The Case For Negative Nominal Interest Rates As Presented At Jackson Hole
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The Case For Negative Nominal Interest Rates As Presented At Jackson Hole
The annual Jackson Hole federal economics conference has just ended and Marvin Goodfriend, a Friends of Allan Meltzer Professor of Economics at Carnegie Mellon's Tepper School of Business, presented a paper on the necessity of unencumbering the zero bound on interest rate policy:
"Reflecting the plausible pessimism that has been growing for some time, the zero bound
encumbers interest rate policy today because nominal market interest rates around the world
have drifted precipitously lower in the past two decades. For instance, average inflation-indexed
10-year bond rates in the developed world, and in the U.S. alone, have fallen steadily from 4
percent in the mid-1990s to around zero percent today. And with inflation stabilized at or below
2 percent and inflation expectations well-anchored, nominal bond yields have declined to historic
lows, too. Also at work depressing the long term nominal bond rate is the net compensation for
risk transfer (term premium) which has fallen from around 2 percent in the mid-1990s to near
zero today, as we shall see, plausibly reflecting the shift from cyclical inflation risk to cyclical
deflation risk.
The problem for monetary policy is that low long term nominal rates leave little or no
room for the usual cyclical fluctuations of short term nominal rates below long term nominal
rates over the business cycle. Moreover, the secular decline in long term nominal interest rates
reflects underlying factors likely to persist—low inflation expectations, downward pressure on
the intertemporal terms of trade, and downward pressure on the price of risk transfer in long
bonds. It is only a matter of time before another cyclical downturn calls for aggressive negative
nominal interest rate policy actions."
He speaks of the necessity to abolish paper currency, introduce a flexible deposit price of paper currency, or a third method which I do not fully understand to accomplish his goal:
"With these advantages in mind, the paper describes three methods by which the zero
bound on interest rate policy can be unencumbered completely. The three methods in turn would:
i) abolish paper currency; ii) introduce a market-determined flexible deposit price of paper
currency; and iii) provide electronic currency (to pay or charge interest) at par with deposits,
with or without the provision of paper currency as in (ii) above."
He concludes his remarks with:
"With inflation credibly under control, the public could safely hold longer term nominal
bonds to minimize its exposure to negative short term interest rates. Thus, we can imagine a
mutually reinforcing equilibrium in which the public extends the maturity of its savings and the
central bank with the public’s support feels free to pursue negative nominal interest rate policy
whenever required to perpetuate full employment and price stability. The idea of negative
nominal interest rates takes some getting used to, but it should be possible to make the public
aware eventually that such flexibility in short term interest rates is well worth it to provide better
employment security and more secure lifetime savings."
In his address he also sites the previous unpegging of our gold standard as a success story, which makes me think that if this policy were pursued there would be much, much more upside in bonds to be had while, at the same time, reducing the value of our money through this "flexible market_determined deposit price of paper currency."
https://www.kansascityfed.org/~/media/f ... .pdf?la=en
Note: Jim Rickards brought this to my attention with one of his tweets this morning.
"Reflecting the plausible pessimism that has been growing for some time, the zero bound
encumbers interest rate policy today because nominal market interest rates around the world
have drifted precipitously lower in the past two decades. For instance, average inflation-indexed
10-year bond rates in the developed world, and in the U.S. alone, have fallen steadily from 4
percent in the mid-1990s to around zero percent today. And with inflation stabilized at or below
2 percent and inflation expectations well-anchored, nominal bond yields have declined to historic
lows, too. Also at work depressing the long term nominal bond rate is the net compensation for
risk transfer (term premium) which has fallen from around 2 percent in the mid-1990s to near
zero today, as we shall see, plausibly reflecting the shift from cyclical inflation risk to cyclical
deflation risk.
The problem for monetary policy is that low long term nominal rates leave little or no
room for the usual cyclical fluctuations of short term nominal rates below long term nominal
rates over the business cycle. Moreover, the secular decline in long term nominal interest rates
reflects underlying factors likely to persist—low inflation expectations, downward pressure on
the intertemporal terms of trade, and downward pressure on the price of risk transfer in long
bonds. It is only a matter of time before another cyclical downturn calls for aggressive negative
nominal interest rate policy actions."
He speaks of the necessity to abolish paper currency, introduce a flexible deposit price of paper currency, or a third method which I do not fully understand to accomplish his goal:
"With these advantages in mind, the paper describes three methods by which the zero
bound on interest rate policy can be unencumbered completely. The three methods in turn would:
i) abolish paper currency; ii) introduce a market-determined flexible deposit price of paper
currency; and iii) provide electronic currency (to pay or charge interest) at par with deposits,
with or without the provision of paper currency as in (ii) above."
He concludes his remarks with:
"With inflation credibly under control, the public could safely hold longer term nominal
bonds to minimize its exposure to negative short term interest rates. Thus, we can imagine a
mutually reinforcing equilibrium in which the public extends the maturity of its savings and the
central bank with the public’s support feels free to pursue negative nominal interest rate policy
whenever required to perpetuate full employment and price stability. The idea of negative
nominal interest rates takes some getting used to, but it should be possible to make the public
aware eventually that such flexibility in short term interest rates is well worth it to provide better
employment security and more secure lifetime savings."
