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Philip Pilkington: Is QE/ZIRP Killing Demand?

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By Philip Pilkington, a journalist and writer living in Dublin, Ireland

Warren Mosler recently ran a very succinct account of why the Fed/Bank of England’s easy monetary policies – that is, the combination of Quantitative Easing and their Zero Interest Rate Programs – might actually be killing demand in the economy.

Mosler’s argument runs something like this: when interest rates hit the floor they suck interest income payments that might flow to rentiers and savers. And no, we’re not just talking about Johnny Moneybags refusing to buy his daughter a new Prada handbag (which, say what you will, creates job opportunities). We’re also talking about regular savers and, as the Fed recently noted, pension funds seeing their income fall – not to mention certain industries, like insurance, finding their profits lowered (and hence their premiums raised?).

Mosler sums it up well:

Lowering rates in general in the first instance merely shifts interest income from ‘savers’ to borrowers. And with the federal government a net payer of interest to the economy, lowering rates reduces interest income for the economy.

He then goes on to make the point that we’d have to see borrowers spending more than savers to see any real stimulative effect on the real economy. But alas, such is probably not the case.

The only way a rate cut could add to aggregate demand would be if, in aggregate, the propensities to consume of borrowers was higher than savers. But fed studies have shown the propensities are about the same, and, again, so does the actual empirical evidence of the last several years. And further detail on this interest income channel shows that while income for savers dropped by nearly the full amount of the rate cuts, costs for borrowers haven’t fallen that much, with the difference going to net interest margins of lenders. And with lenders having a near zero propensity to consume from interest income, versus savers who have a much higher propensity to consume, this particular aspect of the institutional structure has caused rate reductions to be a contractionary and deflationary bias.

In her seminal book The Accumulation of Capital – truly a forgotten classic of 20th century economics, right up there with Keynes’ General Theory – Joan Robinson trashes out the implications of falling interest rates. Of the investor she writes:

If he has been successful in the guessing game (on the advice of his broker or backing of his own fancy) and made [investments] which have risen in price so that his capital has appreciated, he has to debate with his conscience whether he has a right to realise the appreciation and spend it, and his decision turns very much upon whether he may expect similar gains in the future, so that they are properly to be regarded as a continuing income.

The point that Robinson is making is that investors have a peculiar morality – she calls it a ‘peasant morality’ – which leads them to separate in their own mind their capital and their income. Investors tend to prefer to spend based on income – that is: dividends, interest etc. – and preserve their capital intact. It’s a bit like the drug dealer’s street wisdom: “Never get high on your own supply”. Spending out of capital – even if this capital has accumulated in the short-to-medium run – is seen by the investor as being somehow immoral. And for this reason investors tend not to dip into their outstanding capital lest their net worth fall as a result.

Robinson then goes on to make a point that would certainly resonate with bond traders today who are, due in large part to the Fed and the Bank of England’s easy monetary policies, seeing value increase and yields (which are essentially interest income) fall.

If the value of [the investor’s] holdings has risen, not because of his personal skill as [an investor], but because of a general fall in the level of interest rates which is expected to be permanent, he is faced with a different problem. For the time being his receipts are unchanged and the value of his [investments] has risen, but, unless all his holdings are in very long-dated bonds, or in shares in whose future capacity to pay dividends the market has great confidence, he will later have to replace money at a lower return, so that his prospect of future income has fallen.

Robinson’s point is that in the investor’s mind his income has fallen. And such a fall in income leads him to retract consumption spending. This leads, as Mosler points out, to a dampening of effective demand in the economy.

It also, I should think, affects investor psychology in that a lack of future income leads them to see the future as being all the more bleak. Their prospect of future income having fallen, this could well lead to a far greater propensity to hoard. It could also make investors more edgy as they try to preserve their capital in what has come to seem like a very uncertain environment. This could lead them to seek out what they think to be safe investments – such as gold and other commodities – thereby inflating bubbles that further exacerbate consumer spending power.

Monetary policy is a slippery beast indeed. But it has become the mantra of the day. For many central bankers, whom I have no doubt go to bed at night dreaming that their governments would initiate stimulus programs, it is all they have. That said, they should really take a look at the facts and not assume simple causal relations that may hold good (to some extent) some of the time, but by no means hold good all of the time.

Yet, the internet commentariat continue to call for more ‘innovative’ monetary policy. A good recent example of this is Clare Jones over at the FT:

What’s clear already though is that, unless the Fed opts to give more quantitative easing — or something more radical — a try, there’s little else it can do to lower the cost of borrowing.

Analysts need to drop their preconceptions. There are very few hard and fast causal relations in capitalist or any other economies. These economies are constantly changing and as they toss this way and that causal relations alter and break down. To try to come up with simple rules to understand the workings of an economy is to excuse oneself for giving up on actually thinking things through.

In truth, negative real interest rates – which, I believe, is what Jones is alluding to – even if they could be implemented (which I don’t believe they can), would be rather dangerous in the current environment. They would likely lead to more hoarding behaviour as investors became ever more nervous about the future. Its expansionary fiscal policy we need. Strong-armed expansionary fiscal policy. There is no alternative.

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149 comments

  1. Foppe

    I hate to say it, but I fail to see what is really novel about this piece..
    (And isn’t the real question whether the benefits from zirp/qe offset the fact that you’re killing savers and people who live off interest payments?)

        1. craazyman

          the entire body of thought is a novel, lurching forward in a chaotic post-modern collocation of episodes that don’t cohere except through the most aggressive suspension of the disbelief they call poetic faith.

          that’s why I’m heading for Spain and the red wine with the donkey soon, as soon as I get rich quick, hopefully by being lucky because being smart is too complicated.

          1. Mikey M

            ya well Spain is very expensive nowadays within the productivity-killing euro, i recently did an analysis of prices between UK and Spain in supermarkets, and UK is now only about 10-20% higher. 10 years ago the difference was about 50%-60%.

            So if you think you can retire in Spain on pittance you better look elsewhere :-)

    1. Fifi

      It is somewhat novel to hint that interest rates policy may have a composition problem, very much like tax policy and income distribution.

      Low interest rates simply don’t have traction in the real economy for many reasons exposed above and below and benefit only a very small sliver and the bad one at that, banks, the one sector that should have been liquidated and restructured with utmost prejudice for its principals.

      The problem is no so much what but whom. Interesting point.

    2. Jack Parsons

      Not hitting yourself in the head with a hammer is quite novel to many people. I’ve read this thesis before, and it resonates with Steve Keen’s ‘bank credit creates money’ thesis: zirp creates a static economy. To stimulate supply of money, you have to give banks a reason to lend. With money supplied, it can then have velocity.

  2. billwilson

    This has been the argument some have been making about Japan for some years.

    Faced with horrible returns on their savings in government bonds Japanese pensioners have been in ultra low consumption mode for some time now.

    I remember reading a few years back about an economist who recommended raising interest rates as a way to stimulate demand. The theory being the receivers of interest would start to spend, while the impact on borrowing would be less significant. For example if the Feds paid a higher interest rate it would be similar to a payroll tax cut (money borrowed then injected into the economy), but the money would go to a different cross section of the public (savers).

    1. aet

      I remember when Northeastern American blue-bloods swore by the old adage:

      “NEVER spend your capital!”

      …that was the bedrock of American prosperity, then and now, IMHO….

      Now, our “leaders” encourage us to spend our capital on having a so-called “good time” in Las Vegas – to “stimulate the economy”!!

      Stimulating idiocy, imho…

      PS Funny how the largest importers of Iranian oil (on terms of “easy credit” from their supplier, Iran) are…Greece, Italy and Spain…

      I’m sure that that has nothing whatsoever at all to do with the “debt crisis” those countries now face, nor for that matter does the high price of oil factor into those crises…

      http://www.farosradio.gr/en/faros-news/item/2006-iran-greece-and-the-west%E2%80%99s-oil-war.html

      …no matter what malicious people, who seek to hurt people who have never hurt them in any way, may have to say about the situation.

      1. enouf

        “Let’s Go Shopping!”–G.W.Bush
        (in response to the 9/11 attacks … “We’ll show those tewwoists we’re not afraid!”).

