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View Full Version : Is this the Right Time for the Fed to go Negative?



doobsta
09-10-2010, 08:07 PM
SEPTEMBER 10, 2010

By WILLEM BUITER

Ben Bernanke, chairman of the Federal Reserve Bank, has a lot more tools for supporting U.S. economic activity through expansionary monetary policy than he discussed in his Jackson Hole speech, which alluded only to more quantitative easing and credit easing—increasing the size and changing the liquidity composition of the Fed's balance sheet.

Perhaps out of fear of resurrecting the moniker "Helicopter Ben," Mr. Bernanke did not refer to the combined fiscal-monetary stimulus that (almost) always works: a fiat money-financed increase in public spending or tax cut. Treasury Secretary Tim Geithner can always send a sufficiently large check to each U.S. resident to ensure that household spending rises. By borrowing the funds from the Fed, there is no addition to the interest-bearing, redeemable debt of the state. As long as households are confident that these transfers will not be reversed later, "helicopter money drops" will, if pushed far enough, always boost consumption.

However, stronger consumer expenditure, while appropriate from a cyclical perspective—any additional demand is welcome—is not what the U.S. needs for long-term sustainability and structural adjustment: to raise the national saving rate, boost fixed investment in plant, equipment and infrastructure, achieve a trade surplus and shift resources from the non-tradable to the tradable sectors.

By way of illustration, an eight percentage point reduction in public and private consumption as a share of GDP could be compensated for by an increase in the trade surplus of five per cent of GDP and in non-housing U.S. fixed capital formation of three per cent of GDP. To achieve this, a much weaker real exchange rate and lower real interest rates are necessary. To pursue these objectives speedily a Federal Funds target rate of around minus three or minus four per cent may well be required right now, in our view. This brings monetary policy up against the zero lower bound (zlb) on nominal interest rates.



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Got Goldies
09-10-2010, 09:00 PM
You can't get rates below 0%.

The problem is people do not want to take on more debt and are either:

1. Paying it off.
2. Claiming bankruptcy

Which is more likely?

The only way for Bernanke to entice people into credit is to drop the prices for many big ticket items..

Silvercoin
09-10-2010, 10:20 PM
You can't get rates below 0%.


You can. The Bank of Japan tried that. Charging savers a penalty (-0.5% interest rate) for depositing their money in the bank to get them to spend it instead.

It did not work. People shut down their spending even faster and increased their savings to make up for the lost interest. Just the opposite of what was expected.

All these silly keynesian economic threories should be burnt along with the economists that promote it. The best thing to do is stop fiddling around with the economy and let it establish its own equilibrium.

Got Goldies
09-10-2010, 10:52 PM
You can. The Bank of Japan tried that. Charging savers a penalty (-0.5% interest rate) for depositing their money in the bank to get them to spend it instead.


That would cause a bank run. If they started deducting negative interest rates on me, I would shut my account. The bank would collapse in 1 week. They can't force me to spend it.
Likewise, they can't put me in debt.

Silvercoin
09-11-2010, 12:25 AM
That would cause a bank run.

Whether they charge you a -0.5% interest rate or steal your purchasing power via printing as they are doing now, the result is the same. But people are still putting money into banks rather than taking it out so how does your theory of a bank run hold up.

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From 2003 :

Tokyo announces negative interest rates

The Japanese monetary authority has announced it will authorize banks to charge negative interest rates of 3-5 percent below zero. The move was reported in Shukan Gendal, a Japanese financial publication, according to a June 9 article by James Sinclair, a stockbroker and precious metals trader in the United States. The article was posted on the website of Le Metropole Café, an internet publication aimed at investors and financial analysts.

This is another attempt by Tokyo to channel credit to productive activity and generate growth in the stagnant national economy. Under this approach, the banks would pay borrowers to take loans-a move that would in theory provide an incentive to capitalist corporations and other investors to take out new loans.

Prospective depositors, on the other hand, would have to pay banks to keep their savings-a possible incentive to many to invest their money in productive activity rather than putting it into a savings account.

Got Goldies
09-11-2010, 12:28 AM
Whether they charge you a -0.5% interest rate or steal your purchasing power via printing as they are doing now, the result is the same. But people are still putting money into banks rather than taking it out so how does your theory of a bank run hold up.

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I don't have a job so my money is what I have left to survive on. I can tell you if they started charging me fees, deduction for neg interest rates, or some other add on, I would close my acct and put Cash under the pillow. I'm in charge of my money, not them.

I have turned off bill pay and any other charges connected to my acct. Right now I have free checking.

JROCPW
09-11-2010, 01:20 AM
I hope the stimulus thing happens. I (or should I say, my dealer) could use another 600 or 800, or whatever they plan on "giving" me. Couple rolls of SAEs, kill the Fed-all in a days work!

Silvercoin:

Wouldn't that neg interest crap cause people to keep their cash OUT of the banks?

JROCPW
09-11-2010, 01:30 AM
Wow, let's tax currency, or better yet-get rid of it. :eek:

Second paragraph is most disturbing. Somebody is floating a trial balloon here, we must be nearing the fan methinks. Author of this article is Chief Economist for Citi, so go figure. Banks stand to make bank on this idea.


To restore monetary policy effectiveness in a low interest rate environment when confronted with deflationary or contractionary shocks, it is necessary to get rid of the zlb completely. This can be done in three ways: abolishing currency, taxing currency and ending the fixed exchange rate between currency and bank reserves with the Fed. All three are unorthodox. The third is unorthodox and innovative. All three are conceptually simple. The first and third are administratively easy to implement.

The first method does away with currency completely. This has the additional benefit of inconveniencing the main users of currency—operators in the grey, black and outright criminal economies. Adequate substitutes for the legitimate uses of currency, on which positive or negative interest could be paid, are available.

The second approach, proposed by Gesell, is to tax currency by making it subject to an expiration date. Currency would have to be "stamped" periodically by the Fed to keep it current. When done so, interest (positive or negative) is received or paid.

The third method ends the fixed exchange rate (set at one) between dollar deposits with the Fed (reserves) and dollar bills. There could be a currency reform first. All existing dollar bills and coin would be converted by a certain date and at a fixed exchange rate into a new currency called, say, the rallod. Reserves at the Fed would continue to be denominated in dollars. As long as the Federal Funds target rate is positive or zero, the Fed would maintain the fixed exchange rate between the dollar and the rallod.