In his address he also sites the previous unpegging of our gold standard as a success story, which makes me think that if this policy were pursued there would be much, much more upside in bonds to be had while, at the same time, reducing the value of our money through this "flexible market_determined deposit price of paper currency."
https://www.kansascityfed.org/~/media/f ... .pdf?la=en
Note: Jim Rickards brought this to my attention with one of his tweets this morning.
Re: The Case For Negative Nominal Interest Rates As Presented At Jackson Hole
i) abolish paper currency
BASTARD, and gold confiscation would follow
ii) introduce a market-determined flexible deposit price of paper currency
Like a US Postal Service "Forever" stamp
iii) provide electronic currency (to pay or charge interest) at par with deposits, with or without the provision of paper currency as in (ii) above."
Bitcoin-like crypto-currency
BASTARD, and gold confiscation would follow
ii) introduce a market-determined flexible deposit price of paper currency
Like a US Postal Service "Forever" stamp
iii) provide electronic currency (to pay or charge interest) at par with deposits, with or without the provision of paper currency as in (ii) above."
Bitcoin-like crypto-currency
- MachineGhost
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Re: The Case For Negative Nominal Interest Rates As Presented At Jackson Hole
Oh joy, the True Socialists have come out of the woodwork:
1. Is so your money can be fee'd, taxed and inflated away and not hide it under the mattress.
2. Means the nominal value of your money also won't be stable, not just the real.
3. I don't understand it either, but see #1 above.
When will these idiot savants learn you cannot control human behavior? This kind of crazy bullshit can only come from liberal Ivory Tower academics enabling a new food source for parasitical politicians and bureaucrats.
1. Is so your money can be fee'd, taxed and inflated away and not hide it under the mattress.
2. Means the nominal value of your money also won't be stable, not just the real.
3. I don't understand it either, but see #1 above.
When will these idiot savants learn you cannot control human behavior? This kind of crazy bullshit can only come from liberal Ivory Tower academics enabling a new food source for parasitical politicians and bureaucrats.
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Re: The Case For Negative Nominal Interest Rates As Presented At Jackson Hole
Let me translate that:Reub wrote: "The idea of negative nominal interest rates takes some getting used to, but it should be possible to make the public aware eventually that such flexibility in short term interest rates is well worth it to provide better employment security and more secure lifetime savings."
"The idea of being forced by the government to pay a percentage of your money to a private bank against your will may take some getting used to, but it should be possible to convince the average citizen we're so carefully avoiding here in Jackson Hole that giving the banks flexibility to take as much money as they want will ensure nothing unseemly happens to their precious jobs or life savings."
Yeah, that will totally fly.
Re: The Case For Negative Nominal Interest Rates As Presented At Jackson Hole
Agree T. Disgusting.
Re: The Case For Negative Nominal Interest Rates As Presented At Jackson Hole
Wow, this guy is living in a dreamworld.
Outlawing paper currency would virtually decimate micro-small businesses, like mom and pop shops, farmers markets, and fruit/vegetable stands on street corners, that currently accept only cash. On the plus side, it would have an immediate impact on "under the table" transactions like your lawn mower guy hiring illegal immigrants.
Anyway, lots of ramifications. Interesting thought to consider though.
Outlawing paper currency would virtually decimate micro-small businesses, like mom and pop shops, farmers markets, and fruit/vegetable stands on street corners, that currently accept only cash. On the plus side, it would have an immediate impact on "under the table" transactions like your lawn mower guy hiring illegal immigrants.
Anyway, lots of ramifications. Interesting thought to consider though.
Re: The Case For Negative Nominal Interest Rates As Presented At Jackson Hole
Judging by today's large upward move in long bonds, I wonder if others have also noticed the same presentation at the Jackson Hole event.
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Re: The Case For Negative Nominal Interest Rates As Presented At Jackson Hole
From the old quote,
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property"
How would that work exactly? esp the deflation part
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property"
How would that work exactly? esp the deflation part
- MachineGhost
- Executive Member
- Posts: 10054
- Joined: Sat Nov 12, 2011 9:31 am
Re: The Case For Negative Nominal Interest Rates As Presented At Jackson Hole
Hi, Fresh Meat!boglerdude wrote:From the old quote,
"If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around them will deprive the people of all property"
How would that work exactly? esp the deflation part
1. That quote from Jefferson is a Tall Tale.
2. Banks already control the issuance of their money.
I suggest you read this paper and get clued in: http://papers.ssrn.com/sol3/papers.cfm? ... id=1905625
"All generous minds have a horror of what are commonly called 'Facts'. They are the brute beasts of the intellectual domain." -- Thomas Hobbes
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!
Disclaimer: I am not a broker, dealer, investment advisor, physician, theologian or prophet. I should not be considered as legally permitted to render such advice!