BoJ resorts to negative interest rates. The desperation is real.

[DucatiMonster696]

The BoJ is so desperate that they are going into territory that not even Keynes himself dared not to seriously entertain in any meaningful manner.

After they blew through their massive QE adventure and the end result was lackluster long term growth (despite the victory dance by those who only look at the short term results in a myopic and partisan manner) they are now so desperate that they are dipping their toes into a the dark and seldom trodden ground of negative rates.

http://www.cnbc.com/2016/01/28/bank-of-japan-adopts-negative-interest-rate-policy-reuters.html

http://money.cnn.com/2016/01/28/news/economy/bank-of-japan-negative-interest-rate/index.html

http://www.wsj.com/articles/bank-of-japan-introduces-negative-interest-rates-1454040311

http://www.zerohedge.com/news/2016-...ult-more-currency-wars-and-global-growth-slow

Can't wait to see how this turns out.

 

[fskimospy]

The BoJ is so desperate that they are going into territory that not even Keynes himself dared not to seriously entertain in any meaningful manner.

After they blew through their massive QE adventure and the end result was lackluster long term growth (despite the victory dance by those who only look at the short term results in a myopic and partisan manner) they are now so desperate that they are dipping their toes into a the dark and seldom trodden ground of negative rates.

http://www.cnbc.com/2016/01/28/bank-of-japan-adopts-negative-interest-rate-policy-reuters.html

http://money.cnn.com/2016/01/28/news/economy/bank-of-japan-negative-interest-rate/index.html

http://www.wsj.com/articles/bank-of-japan-introduces-negative-interest-rates-1454040311

http://www.zerohedge.com/news/2016-...ult-more-currency-wars-and-global-growth-slow

Can't wait to see how this turns out.

So you seem to think this is a bad idea. What would you do instead?

 

[realibrad]

So you seem to think this is a bad idea. What would you do instead?

It seems like Japan thinks that its desired economic growth is captured in activity that cannot happen with the current cheap money policy. That seems weird to me. Investment is supposed to give a return. We lend money and charge interest. If that interest is lower than the expected return and there are no better options, then you take the money and use it. The current rate was basically zero. So, the expected return would only need to be above zero to be worth while, yet that was not enough to get growth. Now they are going to pay people to take their money.

I would think the problem is over investment in the economy. They have already built so much and anything else is really not needed. Companies are not going to invest in something big because there are long term costs. China is dealing with this right now in its housing bubble. They have entire cities built and nobody in them, and they are paying a lot of money to maintain those cities.

 

[disappoint]

From the first link in the OP:

Negative rates are aimed at achieving the government's 2 percent inflation target "at the earliest possible time," said the BOJ's statement.

The BOJ now forecasts core inflation to average 0.2 to 1.2 percent between April 2016 and March 2017. Governor Kuroda had previously said he hoped to hit 2 percent inflation by late 2016 but markets are widely skeptical of that.

Collapsing inflation expectations were a key reason underpinning high expectations for fresh stimulus. Ahead of Friday's decision, leading banks, including Societe Generale and BNP Paribas, estimated the probability of further easing at 40-50 percent.

Consumer prices have remained stubbornly low, seen by December's core consumer prices released earlier on Friday. The index, which includes oil but not fresh food, ticked up just 0.1 percent on year, unchanged from the previous month.

I'm not an economist, can someone explain why consumer prices remaining low is a bad thing? As a consumer I like low prices it means I can afford more stuff on the same income. This makes me .

Why is the target 2% inflation?

 

[fskimospy]

From the first link in the OP:

I'm not an economist, can someone explain why consumer prices remaining low is a bad thing? As a consumer I like low prices it means I can afford more stuff on the same income. This makes me .

Why is the target 2% inflation?

2% is generally the goal because of the severe and asymmetric risks of a deflationary spiral. If the central bank has rates at zero and inflation is still not present that means they have little further ability to stave off deflation if it were to happen. That's dangerous.

You might ask why deflation is bad, considering that you could buy more stuff with the same money. It's bad because if your money is worth more tomorrow than it is today without you having to do anything you might as well hold on to it. The thing is, when everyone does that the economy basically grinds to a halt. Your money might buy more for a bit... until ou lose your job.

