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Monday, February 1, 2016

Bill Mitchell — The folly of negative interest rates on bank reserves

On Friday (January 29, 2016), the Bank of Japan issued a seven-page document – Introduction of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate” – which left me confounded. Do they actually know what they are doing or not? For years, the liquidity management conducted by the operations desk at the Bank has been impeccable, in the sense that they have maintained near zero interest rates in the face of growing fiscal deficits. There was always some doubt when they were the early users of quantitative easing which many claimed was to provide the banks with more reserves so that they would increase their lending to the private domestic sector in order to stimulate growth, after many years of rather moderate real performance to say the least. Of course, banks are not reserve constrained in their lending so the the only way that this aspect of ‘non-conventional’ monetary policy would be stimulatory would be if investment and purchasers of consumer durable were motivated to borrow at the lower interest rates that the asset swap (bonds for reserves) generated. The evidence is that the stimulus impact has been low and that there are many other factors other than falling interest rates governing whether borrowers will approach their banks for loans. In their latest announcement, the logic appears to be that by reducing reserves they will induce banks to lend more. Go figure that one out!
Bill Mitchell – billy blog
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia

3 comments:

  1. You can empty a trough (decrease the liquidity) and make the horse (aggregate demand) stop drinking, but you can't fill a trough, lead the horse to that liquidity and make it drink.

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  2. "Well, under the QQE policy, the Bank proposes to pump and additional ¥80 trillion per year into the banks’ reserve balances and then tax them 0.1 per cent into the bargain."

    They NEED the munnie... otherwise they are probably looking at 'losing munnie!'....

    And here:

    "With a view to encouraging a decline in interest rates across the entire yield curve"

    Forget it.... They will lower their bids (to get a "good deal!") as the largest purchaser in the marketplace and start a bond sell-off... rates will go up curve will steepen...

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  3. What marketplace, there is no marketplace. Is the government moving money from the right pocket to the left pocket. There is no "marketplace", the immense majority of the debt is owned by the government through STATE banks. Biggest facade ever lol. And the morons keep saying "they are broke!" or "hyperinflation!". They don't understand anything.


    Re. negative interests: I picture central bankers in Davos crying "why they won't take on more debt buabuabua". They want people to keep pilling on debt to ignite consumption, "Banks won't lend". Banks need borrowers to lend idiots: millennials don't have proper income and jobs and baby boomers are retiring (it's called demographics), as the economy disinflates in real terms (every sector except Unicorns, oil and construction in some places was in a permanent state of recession if you remove the now crashing developing markets growth) the credit worthiness of potential borrowers decreases, which aggravates the problems even more. So neither potential borrowers want to borrow, nor potential lenders want to lend.

    CB's are clueless.

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