Tuesday, September 11, 2018

Brian Romanchuk — No More Neutral Rate?


A bit wonkish (but no math), but interesting if you are into interest rates and how they affect the economy.

Bond Economics
No More Neutral Rate?
Brian Romanchuk

12 comments:

Andrew Anderson said...

Does anyone consider how odd it is that the so-called "natural" interest rate for fiat is ZERO? And would fall to near zero except for Central Bank intervention such as IOR (Interest on Reserves) or Open Market Sales of Central Bank Assets?

And here's the reason, except for mere physical fiat, aka "cash", ONLY the banks and other depository institutions with accounts at the Central Bank may even use fiat while the non-bank private sector is forced to deal with bank, etc. deposits, which are mere liabilities for fiat. And since the banks need only settle DIFFERENCES among themselves (inter-bank) with fiat and need no fiat at all for intra-bank transactions, the demand for fiat is less than it would be if all citizens could have accounts at the CB and all other privileges for the banks have been abolished - so much so that the interest rate for fiat would be near zero except for Central Bank intervention.

So it should be no surprise if there exists no neutral rate of interest for fiat given that its use is largely limited to a government privileged usury cartel with the non-bank private sector slaves to it - unless God is mocked and injustice is stable.

Ralph Musgrave said...

Andrew’s points certainly seem to tie up with Warren Mosler’s claim that “The Nautral Rate of Interest is Zero” to quote the title of a paper by him and Mathew Forstater. In fact Mosler makes a broader point than Andrew: like Milton Friedman, he claims governments should borrow nothing. I.e. he says they should pay no interest to anyone in respect of their liabilities (i.e. base money or government bonds).
I actually put a paper online yesterday on this topic. See:

http://www.openthesis.org/document/view/603834_0.pdf

I find Mosler and Forstater’s arguments a bit convoluted. Hopefully mine are clearer.

Matt Franko said...

Well if “natural rate” (cue the Darwin) is zero then why for 8 years during which Fed had rate at 0.25% you could only get a mortgage at 4% even if you put 50% down?

Ralph Musgrave said...

Matt,

Mosler, Forstater, Me (and Bill Mitchell BTW) claim the interest paid on state liabilities should be zero, which is actually where it's been approximately for the last few years. But that's the "risk free" rate. Mortgages are risker, so the rate is higher. As for pay day loans and credit card loans, the rises are even higher, so the rate is higher still.

Matt Franko said...

Well I would think “natural “ would imply relationships between humans...

Matt Franko said...

Warren Buffet recently said “if government set rates at zero for 50 years the Dow would go to 100,000”....

Even at 100,000 the Dow would still have a nonzero rate of return...

Matt Franko said...

“He says they should pay no interest “...

He also says speed limit should be 35mph....

And Bill says we should use picks and shovels for road construction....

Andrew Anderson said...

Well if “natural rate” (cue the Darwin) is zero then why for 8 years during which Fed had rate at 0.25% you could only get a mortgage at 4% even if you put 50% down? Franko

Good question.

But suppose that all citizens were allowed accounts at the Central Bank? Then it would be possible for banks to lend out their reserves, no? Then suppose negative interest were imposed on bank reserves and other non-individual citizen accounts but individual citizens were exempt up to, say, $500,000?

Then imagine how eager banks would be to lend out their reserves to avoid paying interest on them, i.e. lend them or lose them anyway.

Then consider that individual citizens have an inherent right to use their Nation's fiat FOR FREE up to reasonable limits and that banks and other large users DO NOT.

Matt Franko said...

The US Treasury already owns the GSEs... they could already just lower the rates that their GSEs charge for mortgage interest...

André said...

Andrew Anderson, you really should learn how to invest in treasury direct...

Andrew Anderson said...

André,

Treasury Direct allows citizens to SAVE but not USE fiat.

Simsalablunder said...

"And Bill says we should use picks and shovels for road construction...."

Bill does not say that anywhere. That's just one of many things Matt makes up due to his political bias.