        1. ambrit

          Dear enouf;
          Sort of makes me think of those old Warner Brothers cartoons.
          “Shhh! I’m hunting tewwowists!”
          Somewhat later:
          “It’s terrorist season!”
          “No! It’s infidel season!”
          “Terrorist season!”
          “Infidel season!”
          Blam!
          “You’re despicable!”
          “Heh heh heh, what a maroon!”

          1. ScottS

            You forgot the part where Bugs points the gun at himself and says “Rabbit season!” and Daffy, in a fit of gainsaying, points the gun at himself and says “Duck season!” and is promptly shot in the face.

            The metaphor couldn’t be more apt with Newt Gingrinch now attacking Romney for being too successful a capitalist. Obama must be laughing himself to sleep.

          2. B. Bonny

            Bugs [to Elmer]: Do you want to shoot me now, or wait ’till you get home?

            Daffy: Shoot him now! Shoot him now!

            Bugs [to Daffy]: You keep out of this! He doesn’t have to shoot you now.

            Daffy: [to Bugs] Well I say he does have to shoot me now! [to Elmer] I DEMAND that you shoot me now!

  3. Richard Kline

    It has long been my view that neg real rates are the pernicious anemia of a capitalist economy [much as I'm leery of organicist metaphors]. Neg rates grow nothing, forgive nothing, and reward nothing excepting only, in the latter case, past proflicacy.

    But there’s a slight misconception snagged up in the presentation like corn kernal skin lodged betwixt ones teeth. For neg real rates as pursued by present central banks, most especially the Fed Reserve, are in no way intended to be ‘stimulative,’ remarks for public pablum consumption to that effect notwithstanding. Neg rates are intended to keep zombie financial oligarchs and corporate actors from actively rotting, allowing them to roll over their hundreds of billions of foul, dead, debt at no cost through the mid-term. It’s like filling the financial atomosphere around said zombies with nitrogen to inhibit decay; doesn’t reanimate them and suffocates everything near, but one doesn’t see the greenish spots spreading in plain view. The real goal is to keep those zombies looking pink for as many electoral cycles as possible—or until a way can be found to bill the public flat our for the entire cost of refunding the dead.

    Since the goal of neg rates is not in any sense ‘stimulative,’ it should be wholly unsurprising that the real economy receives no help. Said dead financial zombies added little to the real economy at the best of times anyway, so it’s a double tragedy that keeping them looking pink by grossly distorting capital flows devestates the real economy in these, the worst of times. If financial aristocrats continue to ship money out of the real economic countryside during this funding ‘famine,’ revolutionary solutions can be found to intitutional kleptocracy; certainly such solutions have been found in the past . . . .

    1. andrew hartman

      interesting article. way to go richard for keeping the hard left perspective in
      our faces…..foul, dead debt……revolutionary solutions…….page two of
      comic book marxism.

      1. K Ackermann

        Cut the crap and quit trying to obfuscate truth, or you’ll be first against the wall.

        Marxist, my ass. Snivelling twit.

    2. Philip Pilkington

      Paul Krugman and the folks at the FT are pushing for negative real interest rates. I don’t think they’re thinking in your terms. I think they’re thinking in terms of eroding consumer debt and stimulating the economy ala the so-called IS/LM curve. Unless, of course, our leftish friends are in the pay of the zombie banks — but that seems unlikely…

      1. alex

        “Paul Krugman and the folks at the FT are pushing for negative real interest rates.”

        Yes, but what Krugman and other “leftish” NRIR (negative real interest rate – I invented an acronym!) advocates overlook is that in order for inflation to erode consumer debt, the consumer’s wages would have to increase commensurate with inflation. But given the current non-existent bargaining power of labor that’s not going to happen. The result will be little or no reduction in debt service costs as a percentage of the average person’s wages, and what’s left over after debt payments won’t go as far.

        1. Philip Pilkington

          Yes, Krugman et al miss a lot of things. I’m just making the point that the intentions are probably not nefarious — just misguided.

      2. Richard Kline

        So Philip, I wasn’t lacing into you btw but raising a broader point on my own interest on a vector from your own remarks.

        But two points: Krugman and the like aren’t ‘leftish’ in any sense of the term: he’s a self-defined centrist liberal. Those types only _seem_ ‘left’ in the FoxCon media smear sense of things. While Paul is more humane than many, he’s a technocrat first who sees things in terms of intitutional solutions. He _cares_ about what the Fed does, and it doesn’t enter his weltanschauang that the Fed works to keep the oligarchy rich rather than the economy functional. That’s the problem with centrists, they’re attached to a particular kind of systemic political illusion which, even less than all of _our_ said illusions tracks not at all with the present socio-political reality.

        And second, Krug and the like are, I regret to say, economists, and as such are in thrall to the persistent _delusion_ that their perspective on finance capital in any way corresponds to what finance capital actually does. The perspective of economists on the political economy, within which they refuse to see the political part of the equation, renders their judgments invalid. I’m dead serious. This doesn’t mean that, necessarily, Krugman’s economic assessments, or any one else’s, are ‘wrong,’ although they may be that; what it means is, essentially, their assessments are _irrelevant_.

        Ben Bernanke, for instance, is convinced that he ‘must save the banks.’ By which he doesn’t mean the bank banks but rather the broker-dealer banksters. Bernanke doesn’t question why ‘he must do this;’ it’s for him a given, and every operator on his level tells him this is so, reinforcing the groupthink. Bernanke doesn’t have to be ‘bought’ because the interior of his braincase ws coopted so long ago he couldn’t tell you in which decade this took place. The oligarchy, you see, doesn’t need you or Ben or me to believe what they, variously, believe, but rather simply to play footsie in the scheme inside the box that they design and maintain. The idea that the banks are grossly corrupt has no equation in Benanke’s head, and while present in Krugman’s doesn’t fit into the solutions his worldview prefers so it just sits there smoking. The idea that the banks are killing the real economy can’t exist in Ben Bernanke’s head or it would explode, so he doesn’t even think the unthinkable; to him the concept appears to be an unknown unknown. I suspect Krugman grasps that the zombie banks are killing the economy, but he hopes that by pulling enough levers on the sidelines well-meaning technocrats, i.e. ‘his sort’ can keep things running even so. I can’t prove Krugman is wrong; history will do that for him and me both, is how I see it.

        But my larger point is that many serving the machine do not have to be acting in any cynical way to serve the 1%, they are there by social conditioning and a life time of food pellet rewards that reinforces the surface meaning of that they believe they do. They are enabler drones, not convinced participants. In short, I attribute ‘imperfect knowledge’ to them, so to speak . . . Which isn’t to say that I have perfect knowledge, or that anyone does. I can smell that rotting debt, though . . . .

        1. Fiver

          I like a good deal of what you say at NC, but I cannot agree re Bernanke. In my view, he was selected precisely because he was Mr. Depression and had already demonstrated in his responses under Greenspan to the Internet Bubble burst that he viewed deflation as if it was gamma rays and saw it everywhere. That indeed made him putty in the hands of Wall Street, but that doesn’t change the fact that he KNOWS he and Paulson, and Geithner, and Dudley, and Dimon, and Blankfein and many, many more have been lying non-stop for years and ALL broke the law repeatedly – what he so cutely termed having to do some “distasteful” things.

          He belongs in jail. And with plenty of company.

      3. Robert Dudek

        I’m confused here,

        Since inflation is higher than interest rates, real interest rates are already negative and have been for some time.

    3. Doug Terpstra

      Yours is a vivid, aptly grisly paraphrase of Mosler’s point. Reanimating the gangrenous flesh of banksters is the intent of the Criminal Reserve Cartel, not the health of the Main Street economy, house-debtors, students, prudent savers, or pensioners. This nightmare scenario only makes the leveraged slaughter to come exponentially worse.

      Question: is this ignorance, lack of imagination, depraved indifference, or a power play of premeditated murder?

      1. Richard Kline

        So Doug, it’s the bowel matter of the human condition. But the gods save those who save themselves, so we’d better get off the pot and start fishing if we want to have supper rather than be it is my view.

