscal stimulus?

    Nick, would you be unhappy with more spending, or the Trillion Dollar coin used in the manner beowulf suggests?

    SRW lays out reasons to favor fiscal stimulus today, and I personally prefer fiscal.

    But jeeeezzzeee, I won’t look a gift horse in the mouth either. I prefer NGDP level targeting over inflation targeting – hugely prefer NGDP level targets.

    And if we had a bit of Trillion Dollar coin goodness thrown in and infrastructure spending thrown on top, well, I’d be pleased as punch.

    We’re at the zero bound. Fiscal policy should be helpful here if the fed doesn’t get in the way, even according to high priest Scott S, unless I am reading his snark about Japans crazy central bank wrong.

    Let’s get it done.

  71. JKH writes:

    Beowulf,

    I assume you’re responding directly to SRW’s siren call:

    “They are two sides of the same coin”.

    Will you be platinum-izing the starting position in Treasuries, before you allow NGDP QE to commence?

    Seems like a reasonable quid pro quo for merger of the two clubs.

    BTW, you should attach some letters to your name:

    MSAB (master of state accounting arbitrage)

    Sort of a variation on “Kemo Sabe”.

    Suggest we consider Johnny Depp to play you in the movie.

  72. wh10 writes:

    Beo, I like it. Nick, what do you say?

  73. beowulf writes:

    JKH, thanks for the kind words. Actually I’d want soap opera actor Eric Braeden (“Victor Newman”) play me.
    His alter ego, Victor Newman, has been shot, poisoned, spear-gunned, kidnapped, and presumed dead. But— this is the scary part— you should see the other guys. Victor Newman prevails. Always. He pursues his enemies with Captain Ahab-like monomania, never letting up until he’s exacted revenge.
    http://www.umt.edu/montanan/w08/young.asp

    “Will you be platinum-izing the starting position in Treasuries, before you allow NGDP QE to commence?”
    Not sure it makes it difference really. Braeden’s fellow German expatriate Jan Hatzius has suggested the Fed buy $100 billion in long bonds every day for a month. Fine, then the Secretary of the Treasury should deposit a $100 billion coin every day for a month in exchange for said long bonds.
    The debt clock would begin running backwards like the train station’s in The Curious Case of Benjamin Button. The human tragedy of Pete Peterson stroking out would be mitigated to the extent the SSA has one fewer beneficiary depleting its trust fund.

  74. Nick Rowe writes:

    wh10: no big objections from me. Having the wider government sign up to the NGDP target (like the Canadian government does for the Bank of Canada’s 2% inflation target) is a good thing. Having fiscal policy riding shotgun with monetary policy can only improve the credibility of the target. You wear both belt and braces if you want to make really sure your pants don’t fall down. Give it both barrels. Pick your metaphor.

    There’s one problem. But it’s not a biggie. When the NGDP target becomes credible, and gets hit, both fiscal and monetary policy will need to reverse course quickly, to prevent an overshoot of the target. It’s easier to reverse monetary policy than fiscal policy (you just sell back the assets you bought). But again, that’s no big deal, compared to the consequences of failure.

  75. TC writes:

    Nick,

    beowulf has proposed a fiscal rule aimed at payroll taxes. U rate – 2.5% = percent of payroll tax holiday, with a max of 100%. I’ve proposed a rule that has both an unemployment and inflation target, also aimed at payroll taxes. This fiscal stimulus could be adjusted quarterly, or every 6 weeks like the fed adjusts monetary policy today.

    There are ways to form fiscal policy that doesn’t involve massive multi-year projects.

  76. beowulf writes:

    Nick, it isn’t about fiscal policy directly, except to the extent it removes, say, $30 billion a year of interest income per $1 trillion of bonds redeemed.
    There’s the story on how a circus trains elephants; from the time a baby elephant can walk, its trainer ties it by string to a stake in the ground. The calf can’t break free and soon enough resign itself to its fate, even though well before its fully grown it could snap the string at any time.

    This isn’t monetary or fiscal policy, its psychology. The policy goal is to cut the string so the politicians will realize they’re free to do their jobs without fearing, in the words of the sadly deluded President of the United States, “we are out of money now”. So indirectly, I suppose, it is about fiscal policy.

  77. beowulf writes:

    Sorry, I didn’t see TC’s post. By policy goal I meant Tsy desterilization (which sounds a vasectomy reversal) of Fed NGDP policy. Of course, I wholeheartedly endorse what TC wrote as well. :o)

  78. JKH writes:

    Nick,

    Does the Canadian government actually commit itself formally, under its own fiscal budgeting responsibilities, to assist as possible in meeting a 2 per cent inflation target? I didn’t think so. I thought it was just a 5 year monetary policy sign off authority, with no direct interaction with fiscal policy.

  79. JKH writes:

    Beowulf,

    Good.

    Depp and Pitt might be more suitable for support roles.

  80. [...] interfluidity » The negative unnatural rate of interest. @5:27 pm Comment (0) [...]

  81. [...] “giv[ing] their excess bread to charity in return for a nice smile and tip of the hat” (Nick Rowe); or iii) participating in a lending market. If land owners don’t lend, McArdle is right [...]

