The single interest rate lever is supposed to be Pavlovian in its stimulus/response. When the rate goes down that means “spend”. When it goes up it means “don’t spend”. That’s the belief, which fiscal policy is supposed to follow along behind like a faithful hound.New Wayland
What’s amusing is that this response process doesn’t appear to take into account expectations....
The Perpetual Problem With Interest Rates
NeilW
The perpetual problem with interest rates is they are managed via welfare for the banks and the rich:
ReplyDeleteE.g. to lower interest rates in fiat, limit its use to banks - thus establishing a "natural" interest rate of zero percent in fiat.
E.g. to raise interest rates in fiat, issue inherently risk-free sovereign debt at positive yields and interest - thus providing welfare proportional to account balance.
It also doesn't take into account that the government is a net payer of interest, so raising rates actually increases net transfers (income) from the government to the non-government. In this regard it's fiscal expansion, all else equal. The opposite is true when rates are cut: income is removed. (It's fiscal consolidation. All else equal.)
ReplyDeleteFurthermore, rate setting is price setting by virtue of the fact that the cost of credit is reflected in the cost of all goods and services. Raising rates necessarily increases the general price level and cutting rates does the opposite. This goes against mainstream belief.
Finally, for every debtor there is a creditor, so the adjustment of rates equates to income redistribution.
“Finally, for every debtor there is a creditor, so the adjustment of rates equates to income redistribution”
ReplyDeleteBut it nets to zero so it can be ignored!!!!! jk