  4. rjs

    i think kid dynamite explained the problem a bit more succinctly:

    I disagree with the theory that placating market assumptions about interest rates in the future – reassuring the market that rates will stay low for a long time – will make it more likely for people to want to borrow NOW. Let me explain: right now, one appealing factor of home buying/selling decisions is that interest rates are very low – you can afford to buy more house. If I think that interest rates are going to remain low for a long period of time, I will be in no hurry to lock in this low rate on the debt I’m borrowing – I will be in no hurry to go out and buy a house….. Same for issuing fixed rate debt: if I’m a company looking to expand and I think interest rates will be going higher, I have more incentive to borrow money NOW, at this low rate. But if the Fed assures me that rates will be low for a long time, then I have no reason to rush my borrowing (and subsequent spending) plans. It seems to me that by assuring the Market that rates will be low for a long period of time, the Fed is giving borrows an excuse to NOT borrow (and thus not spend) now with any sense of urgency.

    http://feedproxy.google.com/~r/blogspot/dNro/~3/DF2JJHe2SOk/

    1. Philip Pilkington

      I don’t buy it. I often find that KD oversimplifies things. He’s making a sort of deflation argument about borrowing. E.g. In deflation people put off purchases because they know prices are falling. In order for KD to be correct the Fed would have to be implicitly announcing that in the future the interest rates would fall even more. They are not doing that and I doubt that they will do that.

      Besides, he’s got the whole thing backwards. People are not taking out debt because they’ve accumulated so much debt. It’s really that simple.

      http://misc.mortgagebrokers.ie/images/blogimages/2010/October2010/US%20Private%20Debt%20to%20GDP.jpg

      1. Ransome

        Under normal conditions, you have three factors influencing a purchase, price, terms, and location. Today we have favorable prices, favorable terms, and a vast selection of locations. The factors influencing a purchase today are mortgage mobility and job stability. Once they finally fix the mortgage mobility and job stability problems, the market will take off like a shot. Those that have stable jobs should be looking to take advantage of prices, terms and the vast selection if your current mortgage situation is favorable. Beat the stampede.

        1. spooz

          Can’t agree with you about the favorable prices. I follow the housing market in my large urban area pretty closely and there is not a “vast selection of locations” unless you are willing to deal with the hassle of a distressed sale. The inventory levels are pretty low and prices(other than distressed properties) have not come down enough to be tempting to would-be buyers. Many buyers are still afraid of becoming knife catchers and many sellers haven’t come to the realization that the short sale price is the new comp.

          Today we have favorable prices, favorable terms, and a vast selection of locations.

  5. skippy

    Killing… No.

    Just replacing…for a bit, and a bit more.

    Skippy… wheres that underdeveloped world when you need it? Oh yeah its the shite we turned into a tip away back.

    PS. biggest revolution this planet could experience is… to turn it off.

    1. citizendave

      There is more going on than monetary policy. I’ve been using “Planetary Burn Rate” to refer to the permanent damage done to the planet by that portion of the economy based on extraction of natural resources. In a booming economy the PBR rises sharply. Many of us are reluctant to contribute to the PBR. I’m certainly not cheering for millions of unemployed people, but if there is an upside, it is the lower PBR.

      We lost a major customer in 2009, so two years ago this week I volunteered for early retirement, at age 61. I started collecting Social Security benefits as soon as I was eligible, in July 2010. My meager retirement funds are in a money market IRA, which I don’t regard as safe, but it’s OK for now. (I would not buy gold, but I would buy US Treasury bonds.) When I was working, my wife and I split our fixed costs evenly. The Social Security benefit is not enough to pay my full share, and our rule is that I should not spend my principal until it becomes necessary. She is working and is able to make up the difference in fixed costs for me. If I could earn 2% or 3% on my retirement fund, it would give me enough to meet my half of our costs, and give me some spending money, which I would spend. Currently, I’m spending my cash savings, which will run out. We’ve cut our fixed costs to the brink of discomfort, beyond which we are reluctant to go at this point.

      If we are truly free, the future must be unknowable. There is much uncertainty in the air. Those who caused the Great Crash remain unrestrained. We don’t know what will happen in Europe or China or anyplace else. We don’t want to hunker in a bunker, but we have many reasons to limit our spending. I would be more at ease if instead of monetary policy and fiscal policy, we would talk about what will become of Planet Earth. I would gladly put my shoulder to the wheel and spend my meager funds if I could see any credible movement in the United States to transform our dinosaur era economy, burning oil and coal, into something modern that takes the long view into the future. Until then I will remain content to watch the shadows move across the room.

      1. K Ackermann

        The global burn rate… yes. Something often overlooked is the fact that it always takes some amount of energy to transmit information – any information – and information is growing at some geometrical rate, and worse… much of it is being sorted and tabularized and any number of other entropy-increasing operations.

        Forget about cars. Their growth rate is nothing like geometrical. It’s information that’s going to leave us cold and static on a very warm planet.

      2. Fiver

        Great comment. But that we had more like you, sir.

        But I’m afraid, CDave, that the “left” is largely as out to lunch as the “right” when it comes to thinking truly seriously about what we need to do to radically reduce our impacts if we wish to avert not just a human catastrophe, but a plethora of extinction events for virtually all large wild mammals, fish etc., the collapse of whole sub-systems, and much more.

        We need to jettison the “any growth is good growth” DEAD END ruling paradigm and laser in on redistribution and sustainability – we are already very, very late in the game.

  6. fresno dan

    I think Mr. Kline provides a very good insight. And I would add that if you have been trained as a banker, educated as a banker, and I would daresay indoctrinated as a banker…well, thats your hammer and your gonna pound that nail. And maybe they just can’t fathom, as they meet and talk to these bankers, that although (I DOUBT IT) these bankers are fine human beings, they simply did not know what they were doing (allocating capital) – if they didn’t know who or how to make loans before, why do we think they can do that now????
    And as I have noted many times, as I approach retirement, my forseeable discretionary income from savings has dropped about 95%. But that sure makes me buy and spend even less, not because of some desire for austerity, but I simply do not have the money to spend.
    One thing I noticed when I read the Fed’s 2006 minutes, is that for people who are suppose to know so much about banking, they seemed to be very naive about finance.

  7. Richard

    Why is anyone surprised that QE/ZIRP would kill demand?

    Walter Bagehot observed in the 1870s that interest rates below 2% create more problems than they solve. (for those who don’t know who Mr. Bagehot is, he is the individual who literally wrote the book on modern central banking.)

    In addition, before these policies were put in place, all one had to do was look at Japan and see that almost two decades of QE/ZIRP had not revived that economy (despite one of the largest increases in the global economy on record).

  8. MDBill

    pension funds seeing their income fall

    This ties in with an LA Times article that appeared this past Monday, CalPERS earned 1.1% return on investments in 2011. The piece goes on to state that CalPERS actuaries claim that a 7.75% rate of return is necessary to fulfill its commitments. I wonder if Bernanke is factoring this into his calculations.

    1. enouf

      Might want to check this out;

      http://www.c-spanvideo.org/program/Heist

      “Ellen Schultz argued that many large employers have plundered employee pension plans over the past decades and detailed some of their tactics. She also talked about the crisis this loss has created. She responded to questions from the retiree association leaders in the audience. This talk was part of their orientation for the National Retiree Legislative Network’s third annual Washington, D.C., Fly-In to advocate for retirement issues.”

    2. Philip Pilkington

      Very interesting. Thanks, I hadn’t seen that. According to their minutes the Fed are recognising this problem, but they seem to be largely ignoring it.

  9. Mark Chembrovich

    What one fails to see is how they have been thrown off track by simply following rates. The real issue is the Fed buying up underwater housing so it can prop up the price of those mortgages. It doesn’t matter what the rates are if the cost of the property is more than twice its value at auction. By talking up rates, you miss the real issues, which is keeping money in the hands of those who have it, and out of those who don’t.

  10. Bruce Krasting

    Philip does not mention the consequence that ZIRP/QE has on the worlds largest $ saver. The Social Security Trust Fund is sitting on $2.6 T in assets. The yields it is getting on this horde are coming down fast. This will be made public in March when SS releases its annual report.

    So ZIRP solves one problem, but creates another.

    1. citizendave

      The yields it is getting on this horde are coming down fast. – BK
      My understanding is that the interest rate paid by Treasury to the Social Security Administration is to compensate for the rate of inflation, not for the use of the money. The transaction takes place exclusively between Treas and SSA, not on the open market. Is that not so? Why does the interest rate on the special bonds in the SSTF matter?