 

[glenn1]

So you seem to think this is a bad idea. What would you do instead?

Let the asset deflation and economic restructuring do its work in short order rather than trying to delay it with Keynesian stimulus measures and dragging out the malaise for decades like Japan. There's no way to prevent the end result anyway and this saves the build-up of government debt to the tune of two or three figures worth of percentage of GDP. The problem isn't marginal propensity to consume like Keynesians think, it's there's no demand to consume at current price levels which interest rates won't help. If I'm upside down on my mortgage I'm not going to take on more debt even if rates are zero or slightly negative.

 

[fskimospy]

Let the asset deflation and economic restructuring do its work in short order rather than trying to delay it with Keynesian stimulus measures and dragging out the malaise for decades like Japan. There's no way to prevent the end result anyway and this saves the build-up of government debt to the tune of two or three figures worth of percentage of GDP.

This sort of thinking has no evidence to back it up that I am aware of. It IS the sort of argument that was put out after the crash in 1929 which then led to the Great Depression though. People stopped arguing for liquidationism after that, haha.

The problem isn't marginal propensity to consume like Keynesians think, it's there's no demand to consume at current price levels which interest rates won't help. If I'm upside down on my mortgage I'm not going to take on more debt even if rates are zero or slightly negative.

Keynesians don't think the problem is that we need to alter people's marginal propensity to consume (wut?). They think the problem is insufficient aggregate demand, which is the EXACT sort of thing that stimulus and easy monetary policy address.

I don't think this is the first time you've actually argued for Keynesian economics while thinking you were arguing against it. That's pretty great. Who knew you were a Keynesian all along? Welcome aboard!

 

[glenn1]

This sort of thinking has no evidence to back it up that I am aware of. It IS the sort of argument that was put out after the crash in 1929 which then led to the Great Depression though. People stopped arguing for liquidationism after that, haha.

Yeah, I know you and your mancrush Krugman will go to your graves thinking that, I'm not going to bother with yet another discussion with you on this as I know neither of us will change the other's mind. I'd figure at some point (maybe another couple decades of the Japan stagnation) you'll start to consider why it's not working, but I won't hold my breath.

Keynesians don't think the problem is that we need to alter people's marginal propensity to consume (wut?). They think the problem is insufficient aggregate demand, which is the EXACT sort of thing that stimulus and easy monetary policy address.

I don't think this is the first time you've actually argued for Keynesian economics while thinking you were arguing against it. That's pretty great. Who knew you were a Keynesian all along? Welcome aboard!

Do you even economics? Low rates are targeting the consumption portion of aggregate demand, unless you honestly think that what we lack is still more capital investment to drive yet more supply.

 

[fskimospy]

Yeah, I know you and your mancrush Krugman will go to your graves thinking that, I'm not going to bother with yet another discussion with you on this as I know neither of us will change the other's mind. I'd figure at some point (maybe another couple decades of the Japan stagnation) you'll start to consider why it's not working, but I won't hold my breath.

Considering the overwhelming evidence that just came from the financial crisis as to the effectiveness of Keynesian economics you're probably right. If you're still clinging to the idea that it doesn't work after all that you're basically immune to evidence.

Do you even economics? Low rates are targeting the consumption portion of aggregate demand, unless you honestly think that what we lack is still more capital investment to drive yet more supply.

Yes, do you even economics though? haha. You clearly don't even understand what you're arguing against.

Marginal propensity to consume is an attribute of people or a society as a whole, mostly defined by each individual's income level, not interest rates. MPC affects aggregate demand by how it acts as a multiplier on disposable income. Lower interest rates can increase disposable income through increases in asset prices or less money paid in interest, but the purpose of lower interest rates is not to alter an individual's or society's MPC, it's to alter the amount of disposable income available.

None of this changes that you said Keynesian stimulus doesn't work while then saying the problem is insufficient demand. You're basically arguing against yourself, haha. Turns out you are a Keynesian after all, but because of culture war issues you'll probably never admit it.

 

[dullard]

From my post in the stock market thread:

Japan is the result of wealth accumulation gone wild + politicians that don't understand simple economic concepts.

