While Bernanke et al have been bungling through with hapless and ineffective quantitative easing policies
and ‘operation twists’, commentators like Krugman – who cut his teeth getting Japan wrong for years – have come out in support of negative interest rate policies
, which essentially means trying to provoke inflation that will cause real interest rates to be effectively negative. These are two sides of the same bad economic model, I’m afraid. They are both based on the same crappy engineering-diagram-cum-economic-model and they both steadfastly refuse to recognise the key lesson Keynes tried to teach us about capitalist economies: namely, that the whole thing is subject to an overarching indeterminacy that cannot be accounted for in a childish toy-model based on equilibrium analysis.
In fact, interest rate policy in the present environment is not simply worthless – it actually worsens the state of the economy to some degree. Why? Because of interest income channels. When the central bank lowers interest rates they assume that people will borrow more. And when Krugman says that we should have inflation outpace the interest rate, he is thinking along the same lines. What these folks never consider is the fact that low interest rates actually act as a net drain on new financial assets entering the economy.
If I’m a saver – and there are a LOT of savers out there these days – and the central bank lowers the interest rate or targets a negative real interest rate, I lose interest on my savings. This ‘interest income’ would have added to aggregate demand – that is, total spending power – as it would mean new net financial assets flowing into my bank account and encouraging me to consume more. Instead, my savings sit around idly earning nothing and so I have even less of an incentive to purchase goods and services.
The MMTers – especially Warren Mosler
– have been pointing this out for years, but to no avail. But now the idea is starting to get play among the VSPs (Very Serious Persons). While most analysts focused on yawn-inducing speculation about the possibility of the Fed running a pointless QE3 program, some more nuanced analysts noticed something of actual interest in the recently leaked Fed minutes. Per the minutes
It was noted that very low interest rates were negatively affecting pension funds and the profitability of the life insurance industry.
That is not much, of course, but at least it is something. It is, at the very least, a jumping-off point for those of us who are sceptical about the efficacy of monetary policy to get a foot in the door.