    2. Procopius

      I know I’m being foolish, but I can’t help myself. Remember this sentence:

      “The horde of Mongol horsemen seized a
      huge hoard of gold coins.”

      I realize this isn’t alt.usage.english (which I used to love) but for dog’s sake words matter.

  11. jake chase

    This morning I listened to CNBCs favorite kleptocrat, Jamie Daimon, grouse about how it costs his bank $300 per year to maintain each checking account. I missed the part about how Jamie’s capital arrives minute by minute, at zero cost, from the Fed, while much of his revenue derives from fueling asset bubbles and selling CDS on the debt of hopelessly insolvent nation states that can never be allowed to pay off. It reminds me of what the Russians said about Communism: the bosses pretend to pay us and we pretend to work.

    The way capitalism really works is to produce alternate inflation and deflation of asset values, fueled by credit extension on the way up and credit withdrawal on the way down.

    ZIRP has already impoverished an entire generation of retired people, without doing anything for real estate which remains moribund. It is the collapse of real estate which has flattened the real economy, but no revival is possible until prices are permitted to fall. Among other zombies being maintained in all this are defaulting homeowners, many of them speculators, sitting out the foreclosure crisis which looks as though it may continue forever.

    Meanwhile, BHO is now running aggressively against his record of the past four years, promising to save mortgage borrowers up to $3000 per month, without reducing principal balances.

    None of this makes any economic sense, but selected constituencies will continue making a fortune from it. So it goes.

    1. Susan the other

      Just read the CNBC article on Jamie Dimon’s speech or interview from Davos. He is advocating bankrupcy for TBTF banks. Clearly he thinks JPMC is not one of those. He says they are not to big to fail, they are just big and dumb. Is this starting to happen now?

        1. Susan the other

          It does kinda sound like Dimon is saying the banks didn’t understand their own PSAs. And never really understood the long history of land title recording. And were never clear on the definition of forgery. And their bookkeeping was straight into the wind. Couldn’t trace that money if they had to.

      1. Don Delgado

        I think we can safely say that Dimon is too wealthy to have skin in the game and anything he says is beside the point, whether incidentally correct or not.

        Just get out of the habit of listening to people who own islands when it comes to anything at all about the future of the economy, is all I’m saying.

  12. Ed

    I think the justification for ultra-low interest rates were that businesses would more cheaply borrow and expand to take advantage of opportunities, and the economy would grow.

    However, because of hard resource constraints (mainly peak oil) there aren’t investment opportunities and the economy isn’t going to grow. So the one positive aspect of the policy won’t happen, but all the negative ones will happen.

    Actually the net effect is to make more people poorer more quickly. Since businesses aren’t investing, it is harder to get a job and if you have a job, with unemployment as a threat, you can’t expect a raise. But you can’t live on the interest from your savings either. I suppose there is a sort of logic go bad economic policies in that if due to resource constraints we are going to be poorer anyway, we might as well do it quickly so we can adjust better.

    And keeping interest rates this low, as others have pointed out, is opposed by what has been the standard wisdom about central banking, and the historical examples all indicate it is a bad policy.

    1. Procopius

      When they first dropped the rate to zero I thought, “Yeah, that’s what they’re supposed to do.” After a while I started thinking about what Samuelson (textbook ca. 1960) said that Keynes had shown, “Dropping interest rates won’t help; you can’t push on a string.” Raising interest rates can stop inflation, as Paul Volcker proved. It can also destroy labor unions and send your industries to other countries, as Paul Volcker proved. But it doesn’t seem to be very effective at stimulating investmnt when there’s no demand because there are no jobs and nobody has any money.

  13. Witold

    John Hussman has long been making the argument that low interest rates and QE policies decrease the velocity of money. for example, here: http://www.hussmanfunds.com/wmc/wmc110124.htm

    His argument is simpler, though: drop yields low enough and investors will have no preference between keeping their cash in a savings account and investing it and risk losing some of it. It’s intuitive and certainly the reason why I personally am parked on the sidelines.

    1. Pitchfork

      Yep. Count me as a second data point. I’m almost entirely in cash — and will be until the ZIRP games come to an end.

      ZIRP has done all it can do at this point for stocks, and, as Pilkington and others have pointed out, the risk-return on bonds is so out of whack you’re better off not playing. Unless you’re tapping the Fed and earning the spread, of course.

  14. Dan G

    I think the divide between the haves and have not is a continuous perpetuation that will be hard to overcome in this environment. Real interst rates might be low for the haves, but many of the middle and lower classes still pay high interest rates on mortgages, school loans, car loans etc..; the conundrum being that they dont qualify for low interst rates, but the GSEs (Fannie, Sallie, and Freddie) are happy to enslave them. For instance, the goverment is still willing to offer student loans too many, but at relative exorborant interst rates, often above 8%, while the banks get virtually free money. The whole idea that the goverment wants to help the middle and lower class appears ludicrous; action speaks louder than words.
    Unfortunately, there are no easy answers. On the one hand, the GSE’s shouldn’t even exist in a healthy economy. The grand illusion and bubble that home ownership and education have created is still going strong,until the second avalanche of defaults gets booked on the balance sheets.

  15. vlade

    I’d put it slightly differently.
    Zero yields with flat yield curve is what is bad. If the short rates are close to zero, but longer ones are reasonable, there’s space for investors (and even for banks to recapitalise via interest income, assuming they won’t shovel it out in bonuses. Yeah, I know).

    But Fed wants flat yield curve as well, because it believes the dumb theory that it’s the interest rate that drives investment as opposed the realised cashflows of the investment.
    If you have nothing to discount, it makes no difference what you discount it with. If you have profitable project that’s going to generate 25% margins, discount rate 6 instead of 4% will not make much difference in the investment decision.

    1. Maximilien

      “Zero yields with flat yield curve is what is bad.”

      Good point. Bernanke started “Twisting” about a year ago, and now he’s got himself all twisted in a knot. A Gordian knot.

      By effectively borrowing short (selling short-dated securities) and lending long (buying long-dated ones) to flatten the yield curve, poor old Ben has resorted to the last tactic (but one) used by desperate central bankers everywhere and always. He has succeeded only in tying himself up.

      All he can do now is print (the LAST tactic of desperate central bankers) and wait for the inevitable day of reckoning. He has saved his banker friends for a few years; he has doomed the Fed.

      For the non-believer in monetary mumbo-jumbo, this is happy news indeed. In fact, the non-believer wistfully contemplates a possible timeline detailing the decline and fall of the Fed:

      2008 – 2014: Disrepute. Policy pronouncements are questioned.
      2015 – 2019: Irrelevance. Policy pronouncements are ignored.
      2020: Extinction. Policy pronouncements cease. Chairman and Board of Governors of Federal Reserve are evicted from Eccles Building.

  16. don

    Oh, for the good old days when progressives were critical of consumer society. Today, those same progressives have dreams of increased aggregate demand.

    Tripping over each other to re-start a growing global economy, they ignore anything to do with sustainability, whether biologically, ecologically and economically, in effect downplaying the need to focus on a dramatic reversal of growing class disparity and inequality to one of increasing consumption. Pity.

    1. Wendy

      Agreed! The reference to Japanese pensioners switching to ultra-low-consumption mode… I made that switch myself 5-6 years ago, and regard it as a huge positive in so many ways, not least of which is sustainability (both micro and macro). Yes, it would mean switching to a different model, but we’ve done that before – we weren’t always a consumer-driven economy – and I think the future would look a lot brighter if more people made this switch, and organized around it.

      1. citizendave

        The crux of the problem is how to develop a system in which we can pay the cost of living, while not consuming the planet. Not consuming the planet entails not producing so much stuff to consume.

        The money-lender rentier class wants us to have debt so they can live without working. How can all of us live without working, or only work because we want to, not because we must?

        Amish people have barn raisings, in which members of the community donate their labor, which reduces the out-of-pocket cost to materials only. Their environmental impact is fairly low.

        I could easily be happy, or pursue happiness, just working in the garden and on the house, making art and music. But I have a mortgage, and property taxes, and need to eat, etc.

        If we could shift the economy to pay more for less work, we could have full employment for anyone who wants to work, work far fewer hours, live the lives we wish for, and return to making things that are well-made and durable.