In general, wealth accumulation can be a very good thing. It encourages hard / efficient work, because that may lead you to a better life than someone who works less hard or less efficiently. But, when taken too far, there are serious consequences.

In Japan's case, wealth has accumulated in the elderly, and for Japan the elderly are quite old. That means a typical 90 year old has a big pile of wealth there. I don't know much about the elderly Japanese myself, but having been in Japan a few times, the products on the shelf certainly do not appear to be geared towards the elderly. They seem to be geared towards the young who in Japan are quite indebted and often have no way to get a good income.

That means, the Japanese wealth is stagnant. Eventually, they die and the next round of 70-year olds inherit the wealth. Again, to another person who isn't typically a big spender.

What Japan needs more than anything is to encourage the spending of that wealth to get their economy back on track. So what does Abe do? Massive tax on spending. Sorry, but taxing spending is NOT how you encourage spending. He hoped to encourage spending by threatening even higher sales taxes in the future. Instead, Abe needs to do the opposite: threaten to tax stagnant wealth while cutting sales taxes. THAT will finally get Japan back on track.

The money is in the hands of people who aren't spending it. A slightly lower interest rate won't change that fact. This will do nothing for Japan.

 

[fskimospy]

From my post in the stock market thread:

The money is in the hands of people who aren't spending it. A slightly lower interest rate won't change that fact. This will do nothing for Japan.

Well a negative interest rate would affect that somewhat, but overall I agree.

 

[glenn1]

Considering the overwhelming evidence that just came from the financial crisis as to the effectiveness of Keynesian economics you're probably right. If you're still clinging to the idea that it doesn't work after all that you're basically immune to evidence.


Yes, do you even economics though? haha. You clearly don't even understand what you're arguing against.

Marginal propensity to consume is an attribute of people or a society as a whole, mostly defined by each individual's income level, not interest rates. MPC affects aggregate demand by how it acts as a multiplier on disposable income. Lower interest rates can increase disposable income through increases in asset prices or less money paid in interest, but the purpose of lower interest rates is not to alter an individual's or society's MPC, it's to alter the amount of disposable income available.

None of this changes that you said Keynesian stimulus doesn't work while then saying the problem is insufficient demand. You're basically arguing against yourself, haha. Turns out you are a Keynesian after all, but because of culture war issues you'll probably never admit it.

You continue to misdiagnose the problem as insufficient demand when in reality it's oversupply driven primarily by huge capital investments by China which also drove huge inflation in basic materials, energy, and other non-capital goods. Instead you're trying to use rates as a tool to stimulate demand in housing and other capital asset classes to prevent asset deflation. Which is stupid.

 

[dullard]

You continue to misdiagnose the problem as insufficient demand when in reality it's oversupply driven primarily by huge capital investments by China which also drove huge inflation in basic materials, energy, and other non-capital goods. Instead you're trying to use rates as a tool to stimulate demand in housing and other capital asset classes to prevent asset deflation. Which is stupid.

It is both insufficient demand AND oversupply.

Demand is there, but in the wrong people. In general, those who want to buy things in Japan are heavily in debt and often have no job and/or terrible job prospects. So, while they have demand, they don't have the means. Conversely, there is little demand to buy goods/services in Japan for the people who do have the means to buy them. So, demand is a major problem (or at least the distribution of demand).

But there is also a whole set of zombie companies there caused by oversupply. Cutting interest rates will only prolong the zombie companies (and may even encourage more oversupply). Eskimospy and I have a long running dispute over that idea. I strongly think and the evidence strongly shows it that cutting interest rates increases supply -- which can then lead to even lower prices if the interest rate effect on demand doesn't keep up with the new oversupply.

 

[fskimospy]

You continue to misdiagnose the problem as insufficient demand when in reality it's oversupply driven primarily by huge capital investments by China which also drove huge inflation in basic materials, energy, and other non-capital goods. Instead you're trying to use rates as a tool to stimulate demand in housing and other capital asset classes to prevent asset deflation. Which is stupid.

So originally you said that Keynesians were wrong because they thought the problem was with marginal propensity to consume while the real problem was insufficient demand. When it turns out you were both clueless about what Keynesians think as well as how the marginal propensity to consume functions you now claim the problem isn't demand like you claimed before, but oversupply. (wut.)

