As we saw from the Stephen Williamson, it's very elusive to find agreement on what low interest rates do and the value in achieving them. SW recently seemed to say we'd be better if they were higher. Koo in his book argues that low interest rates can actually drive investment out of the country because of the paltry yield.
As a little personal aside-it seems I am now coming into a little money soon. I may not even be part of the bottom 1% when I'm done. I will still be all about fighting for their interests naturally. Still, even now I'm thinking about how unappetizing these interest rates are-in terms of making a little something on your money.
Of course, the idea that low interest rates are good is that they encourage money on the side lines to get in the game. However, Koo's argument is that low interest rates tend to discourage foreign investors. It certainly wouldn't excite depositors. It's a tough task to isolate the various causes and effects of interest rates.
Sumner's big thing is that interest rates are a terrible way to judge monetary policy and that they are more an epiphenomenon-or an effect among effects I guess. What is tricky is cause and effect. What's clear is that most economies with strong growth have higher interest rates whereas an economy in contraction usually has low rates. This doesn't mean that to get a strong economy though you raise rates. Though SW seemed to be saying something similar.
What got me thinking in this vein is something Koo wrote here in his Holy Grail:
"In reality, however, low domestic interest rates have encouraged capital to leave Japan, and have only added to the weakness of the Yen, while doing little to stimulate domestic demand."
http://www.amazon.com/Holy-Grail-Macroeconomics-Lessons-Recession-ebook/dp/B006ES4UX0/ref=sr_1_1?s=books&ie=UTF8&qid=1394671478&sr=1-1&keywords=richard+koo
"At the other extreme, the central bank having the most difficulty trying to rein in domestic investment activities is the Reserve Bank of New Zealand (RBNZ). With the highest interest rates in the world, New Zealand has attracted huge capital inflows from investors."
It's one thing to say that a country with high interest rates attract lots of investors. Koo seems to be suggesting that it's the high interest rates themselves that are doing it. Meanwhile, while Koo's balance sheet recession idea appeals to the MMTers, he differs with them as they argue that it's preferable that the Fed leave the FF rate at 0 percent forever. Koo clearly would see this as a disastrous policy-discouraging global investors, etc. MMTers don't believe that a CB can achieve an inflation target or an NGDP target-Koo thinks the CB can cut inflation but not raise it-but they do believe it can set the interest rate.
As a little personal aside-it seems I am now coming into a little money soon. I may not even be part of the bottom 1% when I'm done. I will still be all about fighting for their interests naturally. Still, even now I'm thinking about how unappetizing these interest rates are-in terms of making a little something on your money.
Of course, the idea that low interest rates are good is that they encourage money on the side lines to get in the game. However, Koo's argument is that low interest rates tend to discourage foreign investors. It certainly wouldn't excite depositors. It's a tough task to isolate the various causes and effects of interest rates.
Sumner's big thing is that interest rates are a terrible way to judge monetary policy and that they are more an epiphenomenon-or an effect among effects I guess. What is tricky is cause and effect. What's clear is that most economies with strong growth have higher interest rates whereas an economy in contraction usually has low rates. This doesn't mean that to get a strong economy though you raise rates. Though SW seemed to be saying something similar.
What got me thinking in this vein is something Koo wrote here in his Holy Grail:
"In reality, however, low domestic interest rates have encouraged capital to leave Japan, and have only added to the weakness of the Yen, while doing little to stimulate domestic demand."
http://www.amazon.com/Holy-Grail-Macroeconomics-Lessons-Recession-ebook/dp/B006ES4UX0/ref=sr_1_1?s=books&ie=UTF8&qid=1394671478&sr=1-1&keywords=richard+koo
"At the other extreme, the central bank having the most difficulty trying to rein in domestic investment activities is the Reserve Bank of New Zealand (RBNZ). With the highest interest rates in the world, New Zealand has attracted huge capital inflows from investors."
It's one thing to say that a country with high interest rates attract lots of investors. Koo seems to be suggesting that it's the high interest rates themselves that are doing it. Meanwhile, while Koo's balance sheet recession idea appeals to the MMTers, he differs with them as they argue that it's preferable that the Fed leave the FF rate at 0 percent forever. Koo clearly would see this as a disastrous policy-discouraging global investors, etc. MMTers don't believe that a CB can achieve an inflation target or an NGDP target-Koo thinks the CB can cut inflation but not raise it-but they do believe it can set the interest rate.
Using the term investors needs to be teased out a little I think. Calling buyers of govt debt "investors" is mistaken I think. They are savers looking for a safe return on their money. It would be nice if it kept up with inflation but its not necessary. Investors should be attracted by high returns on private lending activity not returns on govt bonds! Govts have zero responsibility to make safe assets a high return investment.
ReplyDeleteThere is nothing preventing a bank from paying depositors 4% even when they are only getting 0.75% from the Fed. If banks are awash in 8% car loans that are being repaid then they can afford to pay depositors. The only thing limiting return on their lending activity is the incomes of their borrowers and their existing debt levels. Right now its pretty hard to expect the average American to take on more debt considering the state of the job market and income prospects