        1. F. Beard

          If we could shift the economy to pay more for less work, we could have full employment for anyone who wants to work, work far fewer hours, live the lives we wish for, and return to making things that are well-made and durable. citizendave

          I’d like to see that.

          One hand full of rest is better than two fists full of labor and striving after wind. Ecclesiastes 4:6

        2. Wendy

          “If we could shift the economy to pay more for less work”

          meaning – if the MASSIVE productivity gains of the last 2 decades (or more?) were channeled into wage gains for the producers, instead of solely to profit gains for the owners. Which they won’t be, the owners would never allow it.

          The owners’ squeezing of the workers is seems like returning to feudalism in some ways. We need to become our own owners, and I like your example of the Amish.

    2. Fiver

      Not just a “pity” – it’s going to be the death of half of us and much of the rest of life on this planet. Where a huge slice of the “left” went on this is a mystery to me as the problems embraced by the 2 perspectives (left and environmental)track back to the same set of drivers, i.e., an elite class that has essentially detached itself from the world the rest of us occupy. Really, we should just invite them to leave, and close the door behind.

    3. Don Delgado

      It’s a tough problem.

      Moving away from that model will cause people to die in the future, unless combined with zero-population-growth policies.

      Those policies appear impossible, politically.

      So, it becomes very difficult to tell folks that they need to realize that growth can’t be sustained. It’s suggesting a future of involuntary manslaughter.

  17. Susan the other

    Right now, and for the next two years, the Fed is sticking to a plan to keep US debt from going parabolic. Or whatever is even worse. And we have all now been told that this containment will take at least 2 more years. It doesn’t preclude government spending on jobs stimulus. That’s political.

  18. F. Beard

    “Is QE/ZIRP Killing Demand?”

    Sure. Why not? According to MMT, borrowing by a monetarily sovereign nation (Absurd on its face, isn’t it? And fascist too.) is inflationary because it is an exchange of an interest paying form of money (government bonds) for a non-interest paying form of money (fiat). So yes, lower usury rates would reduce the flow of money into the private sector and thus normally reduce demand.

    1. F. Beard

      “If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.” from http://quotes.liberty-tree.ca/quote_blog/Thomas.Edison.Quote.6991

  19. Bam_Man

    Perpetual ZIRP (which is essentially what we have now) absolutely kills monetary velocity by encouraging disintermediation.

    The author’s points about propensities to save/spend are probably valid, but not the key factor.

    ZIRP and the disintermediation it causes turn the zombie TBTF banks into nothing more than repositories for the government’s growing mountain of debt.

    The end result is the “crowding out” of the real economy on a massive, system-wide scale.

    1. Philip Pilkington

      That doesn’t make any sense. The QE/ZIRP programs are initiated by taking government debt AWAY FROM the private banks and transferring instead masses of reserves.

      1. Bam_Man

        Banks are losing their retail deposits to other higher yielding asset classes such as REITS, muni bonds and corporates. In addition, there is much less incentive to lend when there is a lucrative, riskless carry trade available in Treasury bonds.

        Yes, the Fed periodically buys Treasury bonds from the banks when it engages in QE. But the huge ongoing amount of new supply is more than sufficient to keep the banks’ balance sheets stuffed with Treasuries.

    2. Don Delgado

      Disintermediation would seem to be the order of the day in the retail economy.

      And we all know how well that’s worked out for velocity . . .

  20. alex

    I think this was a great post. A number of people above said “ultra low interest rates cut income” is nothing new, but I never looked at it this way (even though I had other objections to QE/ZIRP).

  21. DL1

    This article is complete tosh from any number of angles…..US consumers are net borrowers(i.e payers not recipients of interest)…..lowering rates reducing interest income for the economy would matter (maybe) if it wasnt for that fact that the stock of outstanding debt has grown exponentially and lets face it the ‘Accumulation of Capital’ by Joan Robinson was forgotten for a reason. Quite possibly the same reason this article will be forgotten. Surely there are better things to devote column inches to(p.s this seems to be a pattern with Mr Pilkingtons musings….)

    1. KnotRP

      > US consumers are net borrowers(i.e payers not recipients of interest)

      You missed the main point….they *were* payers….now, the debt load has overwhelmed the ability to pay or kick the payment can, so the debt implodes…

    2. Philip Pilkington

      Ignoring the nonsense about Robinson — has the commenter read the book? Probably not… Was it forgotten because of the minor argument outlined above? Definitely not…

      Yes, there is this aspect but there’s a lot of things to be taken into account. Are these people repaying or are they turning on the loans? Are they tied into fixed rate mortgages? The list goes on. There are positive aspects to the ZIRP policies, my point is that its a mixed bag and will NOT allow for a recovery.

      Besides the stated aim of the ZIRP policies is to stimulate borrowing to increase aggregate demand, NOT to allow borrowers some leeway. In this, it fails.

  22. Eric L. Prentis

    Chairman Bernanke admits his Zero Interest Rate Policy (ZIRP), that now extents to the end of 2014, is a massive transfer of wealth from savers to borrowers, which reduces capital formation. Consequently, savers and over-indebted borrowers are not spending, reducing demand. Quantitative Easing (QE) by the Federal Reserve to monetize the federal debt, which keeps interest rates low, only increases inflation and asset prices on items everyday workers desperately need, i.e., gasoline, food, clothing. This transfers money from the real economy to the financial markets, further hurting demand. (Another result, increasing asset prices in the stock market mainly goes to the top 10%).

    Since 2000, the national debt has increased from about $5.6 trillion dollars to $15.3 trillion dollars, or 273%, in twelve years. Adding in the increased debt at the Fed for QE 1&2, +$2.1 trillion dollars, and Fannie Mae and Freddie Mac debt, +$5.3 trillion dollars, brings the US national debt to $22.7 trillion dollars, or 149% of GDP. Fiscal policy is under severe strain and politically, expanding it is unworkable.

    Public and private debt is about 370% of GDP. As the public deleverages, mainly through bankruptcy and defaulting on their underwater mortgages, government has attempted to spend more to maintain demand. The problem is we have hit a debt wall, it is impossible to service debt when it is 370% of GDP.

    All the stupid decisions by the financial elite have already been made (Mortgage fraud, securitization, MERS, robo-signing). The American people no longer want to use taxpayer money to support the status quo. The only solution is debt forgiveness. Let the zombie banks die. Raise interest rates to increase demand. Let’s transition out of this casino financial system and start growing the real economy again.

    1. F. Beard

      The only solution is debt forgiveness. Eric L. Prentis

      No,there is another. Steve Keen advocates a universal bailout and equal bailout, including non-debtors, with new fiat combined with new leverage restrictions to prevent the problem from reoccurring.

        1. F. Beard

          Actually, it is very elegant: Reform allows a bailout without inflation and a bailout allows reform without deflation. And politically a universal bailout bypasses the traditional saver vs debtor divide. Of course, it is only a one-time opportunity.

          Also, it is just. To claim justice is fraught with unintended consequences verges on cynical.

          And a universal bailout is not complicated:

          1) Ban any further credit creation by the banks. All future loans to be of existing money only. This would be massively deflationary as existing credit is paid off with no new credit to replace it.

          2) Send equal “restitution checks” to the entire population metered to just counter the deflation from 1). Continue till ALL private credit debt is paid off.

          Since the total money supply (reserves + credit) would not change then neither price inflation nor price deflation should be expected.

          1. F. Beard

            Sounds like the lawyer full employment act

            What’s to litigate? Did Bush’s “stimulus checks” require litigation?

            and very expensive.

            How so? How much does direct deposit cost?

          2. F. Beard

            Sounds like the lawyer full employment act

            A bailout would fix the banks too. They might accept the ban on further credit creation at least for the duration of the “restitution period”.

          3. MyLessThanPrimeBeef

            After the end of the USSR, they sent out checks, or more precisely, vouchers to all their citizens in a similar fashion. The next thing you knew, some became oligarchs.

            That kind of unintended consequences?

        2. citizendave

          Then the question becomes: were the consequences we see all around us intended or not? Avaricious collusion, or blind blundering?

          A universal bailout, as described by F. Beard, would certainly lift my spirits. For one thing, my selection of red wine would move up a shelf.

    2. Don Delgado

      “Quantitative Easing (QE) by the Federal Reserve to monetize the federal debt, which keeps interest rates low, only increases inflation and asset prices on items everyday workers desperately need, i.e., gasoline, food, clothing.”

