Wednesday, April 20, 2016

Trump on ZIRP


Trump takes the mainstream MMT position on rates. (Probably wouldn't do any good for me to write him a letter...)





11 comments:

Ben Johannson said...

MMT does not tell us low rates are good.

Kristjan said...

"MMT does not tell us low rates are good."

In a context it does. Interest payments are econo0mic rent to parasites. At the same time you could argue that real rates should not be negative for the savers to be fair.

Matt Franko said...

No Kristjan now they have gone so far as to make savers as non-existent this from Bill the other day:

"The distribution effects of interest-rate changes alone (creditors lose, debtors gain if rates fall) are sufficient to cast doubt on the effectiveness of monetary policy as a primary counter-stabilisation policy tool."

Now Bill has banks intermediating between creditors and borrowers just like Stiglitz and Krugman et al... savers are completely gone from the scene now.... its even WORSE...

Ignacio said...

It does not imply there is intermediation, it implies that changes by CB's on rates affect both sides of the balance sheet (those holding liabilities and mortgages). So it picks up losers and winners.

As for Trump liking ZIRP, well ofc, business love ZIRP.

In all honestly, CB's should jut come bold and say they have abandoned the desire to set market rates, central planning of IR just doesn't work, and from now on markets will have to find their own rates. The sole purpose of CB's should be backstopping the payment system, helping clearing and providing liquidity, and deposit insurance (all of which could be consolidated on treasuries, there is no need for CB's for that). One can dream...

In practice is how it works anyway, as CB's always operate after-the-fact and are reactive, so the financial system is always setting it's own rates for the lending market. The "only" thing IR fluffing does is change income from the state fixed securities (and that 'trickles down' on the system), but those shouldn't exist either, ideally. It only creates the problem of hippy-boomers screaming that they want more income when they are not receiving the income they were promised/expected.

Disengage savings returns being set by the same mechanism that sets lending costs and we may get somewhere... Pensions don't fund anything (except in Bob Roddis lala land), so there is no reason at all that pensions and mortgages should share the same rates setting mechanism.

Matt Franko said...

" It only creates the problem of hippy-boomers screaming that they want more income when they are not receiving the income they were promised/expected."

This creates a big political problem for us if we dont address this in a mature way...

MMT's as Kristjan puts it " Interest payments are economic rent to parasites." is sophomoric AT BEST...

Ignacio said...

I agree is not helpful (neither is the characterization as 'hippy-boomers screaming', but that was too fun to pass).

Is not an easy solution, but the grown up solution is not expect unaccountable CB'ers to fix our problems by messing with blunt tools that rarely work out. Maybe we should look back to those who are supposed to deal with this kind of problems , being those politicians, who are accountable and been democratically chosen...

If we keep pushing problems to be solved by institutions which are not equipped to deal with those problems and keep giving them powers or expecting solutions from them we just make things worse down the road.

This is my opinion at least, I'm sick of 'VSP' keep turning to those institutions because they hate democracy at core and think governments are useless.

Ther eis a problem, but the no solution is not turning to CB's to solve it.

Ignacio said...

Why is this issue not on the agenda of politicians? Why is everybody expecting for 'something to happen' or CB's fixing our problems? Seems a failure of civil society for lack of awareness and giving things for granted. Systems sometimes need adjustment, change or even total replacement.

If the current one is failing, and people is being affected by it, it should be on the agenda and addressed.

I've relatives in all sides of "the fence", some of them haven't been receiving boosts to pensions in ages and could be much better off with better pensions instead of just muddling through and barely making it to month's end.

But instead we give for granted the current system and situation because 'austerity' and 'bad times'. This makes no sense as there is an output gap and prices are falling, there is no real constraints.

The problem is this is not even on the agenda! Waiting for CB's to solve it is just desperate, like all the idiotic calls for 'helicopter money'. Is desperation, meanwhile we are telling the government is out of money and shouldn't spend more.

Kafkian.

Matt Franko said...

Well you as usual are observing what humans are doing pretty accurately imo...

this is why I am saying that the best thing that can happen at this point is for THEM to raise the rates... i dont care what moron reasonings they come up with to justify raising... we (entire USD zombie world) need the leading USD fiscal flow that would be fomented by the raising... they wont do ANYTHING else...

Tom Hickey said...

In practice is how it works anyway, as CB's always operate after-the-fact and are reactive

It's even called the "reaction function." That is when wages rise "threatening inflation," the cb raises rates to quell inflation expectations.

Bill has explained this in detail wrt to NAIRU and the buffer of unemployed.

Keynes recommended low rates for two reasons.

1. Euthanize the rentier

2. Encourage investment, which is the driver of a capitalist system.

Keynesianism can be summed up in one sentence. Investment drives growth and demand drives investment, so government as the only sector that increase $NFA should counter lagging demand with fiscal stimulus in order to support employment (incomes), hence investment without buildup of unplanned inventory that results in layoffs.

The MMT economists are in general agreement with Keynes on this.

The MMT economists also say that those favoring monetary policy over fiscal have the causality wrong. Interest is a fiscal add, so increasing rates contributes to inflation at full employment.

MMT economists recommend fiscal over monetary as a targeted approach versus a shotgun approach. Bill Mitchell"

The reality is that monetary policy is largely ineffective in supporting economic recovery, irrespective of whether interest rates are low or high.

The distribution effects of interest-rate changes alone (creditors lose, debtors gain if rates fall) are sufficient to cast doubt on the effectiveness of monetary policy as a primary counter-stabilisation policy tool.

Add in the fact that it cannot be targeted spatially or by income group and that it works indirectly through the cost of borrowing (mainly) and is easy to understand why this reliance on monetary policy has failed to deliver the impacts predicted.


http://bilbo.economicoutlook.net/blog/?p=33389

Conversely, using higher interest rates as fiscal add to "increase inflation," which is double-speak for the cb stimulating the economy, is called neo-Fisherism. It is the reverse of conventional MP, which holds that raising rates is disinflationary.

https://uneasymoney.com/2014/11/12/john-cochrane-explains-neo-fisherism/

Ignacio said...

I with neo-Fisherism, although I don't think it's necessarily universal. It depends on the current levels of private debt. With higher debt/income ratios and lower nominal growth the aggregate outcome may not be the desired one, with lower ratios may be beneficial through the income channel ("inflationary").

A lot of debt has been transferred to corporate sector, that's probably why Trump likes ZIRP. I don't know how good would a (substantial) raise be right now, given current nominal growth and income is going up in the US so it's very probably that the aggregate outcome would be beneficial in the US, so I'm neutral to positive on the outcome (some business would go bust, but this may be offset by increased spending).

I'm unsure it's politically feasible though, even tho it may create political problems in the future within an other cohort as Matt says. Is like Schauble complaining about the ECB, talking to his own electorate, but the ECB may be trapped in a position where they cannot raise rates for political reasons (even if this means trouble with other cohorts).

The ECB cannot raise rates unless exports increase again because increasing demand from the USD zone, as Germany thinks we have to export ourself to prosperity we will need 'charity' from other monetary zones, as is the only way they know. Until then, with current debt levels, income and nominal growth a raise in rates would do more harm than good.

Bob said...

Full employment > inflationary pressure > increased interest rates ?