Saturday, 7 June 2014

Monetarists flounder with negative interest rates

Andrew Fisher, author of The Failed Experiment, on how negative interest rates won't solve the crisis

"Negative interest rates!", the headline writers exclaimed this week when Mario Draghi (President of the European Central Bank) announced the deposit rate would drop to -0.1%. So it costs banks to keep money overnight.

The Eurozone economy is in a deep malaise - hit by austerity and the monetarist framework deemed necessary to keep separate political economies together in a structurally flawed currency union. So this week's announcement is designed to stimulate the economy by making it costly for banks to hoard money rather than lending it out to businesses and individuals .

This is based on the assumption that a) banks lend physical money they hold; and b) that the problem is primarily a lack of credit supply rather than demand. Both are mistaken, and so the headlines that this week marvelled at the curiousity will soon pass and be replaced with more agonising about the dire state of the Eurozone economy.

Assumption a) rests on a myth explained by Ann Pettifor in her excellent book Just Money,
"In this view money can represent a surplus to be set aside or saved, accumulated and then loaned out. In this story, savers lend to borrowers, and bankers are mere intermediaries between savers and borrowers" 
Money is not a commodity, but a construct - one based on trust, which incidentally why we had the 'credit crunch' when banks refused to lend to each other because each other's balance sheets were untrusted. Banks do not create credit directly from their deposits, and so taxing deposits (effectively what the ECB has imposed) will not solve a credit shortage ...

Assumption b) is that the problem of the Eurozone economy is a lack of lending from banks. The problem though is a lack of demand. Across the Eurozone people's wages aren't rising, unemployment is high, and many people are living in a precarious situation - worried out losing their job and/or their home.

In these circumstances, businesses are not confident of investing (and banks are worried that if they do lend the investment may go bad (the Swedish economist Wicksell was concerned about low interest rates leading to malinvestment that would be worse for the economy in the medium to long-term).

What further informs against negative interest rates being the solution is that we've had real terms negative interest rates for some time now. This means inflation is higher than interest rates. That has not sparked increased lending - which should be have been a warning that further lowering will not be the 'big bazooka' some think.

While the UK has yet to have nominal negative interest rates, we (like the Eurozone) have had real terms negative interest rates for some time. For the consumer this means the money in their current account is probably only attracting 0.5% interest, while inflation is 1.8% (CPI) or 2.6% (RPI) - and so you are better to spend than to save (unless you can find a much higher savings rate - and indeed, if you can afford to save at all).

This reflects the continuing weakness of the UK economy. In November 2011 George Osborne told MPs , "Low interest rates are helping to keep people in their homes, mortgage payments down and businesses going" - with the clear implication that raising them would do the reverse. And so it is telling that despite the proclaimed 'recovery', the UK economy still cannot risk raising interest rates even marginally.

Low interest rates are stabilising a very fragile economy - they are a sign of weakness not of strength.

But the continued use of monetary policy is a reflection of the impotence of governments to use fiscal policy to solve the crisis. The monetary policy solutions of interest rates and quantitative easing are at best mild ameliorations until incomes and investment levels are increased.

With governments across the Eurozone and in the UK unwilling to step outside the monetarist straitjacket, the economies of Europe will continue to be fragile and teetering on the edge of crisis.

Also worth reading on this subject: Paul Mason, Ed Conway and Andrea Terzi

1 comment:

theyenguy said...

The June 5, 2014 Mario Draghi ECB Announcement of NIRP and Targeted LTROs, produced a stunning moral hazard based prosperity in fiat money, and produced the zenith of liberalism, defined as freedom from the state, as investors drove World Stocks, VT, Nation Investment, EFA, Global Financials, IXG, and Dividends Excluding Financials, DTN, to produce peak Equity Wealth, while Peak Currency Wealth, DBV, and CEW, was achieved in the third week of May 2014, and Peak Credit Wealth, AGG, was achieved the week ending May 30, 2014.

The age of currencies and the era of credit came to an end the week ending June 6, 2014, as stock investors drove Equity Investments to their grand finale finish, manifesting as three long white candlesticks in the weekly chart of the S&P 500, SPY, at a time when the bond vigilantes, called the Interest Rate on the US Ten Year Note, ^TNX, higher to 2.59%.

Peak Equity Wealth is seen in the chart of World Stocks, VT, relative to Aggregate Credit, AGG, that is VT:AGG, rising parabolically, and then peaking in value in the week ending June 6, 2014.

The Mario Draghi ECB announcement of NIRP and targeted LTROs produced a blow off stock market top on Friday June 6, 2014, and at the same time has birthed the Beast Regime, to replace the Creature from Jekyll Island, which ruled in liberal policies of investment choice and in schemes of credit. Soon out of the waves of Club Med sovereign, banking, and corporate insolvency, it will rise to rule the world in authoritarianism, specifically in policies of diktat in every one of the world’s ten regions, and in schemes of totalitarian collectivism in all of mankind’s seven institutions.

The age of diktat and the era of debt servitude commenced on the June 5, 2014, with the mandate of Mario Draghi for a 0.1% surcharge on money held overnight at the ECB. His word, will and way, will compel the debt serf, to experience economic life in regional fascist leader’s policies of regional economic governance, which establish regional security, stability and sustainability.

Thus the Mario Draghi announcement of NIRP and targeted LTROs was both a climax event, one of peak wealth. and also a genesis event, one of the beginning of a new economic age of authoritarianism.