      This is a big claim to make without evidence.

      And no, I am not gullible enough to accept “it’s sure to happen any day now” as evidence, although many of the Ron Paulers seem to be.

      1. spooz

        lets see, food is up 4.8% in 2011, gas is up 6.8%, clothing? who cares, health insurance is up 9%, college tuition is up 11%… but yeah, if the Bernank says inflation is within target, its all good. Guess I must be one of those gullible people who spends a little time on google before I make a statement.

        “Quantitative Easing (QE) by the Federal Reserve to monetize the federal debt, which keeps interest rates low, only increases inflation and asset prices on items everyday workers desperately need, i.e., gasoline, food, clothing.”

        This is a big claim to make without evidence.

        And no, I am not gullible enough to accept “it’s sure to happen any day now” as evidence, although many of the Ron Paulers seem to be.

      2. spooz

        apologize for lack of quotes above.

        Also, it would seem the only deflation we are seeing is from the housing bubble. So I guess we now choose arbitrary measures of inflation to allow the fed to claim it is meeting its dual mandate, that the “moderate” amount of inflation is the trade off for reducing unemployment. Unfortunately it looks more like stagflation, with inflation everywhere other than the artificially propped up housing sector, and intervention is becoming increasingly ineffective.

  23. George

    Keynesian policy doesn’t work? The economic system is too complex to know how to manipulate it?

    Who could have guessed?

    Especially given the fact that there are no countries in the world that have tried Keynesian management who are not also dying from economic problems.

    Now economists are doubting the ideological orthodoxy. A bit slow.

    1. Philip Pilkington

      “Especially given the fact that there are no countries in the world that have tried Keynesian management who are not also dying from economic problems.”

      China?

      1. MyLessThanPrimeBeef

        China has her own problems.

        One is how to grow a living stock market, instead of a puppet stock market where it goes up when the Poliburo tells it so.

        Another is that China has yet proven anything that will work in nations that do not take jobs from other nations. Whatever conclusions you get from China are tentative.

      2. Fiver

        Keynes just rolled in his crypt.

        Let’s remove the enormous, heavily subsidized (by China and home base) global multinational presence (Apple now sitting on $93 billion in cash) that sold out their own countries to make unheard of profits on sweatshop labour to export back to their own hollowed-out bases and see how long the “miracle” continues.

        China is enormous, nobody, and that includes the Chinese, knows how much dead debt there is – except it is mammoth – and any country growing at 9%-10% a year that CANNOT attempt to slow down for even 1 year for a 1% decrease without freaking out and reversing policy is not “managing” anything – it is riding a runaway train.

        Check back in 5 years and m

    2. Don Delgado

      I agree.

      The state has to take an active hand in converting envy into productivity – harnessing the utility of envy by demonstrating to average people that the wealthy will be brought down to size through taxation and regulation.

      Without this, no one will have faith in the economy.

      So we have to jack up taxes on the rich, now; we have to re-regulate, now; we have to make a public show of it, and yesterday.

      1. LifelongLib

        “Envy” is when somebody has a yacht, and I don’t want him to have one because I don’t have one.

        “Revolution” is when he has three yachts and my parents don’t have pensions and I don’t have health care and my kids don’t have decent schools.

        “Envy” is the last thing today’s wealthy have to worry about.

  24. Jim

    “Its expansionary fiscal policy we need. Strong-armed expansionary fiscal policy. There is no alternative.”

    Philip, perhaps there appears to be no alternative because your theoretical lens doesn’t allow you to question some of your key assumptions.

    Is our present social/political/cultural system largely a given in your theoretical framework?

    What are the origins of the psychological components in your theory (i.e things like hoarding, thrift, savings and spending)?

    These psychological components would appear to have some kind of roots in our present social/political/cultural system. Is this explored in your economic framwork?

    Is it possible that the solution your economic framework demands (a strong-armed, state initiated, expansionary fiscal policy) primarily an inadequate policy response to a real breakdown in moral values in our cultural/politica/economic structure?

    In 2012, does such a moderate collectivism as advocated by your economic framework (taken what we now know about the pathologies of goverment, corporate and big bank bureaucracy) contribute to, rather than help to resolve, our present crisis?

    In 2012, is the assumption that when a society’s self-governing mechanisms break down, it only needs more governing from the state, an adequate response taken the apparent magnitude of our task?

    Does your remoralization of the economy by advocating that our sin is spending too little, reinforce some of the worst traits of modern liberalism?

    When push comes to shove

    1. citizendave

      From my perspective, as a believer in the value of going to a war footing to drastically reduce air pollution worldwide, no amount of fiscal or monetary policy jockeying will solve the problem. From this perspective, what we need is what President Kennedy did with the space program, a mobilization that permeates the whole society, down to kindergarten.

      Mr Market is incapable of delivering an economy that does not pollute the atmosphere. The invisible hand is like the emperor’s new clothes: it does not exist. The leaders of the current economy are obsessed with accumulating money, nothing else. They fiddle while Rome burns. Public policy must take over to do what needs to be done. The grownups should tell the children to stop playing monopoly and help fight the fire.

      1. Don Delgado

        Good point.

        The market is a model.

        The state is a reality, backed up by bullets and bombs.

        In fact, the state is civilization; a prerequisite for the sort of market that does what most economists think the market “does”.

        It takes historical myopia to believe otherwise.

  25. zebulon

    The arguments laid out in the post are complete nonsense. The point of lowering interest rates is not that you shift income from one person to the other. That of course is of doubtful effect. The purpose of lowering interest rates as a tool in monetary policy is to generate ADDITIONAL borrowing. People who borrow do this to spend the money, not to to keep it under the matress. Spending money means creating demand, means stimulating the economy.That’s how monetary policy works. If you can’t lower rates because you are already at zero, you have to come up with things like QE, ZIRP and TWIST to try and achieve at least a minimal impact on actual market rates.

    Somehow we are going all the way back to zero in this blog too…

    1. George

      But, it hasn’t worked, whatever the point was.

      It didn’t generate additional borrowing, and there are good arguments that that is exactly the wrong thing to do in any case.

      Arguments like ‘all the economies of the world are dying of debt’.

      1. George

        People can’t borrow. They don’t have jobs, have negative equity in their homes, have too much student debt, are terribly afraid of the future (intelligent, IMHO), and the real 6% inflation rate is absorbing all their income, or all of those.

        Businesses can still borrow, but why? The economy is in the toilet and most businesses think it much wiser to accumulate cash and buy back their own stock.

        The economy is an enormously complex system. No country has demonstrated an ability to control it for net gain over multi-generation intervals. In fact, they all go broke trying to do so.

        Nobody wants to face up to that reality.

      2. F. Beard

        The problem is that people don’t have enough money in the bust to pay debts acquired in the boom.

        What’s the liberal/Progressive objection to governments just handing out cash? The Right opposes virtually any government spending as wasteful but who thinks their own personal spending is wasteful? Bush, a Republican, handed out cash and I sure didn’t send mine back.

        1. F. Beard

          Will it take another Republican to do the right thing? Probably so. Liberals and Progressives are elitists. They are convinced they can spend the population’s money wiser than the population can. The population disagrees.

          I would quickly get behind Steve Keen’s idea of a universal bailout if I were a Progressive. But maybe not if Progressive = elitist.

      3. Eric L. Prentis

        People are not borrowing because either they are at their debt limit, underwater on their mortgage, have too much college debt, fear losing their jobs, are unemployed, had their credit rating lowered increasing their interest rate on a loan, have not been getting raises to keep up with real inflation, there is no trust in the system, no feeling that things are getting better, no trust in politicians, no trust in the status quo. Money dominates elections and the day-to-day government process, the people are ignored. The 1% are in charge and only take care of themselves, and now they wonder why the people are not growing the economy. Incidentally, the 1% also hires shills to advance their position.

        1. F. Beard

          Incidentally, the 1% also hires shills to advance their position. Eric L. Prentis

          But it’s a tired, worn-out position they attempt to advance and one refuted by day to day reality.

          1. Eric L. Prentis

            I am referring to, “Its expansionary fiscal policy we need. Strong-armed expansionary fiscal policy. There is no alternative.”

          2. F. Beard

            I agree we need a strong fiscal policy – a universal bailout with new fiat.