I love how you're always looking for new reasons to believe the same thing. That's the true mark of someone who isn't open to rational argument. I guess you were right about one thing after all.

 

[cubby1223]

ECB did negative interest rates already. So there is some precedence on this and results, of which I have not personally researched to convey here.

 

[fskimospy]

It is both insufficient demand AND oversupply.

Demand is there, but in the wrong people. In general, those who want to buy things in Japan are heavily in debt and often have no job and/or terrible job prospects. So, while they have demand, they don't have the means. Conversely, there is little demand to buy goods/services in Japan for the people who do have the means to buy them. So, demand is a major problem (or at least the distribution of demand).

But there is also a whole set of zombie companies there caused by oversupply. Cutting interest rates will only prolong the zombie companies (and may even encourage more oversupply). Eskimospy and I have a long running dispute over that idea. I strongly think and the evidence strongly shows it that cutting interest rates increases supply -- which can then lead to even lower prices if the interest rate effect on demand doesn't keep up with the new oversupply.

Just have to note that you don't have a disagreement with me so much as you have a disagreement with overwhelming majority of all economists, living and dead.

Higher interest rates = less borrowing = lower money supply = lower prices.

 

[glenn1]

So originally you said that Keynesians were wrong because they thought the problem was with marginal propensity to consume while the real problem was insufficient demand. When it turns out you were both clueless about what Keynesians think as well as how the marginal propensity to consume functions you now claim the problem isn't demand like you claimed before, but oversupply. (wut.)

I love how you're always looking for new reasons to believe the same thing. That's the true mark of someone who isn't open to rational argument. I guess you were right about one thing after all.

Okay, let's bring this down to your level. You support low interest rates as a means to drive aggregate supply, which is a summed total of its components consumption, investment, government spending, and exports. Government spending isn't impacted by interest rates (although future debt service is) as its a function of Congress not the Federal Reserve. Exports aren't impacted by interest rates except for its incidental effect on exchange rates, which could much more easily be affected by direct currency purchases. If you increase investment that generates still more supply which is itself deflationary. Or then you have consumption, which is what we said you were hoping to stimulate with low rates. If you aren't trying to drive consumption with lower rates then please say so.

 

[Kwatt]

...It's bad because if your money is worth more tomorrow than it is today without you having to do anything you might as well hold on to it....

So saving is bad.

It would be bad because assets lead one to become independent. And that would be bad.

I used to believe the 2% inflation was OK. Because, I was always told that. As I think about it more I am beginning to have doubts.

Inflation keeps the consumer from benefiting from increased productivity and efficiency in manufacturing.

Say there was 2% deflation. My refrigerator quits. My choice is to pay a $1000 for a new one now or wait a year and pay $980 for a new now. I am going to have to blow that $20 now.


.

 

[realibrad]

Marginal propensity to consume is an attribute of people or a society as a whole, mostly defined by each individual's income level, not interest rates. MPC affects aggregate demand by how it acts as a multiplier on disposable income. Lower interest rates can increase disposable income through increases in asset prices or less money paid in interest, but the purpose of lower interest rates is not to alter an individual's or society's MPC, it's to alter the amount of disposable income available.

Can you explain that to me? It looks like you said that we lower interest rates to increase disposable income, but that has nothing to do with spending. MPC is the ratio of change in consumption and change in income. If you increase income but do not increase consumption, your MPC would go down. The goal is to increase consumption is it not?

 

[glenn1]

Just have to note that you don't have a disagreement with me so much as you have a disagreement with overwhelming majority of all economists, living and dead.

Higher interest rates = less borrowing = lower money supply = lower prices.

You're still in the business of trying to stimulate aggregate demand for logical fallacies, this time argument from popularity. I can point to plenty of economists who expressly reject Keynesian ideas such as 2004 Econ Nobel Laureate Edward Prescott and Real Business Cycle.

 

[dullard]

So saving is bad.

It would be bad because assets lead one to become independent. And that would be bad.

I used to believe the 2% inflation was OK. Because, I was always told that. As I think about it more I am beginning to have doubts.

Inflation keeps the consumer from benefiting from increased productivity and efficiency in manufacturing.