  82. Websites worth visiting……

    [...]here are some links to sites that we link to because we think they are worth visiting[...]…

  83. Nemi writes:

    @ Nick Rowe
    People don´t have to be infinitely lived if you have some liquidity in the asset market.

    Simply sell it for some value between the amount you borrowed and infinity – it should be a bargin for the rational buyer.

  84. Fed Up writes:

    “It’s easier to reverse monetary policy than fiscal policy (you just sell back the assets you bought).”

    What if the assets have fallen in value?

    The other thing to consider is that people who don’t own assets or own few assets need the help directly.

  85. winterspeak writes:

    jkh: thanks for the link. I don’t like, however, the way the “rich” is conflated with finance. Two working, mid-career engineers would make about $300K (which is rich) but worlds away from the $MM you get in finance. 1980, the year Drum brings up, was the start of the securitization era, when banks stopped worrying about loans getting paid back. How this connects with married professional couples destroying america is beyond me.

    NICK: You are right — worrying about when NGDP targeting becomes credible is not a biggie because the answer is never. Monetarists have no mechanism, just smoke and mirrors (or tinkerbell, whatever it is this week).

    TC: Any sane person is on the side of more employment when we have about 10% of people out of work in the US. This isn’t an MMT or an MM thing.

    MM and MMT are not two sides of the same coin, they are diametrically opposite. MMT is correct and based on reality and accounting. MM is based on a pile of misconceptions about how finance actually works, and is currently academic dogma. What’s holding the US back is MM dogma, so the correct strategy is to expose it for the nonsense it is.

    My policy solution: The Fed announces a NGDP target for 3c (yes, that’s $0.03) and then runs massively larger deficits until we’re back at full employment. That’s both barrels at work for you — one pointed at the lack of aggregate demand, and the other pointed at the money multiplier. May they both rest in peace.

  86. Fed Up writes:

    “Nick Rowe discusses the possibility that the so-called “natural” real interest rate could be negative, referring us to Frances Woolley’s discussion of the drag demographics might exert on real returns.”

    What if the “natural” nominal rate of interest goes/wants to go negative?

  87. Greg writes:

    Nick

    Ive seen you say this before;

    “It’s easier to reverse monetary policy than fiscal policy (you just sell back the assets you bought).”

    “Just”??

    There needs to be a buyer. No one can force a sale. Maybe no one wants the assets.

    All the fed would be doing when “purchasing assets” is changing a savings account to a checking account so in affect you are saying that when selling assets they would be offering new savings accounts again. Under the conditions this would be necessary (high inflation I surmise) what would one have to offer savers to get them to open a new savings account?

    You seem to be positing a fed that is capable of doing much more than seems possible in a non autocratic system.

  88. mattski writes:

    How this connects with married professional couples destroying america is beyond me.

    I don’t think that’s fair to Kevin Drum. He wrote,

    The rich couldn’t really use that gusher of new money, so for 30 years they loaned it out to the middle class in increasingly Byzantine ways

    A couple of engineers making 300K are not exactly who we’re talking about when we’re talking about people who make far more money than they can ever hope to spend.

  89. vimothy writes:

    Our children cannot collectively “save” unless the Government runs larger deficits, something lost on monetarists.

    If only there was some way of converting current output into output in the future…

  90. TC writes:

    WS,

    What is the real issue? Ask yourself this question. What is the logical answer? SWR. once again, shows us an interesting path, and is a 2500+ rated chess master. Bobby Fisher really.

    I used to slam you when you were over at AI and now it turns out we’ve both grown up a bit. Meghan didn’t

    TC

  91. [...] “We need to alter the circumstances under which full-employment requires that lenders pay borrower… [...]

  92. Uncle Jim writes:

    Thanks for another brilliant posting. I am always challenged and enlightened by your writing.

    I think we can make an argument that the real risk free rate of interest has been negative or zero, (or a vanishingly small positive number) for most of human history, and always will be. Periods of time when it has been higher are always offset by negative periods.

    We can estimate an upper bound thus:

    Assume about 100 Savers, but distribute them across 35 centuries. Not unreasonable. Religious texts have decried usury for at least 3,500 years, so people have loaned money at interest at least that long, probably much, much longer.

    What has been the real rate of return?

    The wealthiest individuals today have only 3 commas in their bank account. The national debt has 4 commas.

    I loan an ounce of silver at a modest rate of 5%, compound annually 3,500 times, and Oh my goodness, I have 24 commas. That can’t be right. What do you call that number?

    Steve Martin’s brilliant essay on Times New Roman running out of periods suddenly seems plausible.

    Pick a lower rate, a measly 2%. Compound away, and , ahh that’s better, only 10 commas.

    For one ounce of silver borrowed at 2%, my debtor’s descendants owe my descendants a piece of silver just a shade less than 6,000 times the mass of the Earth. Makes the trillion dollar coin look like small change. Caveat debitor. They shoulda read the small print.

    This seems ludicrous, but I am serious. People have been loaning money for centuries, and we can estimate a real average rate of return. And that answer must be negative, zero or very close to zero.

  93. [...] Negative Un-natural Rates of Interest + follow up model [...]

  94. [...] by Randall Wray), I think I have spotted a short story which leads you on the right path. This is Steve Randy Waldman: Suppose that land to grow wheat is scarce but labor to farm and bake it into bread is abundant. [...]