            If it’s only money that is needed then just give it away.

          3. MyLessThanPrimeBeef

            There is another possibility if we can be humble enough. It’s possible only time can solve our problems.

          4. F. Beard

            It’s possible only time can solve our problems. MLTPB

            Like it solved the last Great Depression with WW II, Europe destroyed and 50-86 million dead?

            No thanks.

          5. F. Beard

            There is another possibility if we can be humble enough. MLTPB

            He has told you, O man, what is good; and what does the LORD require of you but to do justice, to love kindness, and to walk humbly with your God? Micah 6:8

    2. MyLessThanPrimeBeef

      If you lower rates and people are not borrowing, then the only ones benefit are those people who have already borrowed with adjustable rates.

      Imagine a block where you have one guy with adjustable mortgage and the rest retired pensioners living off their savings in money market accounts. It would be like everyone taking home less interest income so that one guy can pay less on his mortgage. There is no new borrowing. The retirees have less to spend and the adjustable mortgage guy, well, he might just keep the money he saves in the bank.

      Is that stimulating the economy?

      That’s one example. You can go through them all and maybe come up with a net effect. What we are seeing is ZIRP is not helping. What we suspect is that it is hurting.

    3. Don Delgado

      “If you can’t lower rates because you are already at zero, you have to come up with things like QE, ZIRP and TWIST to try and achieve at least a minimal impact on actual market rates.”

      And that’s the point, isn’t it? These methods are to “try and achieve” something . . . they’ve been tried . . . and they haven’t achieved.

  26. Luke Lea

    “There are very few hard and fast causal relations in capitalist or any other economies. These economies are constantly changing and as they toss this way and that causal relations alter and break down. To try to come up with simple rules to understand the workings of an economy is to excuse oneself for giving up on actually thinking things through.”

    You are turning into a real good economist! It’s logic, it’s art, it’s experience, it’s history, it’s science, it’s all of the above and it takes a good, well-educated mind. No wonder they are so rare.

  27. Don Delgado

    A very intriguing piece. The strongest part, to me, is at the end.

    It is shudderingly terrifying for most economists to realize that the current state shows that orthodoxy is wrong – that the current crisis cannot be solved by their personal heroes, bankers in boardrooms, through the tools of monetary policy.

    The standard (read: Krugmanite) protests are that we should not “mistake” fiscal policy for monetary policy. This, to me, demonstrates delusion.

    The truth is that monetary policy’s ammunition has run out. Promising future zeroes on rates simply won’t do what lowering rates does, for the reason Pilkington elaborates: promising the Sun and Moon to bondholders scares the shit out of them.

    This will have to involve spending – and that will take pushback against pretty much every economist advising every politician up there in the halls of power, not to mention pushing back against Germany in Europe.

    Can it be done?

  28. Don Delgado

    The state has to take an active hand in converting envy into productivity – harnessing the utility of envy by demonstrating to average people that the wealthy will be brought down to size through taxation and regulation.

    Without this, no one will have faith in the economy.

    So we have to jack up taxes on the rich, now; we have to re-regulate, now; we have to make a public show of it, and yesterday.

    The key is to listen to the jackasses like Romney and what they fear, and not to the liberal weeping willows who follow Rawlsian delusions where envy is a sin or outside the bounds of what society can accept.

    Hayek had a lot wrong, but he had it right that greed is an instinct that civilization harnesses.

    If we do not harness envy through other mechanisms, its results will shatter societies, as it has done many, many times before.

    1. F. Beard

      Disagree.

      1) Removing money from the economy is not good during a Depression.

      2) A universal bailout IF combined with a ban on further credit creation and metered properly would greatly reduce relative wealth disparity by making the poor richer not by making the rich poorer.

      1. Don Delgado

        Relative deprivation will accept either movement – and it’s all relative deprivation in an economy where information about the benefits of wealth blares from every media outlet, 24/7.

        The important bit is to recognize that people will take risks in society if they feel they stand to gain from it, and one way most people have ALWAYS had to gain from society (however slight) is to watch, with pleasure, as it corrects for its own inequalities by causing discomfort to the “haves”.

      2. bulfinch

        This sounds tantamount to a wage subsidy, which historically, have been disastrous. In my opinion, bailouts, in any iteration, are not the way to go.

        1. F. Beard

          The “restitution checks” would go to the entire adult population. And they would continue only until ALL credit debt to the counterfeiting cartel, the banking system is paid off.

          Our mistake to date has been to bailout the villains and not the victims.

          1. bulfinch

            I guess my point is that any such restitution wouldn’t provide the kind of relief you suspect. Certainly, employers would price this in as a subsidy, rationalizing lower overall compensation for employees. I can see it being priced into rents and commodities as well. I see where you’re going, but I suspect that it would not result in the non-zero sum game you’re looking for.

          2. F. Beard

            Certainly, employers would price this in as a subsidy, rationalizing lower overall compensation for employees.

            I think the opposite is more likely to happen. Employers might have to pay more to employees not in so such desperate need for money. Also, a rebounding economy would create a higher demand for labor, not less.

            I can see it being priced into rents and commodities as well.

            With an unchanged size of the total money supply (reserves + credit) neither price deflation nor price inflation should be expected.

          3. F. Beard

            I see where you’re going, but I suspect that it would not result in the non-zero sum game you’re looking for.

            It is essential that the bailout be combined with a ban on further credit creation and metered to just replace existing credit as it is paid off.

      3. Don Delgado

        A far milder version of the argument is that there will always be an element of sadism in any movement for social justice or reduction of inequality, and: so what?

        If the results are virtuous or what we want, why pretend the motivation comes solely from the angels?

        1. F. Beard

          If the results are virtuous or what we want … Don Delgado

          The results would NOT be virtuous. Envy is no better than greed if not much worse.

          1. Don Delgado

            The results would NOT be virtuous.

            I think they already have been. They aren’t always – see the bit I said above about shattering societies if it’s allowed to fester – but I think envy has been a factor in all income redistribution.

            Envy is no better than greed if not much worse.

            On this, however, we agree completely. These are dangerous powers to trifle with, and they must be used competently and with honesty to achieve good ends.

      1. Don Delgado

        . . . although it will take proper policing of psychopathic actors in the economy – and that will be a severe challenge nowadays.

  29. bulfinch

    I’ve finally gotten to a point in my life where I can build some savings, but the message that policy like ZIRP sends is that I should instead plant my seed corn and stop hoarding money: gamble it away on an overpriced commodity or leverage up to afford now what I would otherwise save up for — whatever, just keep the dollars flowing. It’s pretty depressing.

    On a somewhat related note — online lotteries and real-money gambling are getting a lot of positive attention lately as one of the next great hopes for boosting the economy.

  30. bulfinch

    I think the opposite is more likely to happen. Employers might have to pay more to employees not in so such desperate need for money.

    Well, history is not on your side. See Speenhamland. But let’s say it was different this time: this would depend on a rather complex sliding scale for establishing such things as how much and to whom and at what rate the money was to be disbursed. Too much too soon almost certainly would spell disaster, while too little at any rate of disbursement might be imperceptible while still serving the purpose of restitution in name only. See boondoggle.

    Unfortunately, I still feel the idea of a universal bailout could be construed, and fairly so, as poor relief or a quasi wage supplement. As such, I see great potential for the lions share of the relief trickling its way back up to the “owners” and serving only to further aggravate rather than mitigate the wealth/income gap.

    1. F. Beard

      Too much too soon almost certainly would spell disaster, while too little at any rate of disbursement might be imperceptible while still serving the purpose of restitution in name only.

      The bailout would be metered to just replace existing credit as it is paid off. It would taper off to zero as all credit debt was repaid.

      The above (combined, of course, with a ban on further credit) would keep the total money supply (reserves + credit) CONSTANT. That is very conservative and hardly likely to cause disaster. Plus, it is a just solution since banking cheats everyone.

    2. F. Beard

      But let’s say it was different this time: this would depend on a rather complex sliding scale for establishing such things as how much and to whom … bulfinch

      Politically, an equal bailout is the way to go, rich and poor alike. The rich could then not complain of “socialism”.

