Thursday, February 20, 2014

Are negative interest rates a possibility?

There are economists, especially those informed by the Chicago School, who still cling to the belief that monetary policy is the only really critical economic lever.  Unfortunately for this crowd, while high interest rates can certainly slow down an economy and remove pressures for inflation, lowering them will not necessarily get a slowed-down economy moving again.  The reason is simple—it is almost infinitely more difficult to build up the real economy than it is to wreck it.

So following the collapse of the real economy in 2007-8, policy-makers have essentially driven the prime rates to zero and five years later, the real economy has not recovered.  Of course, part of the problem is that while interest rates were lowered for many sorts of lending, they didn't go down for many consumer applications like credit cards and student loans,  So for large swaths of the population, those lower interest rates are only something they read about in the papers.  But the true monetarists are not about to suggest the re-introduction of strict usury laws or anything else that would impinge on their sacred markets.  So if zero interest rates for the world's central banks aren't bringing back economic prosperity, they "reason", why not negative interest rates?  And so we see the IMF suggest exactly that monetary policy to the European Central Bank.

Unfortunately for them, if central banks actually go to negative rates, their very existence is rendered absurd.  As the Producer Class giants of the past have understood so well, if we really want to build up the real economy we should consider the whole idea of debt-free money creation.  I have covered the thoughts of Edison and Ford on this subject in earlier posts.  I also addressed the idea of negative interest rate bonds that retired themselves when I covered monetary policy in Elegant Technology.  So while these ideas are hardly new, the reason they have never been seriously considered is because such policies would expose the essential uselessness of the bankster classes.

IMF urges European Central Bank to mull cutting interest rates below zero

The International Monetary Fund warns deflation in the eurozone is a key new risk for the world economy
Larry Elliott Economics editor
The Guardian, 19 February 2014

The International Monetary Fund has urged the European Central Bank to consider cutting interest rates to below zero as it warned that deflation in the eurozone was a key new risk facing the world economy.

In its assessment of global prospects published ahead of the meeting of G20 finance ministers in Sydney, the IMF said recovery from the deep global recession had been disappointingly weak and urged stronger co-operation between developed and developing countries to promote growth and financial stability.

"A new risk stems from very low inflation in the euro area, where long-term inflation expectations might drift down, raising deflation risks in the event of a serious adverse shock to activity," the Fund said.

It added that the eurozone was "turning the corner" from recession to a recovery that was uneven and fragile. Low inflation added to the problems of the troubled countries on the fringes of the euro area, where it would increase the real burden of already high levels of public debt.

"In the euro area, more monetary easing is needed to raise the prospects of achieving the ECB's inflation objective, including by supporting demand, given the weak and fragile growth, large output gaps and very low inflation," said the Washington-based IMF.

It said further ECB action could include cheap loan schemes, possibly targeted at small and medium sized firms, and "further rate cuts, including mildly negative deposit rates, to support demand and reduce fragmentation"

The Fund urged the US to consult with other members of the G20 – a group of leading advanced and emerging nations – about its plans to withdraw gradually the stimulus provided to the American economy.

"Concerns about the withdrawal of unconventional monetary policy [the bond buying programme known as quantitative easing] in the US have already provoked sharp price movements in emerging markets", the Fund said.

It added that the return to normal conditions would lead to capital flowing out of emerging markets, "with risks of lower investment and, potentially, financial disruptions, notably in those with domestic weaknesses."

The Fund stressed that advanced economies should avoid removing stimulus too quickly given that there was still a large amount of slack to be used up, inflation was very low and governments were trying to reduce budget deficits.

"There is scope for better cooperation on unwinding unconventional monetary policies, including through wider central bank discussions of exit plans. In the euro area, repairing bank balance sheets remains critical to monetary policy transmission. Finally, fiscal consolidation should proceed at a measured pace, while preserving the long-run growth potential of the economy." more

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