Say there was 2% deflation. My refrigerator quits. My choice is to pay a $1000 for a new one now or wait a year and pay $980 for a new now. I am going to have to blow that $20 now.

In a closed system, there can be no raises without inflation (companies can't keep giving most of their employees yearly raises, let alone promotion raises, without at some point raising prices). Think about it, how hard will you work if you have no chance of a raise? Probably not as hard; which to me, is the biggest reason that we want at least some mild inflation. We certainly don't want major inflation either. Just a small number that doesn't significantly erode anything but gives us the flexibility to avoid deflation and to give raises. We can debate whether or not this is a closed system (especially with productivity increases), but that would be a topic for another thread.

2% deflation is not really a problem. The US regularly hits 10% to 20% deflation, a point at which you probably will stop and consider many purchases.
https://en.wikipedia.org/wiki/Deflation#/media/File:US_Historical_Inflation_Ancient.svg

But, don't forget about elastic vs inelastic demand. Items that have inelastic demand means you won't wait even with deflation. Your fridge repair is a good example of inelastic demand. No, you aren't probably going to go a year without a fridge to save $100. But think about that Porche that you might want. If you know the price of the Porche will drop by $20,000 in the next year will you buy it now? Probably not.

 

[Jaskalas]

From my post in the stock market thread:

The money is in the hands of people who aren't spending it. A slightly lower interest rate won't change that fact. This will do nothing for Japan.

Then make it a large negative interest rate?
If the money is removed from bank accounts and sent into the economy...
Jobs / Wealth / Prosperity?

 

[dullard]

Just have to note that you don't have a disagreement with me so much as you have a disagreement with overwhelming majority of all economists, living and dead.

Higher interest rates = less borrowing = lower money supply = lower prices.

If the world were solely at the econ 101 level, you are basically correct. But not in real life. You forgot the other side of the equation:

Higher interest rates -> less supply -> higher prices.

It is the balance of the two that matters. Does the higher interest rate drive demand down FASTER than it drives supply down? Or does the higher interest rate drive demand down but drive supply down MORE? That is highly dependent on the actual economy specifics. And even our current fed is split almost evenly on those specifics.

I don't think a real economist alive or dead would say you can only look at demand and know what will happen to prices. I (and all the economists) say you need to look at both demand and supply. Which, I think, is the root of our disagreement.

 

[Spungo]

Can't wait to see how this turns out.

Savers will take their money out of the bank and push it into the stock market.

Actually, dropping interest rates usually causes bubbles in junk debt. Right now it's car loans. Up until June 2014, it was shale drillers. ~2008 was junk mortgages. Late 1980's was the S&L crisis. You can track the bubbles here:
HYG

As usual, sheep are the biggest victims. People on the sell-side coined the term "high yield" to describe shit quality bonds. Retired folks who grew up with 10% yield on AAA government bonds get suckered into thinking high yield bonds are safe (they are bonds after all), and then they get smashed when those loans go bad. As it turns out, it's mathematically impossible to make money over a long period of time when the interest rate is 7% but the default rate is 10%. Strange how that works. It's like gambling in a casino then acting surprised when the house wins over the long run.

 

[momeNt]

All they have to do is cut taxes.

If you look at it from a MMT perspective, central banks provide money, consumers spend money, and taxes actually delete money. But MMT proposes that that you manipulate both sides of the chain in order to reach balance.

Right now monetary and fiscal policy are treated as separate entities and taxes are looked at as "funding government". That's a bad way of looking at fiat money.

What they are trying to accomplish, increased spending of disposable income,through monetary policy designed to increase the supply of money by penalizing certain balances at a negative interest rate (i skimmed the article but this is the gist I think.) This may increase spending, it may not because of the path the money takes in order to reach the consumers that actually impact the prices.

Taxes on the other hand, delete money from circulation because its taken directly from the consumers and back to the source that created the money. The government can effectively "supply money" directly to consumers by lowering taxes which increases the supply of money, but putting it directly into the hands of the consumers that they are hoping spend it to drive prices up.

I'm not saying I agree with any of these policies, but it is frustrating that these policymakers and economists of central banks view their systems of taxation and money supply as separate entities in a fiat currency system.