    3. F. Beard

      As such, I see great potential for the lions share of the relief trickling its way back up to the “owners” and serving only to further aggravate rather than mitigate the wealth/income gap. bulfinch

      Then the bailout could continue and become a Minimum Income or Social Credit in perpetuity.

      And don’t forget that “credit creation”, the means by which the most “credit-worthy” loot the less “credit-worthy” would be abolished.

    4. F. Beard

      Unfortunately, I still feel the idea of a universal bailout could be construed, and fairly so, as poor relief or a quasi wage supplement. bulfinch

      No, it is “restitution” for theft by inflation by the banking cartel.

      And who cares what employers think? They will pay market rates for labor or do without. And without further access to the counterfeiting cartel, their ability to automate jobs away with the workers’ own stolen purchasing power would be gone.

  31. Paul Tioxon

    Credit has it uses, in the irrational sequence of events of capitalist production. The dead season before the buying binge of Black Friday to End of the Year Clearance buy a big tv for the Superbowl and afterwards, nothing. Credit spills money into the gaps when money is no longer given freely in trade. We have enough factories to make everything we want or need, we have more food than we can or should eat and we bulldoze cities that once housed millions but are abandoned because of economic tides have gone out.

    The trillions in profits sitting on the sidelines, the savings glut, the pension funds that have nowhere to go all await a New World Order to invest in.

    New spaces need to be created other than more shopping malls for more gadgets and more shoe styles. The public infrastructure cries out for maintenance but the returns, not good enough. The solar electric world is waiting to be born but the battle for which network of power will set the structure in place goes back and forth. Oil pipelines and fracking but not a dime for Soylyndra.

    Hate was just a legend
    And war was never known
    The people worked together
    And they lifted many stones.

    They carried them
    to the flatlands
    And they died along the way
    But they built up
    with their bare hands
    What we still can’t do today.

    FROM: “CORTEZ” BY N. YOUNG

  32. Fiver

    I find this somewhat ironic, as it is basically the stance taken by many of those financial analysts/commentators blogs on the “right” all along – eg Shedlock, ZH, Hussman and also the basic stance of Germany – i.e., that ZIRP/QE does far more harm than good and have been saying so since March 2009. And especially not “easing” into the most luxuriant overgrowth of criminogenic scuzz in human history.

    And is has obviously been the case that “easing” has been of virtually no value to ordinary people, but of IMMENSE value (at least for now) to:

    1) Governments who were struggling even before being buried under bad bank debt.

    2) Banks and all their internal ratholes.

    3) Major speculators, who tap near-free money from banks. Note we are not talking about people looking for “safety” from inflation (though I’m sure plenty have TIPS), but those who looked for, and made, enormous killings on gold and commodities and stocks ramping because THAT’S WHERE THEY COULD MAKE OVERSIZED MONEY.

    4) All the other asset managers of the top 25 per cents’ money who know the speculators are there and will follow the lead, and especially if the Fed is managing things on the downside.

    Uunfortunately, pension funds – given the reality of no real protection from governments to force corporations to keep plans funded, and only artificially-induced, phantom market returns (and shearings), pension funds should levy much higher premiums on employees and END playing with risk – start to protect themselves or kiss it goodbye when actually needed so long as criminals run the joint.

    5) Anyone who was able to re-finance debt at history’s lowest interest rates – about half that debt is owed by the top 2 quintiles.

    So anyone WITH money got a gift, and the bigger the hand, the bigger the handout.

    If the 1% or 10% didn’t want Bernanke to print, he wouldn’t. But Wall Street keeps squeezing more easing and they keep getting it. If all they cared about was fees, an interest rate hike would do just as well.

    And there it is. That’s the policy. Feed more money to people with money and whatever dribbles down slobbering lips does so. Note this has been the policy recommendation called for by Krugman, Baker, Galbraith (I believe)pretty much the whole “liberal” or “left” or “progressive” side because (and here’s the lament) “If that’s all that can be done, then we must do it.”

    What we’re actually seeing now in the US is in part the miserable tricklet from 3 years of this BS “help” from the Fed. It was great for a third of Americans. A kick in the face for the rest. And plenty of people said so from the beginning – they were ignored.

    Meanwhile, how much of the US economy traded hands over the last 3 years? And how much is coming for Europe because “easing” is blood for sharks and and Ipads for the kids.

    So it’s agreed? No more “easing” of any kind from the Fed or BoE for the rest of this crisis? That is very good news indeed.

    1. alex

      Fiver: I find this somewhat ironic, as it is basically the stance taken by many of those financial analysts/commentators blogs on the “right” all along …

      It’s only ironic if you buy into the whole left vs. right (or liberal vs. conservative) thing as being the most important difference between people of various opinions. I don’t.

      1. Fiver

        I hear you, Alex. I would say the left/right characterization is sometimes useful in discourse, though often not. I think it’s fairly evident in terms of general orientation that, for example, someone on the “left” would view current multinational corporate behaviour as rapacious, while someone on the “right” typically does not, or a better example, that someone on the “left” favors intervention on behalf of the disadvantaged, while someone on the “right” does not.

        But the reason I raised this was to point out to Mr. P (and others of similar disposition at NC), who for example believes “libertarianism” is a “cult” (said so numerous times here) or that “Austrians” are mad fools, that often they in fact have as good or better analysis of some particular – in this case, that Fed Reserve actions in this environment are KNOWINGLY aimed at helping those that are already comfortable up to the super-rich, and have nothing whatever to do with providing any meaningful support for the actual majority of citizens – that the Fed is a wholly corrupt body that requires radical surgery – even death to be replaced by something completely different. As a life-long democratic socialist, I am in complete agreement. And as an environmentalist who believes ecology trumps everything else, or as a student of technological development who believes we are moving ever faster with ever less thought given to WHAT exactly we are creating, I know only too well that the “left/right” polarity and language of discussion is grossly inadequate to coming to terms with what we rather badly need to do going forward.

  33. Awaster

    Roubini stated in an interview from Davos today “that everyone is waiting for the new models to emerge, they have not shown up yet”.

    Perhaps creating a “new world order” is going to take a while.

    Its a strain to buy that central bank cooperation, coordination and easy money is going to quickly trump citizen psychology and demographics, systemic dysfunction, corruption, disequilibrium…….when it is now, finally clear to most people that the emperor truly has no clothes. Can new models be created by necissity or mandate, or do they have to evolve?

  34. nn

    And from where would the money for higher interest go? The problem is the economy is in standstill and lot of people are overleveraged, raising rates would suck moneoy out of production and consumption and lead to mass defaults.

    Yes, rentiers like to preserve capital, but that’s exactly the problem – they are sitting on the money and incentivizing them to sit on their money even more solves nothing.

    1. spooz

      Mass defaults are necessary, imo. Bondholder haircuts. But then, I’m a graduate of the fight club.

      “raising rates would suck moneoy out of production and consumption and lead to mass defaults.”

      1. nn

        But with mass defaults you exchange lower (or negative) interest for writing off all the money. If too small flow of money from interest is hinders consumption I fail to see how losing the whole capital could help to persuade the rentiers to consume more.

        1. spooz

          guess I don’t know why rentiers consuming more is necessary.

          “persuade the rentiers to consume more”

          1. nn

            I though the point of this article was that low interest is killing rentiers consumption and thus demand, by forcing higher interests on the economy we reverse this dynamic.

  35. Pierre Bigras

    The arguments made here are very similar to those put forward by Michael Pettis to explain the very week consumer spending as a proportion of GDP in China. This is economic repression exercised against savers, but also against consumers who are in deep debt doodoo and need to deleverage. Make no mistake, there IS a Catch-22 here…

  36. SH

    I only ask if if this is true

    “Analysts need to drop their preconceptions. There are very few hard and fast causal relations in capitalist or any other economies. These economies are constantly changing and as they toss this way and that causal relations alter and break down. To try to come up with simple rules to understand the workings of an economy is to excuse oneself for giving up on actually thinking things through.”

    Then how you know this is true?

    “It also, I should think, affects investor psychology in that a lack of future income leads them to see the future as being all the more bleak. Their prospect of future income having fallen, this could well lead to a far greater propensity to hoard. It could also make investors more edgy as they try to preserve their capital in what has come to seem like a very uncertain environment. This could lead them to seek out what they think to be safe investments – such as gold and other commodities – thereby inflating bubbles that further exacerbate consumer spending power.”

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