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

[fskimospy]

You're still in the business of trying to stimulate aggregate demand for logical fallacies, this time argument from popularity.

No, you do not understand the logical fallacy you are trying to claim. If anything it would be an appeal to authority, as I am talking about the opinions of economists, not the overall popularity of the idea. Even in that case it is incorrect however as I am citing the opinion of experts in their area of expertise.

I can point to plenty of economists who expressly reject Keynesian ideas such as 2004 Econ Nobel Laureate Edward Prescott and Real Business Cycle.

That's totally irrelevant. Dullard is not arguing about Keynesian economics, he's trying to run with the argument that raising interest rates INCREASES inflation. That is the point on which he is in disagreement with almost the entire field of economics.

 

[fskimospy]

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 is a general increase in prices, meaning that people holding assets will see them become more valuable.

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

How?

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.
.

Right, so say there's continual deflation. Your smartest move is to delay all purchases as long as possible. That means that most or all businesses will see declining revenues, which will eventually force them to lay off workers, etc. That leads to lower nationwide earnings as well, which leads to further revenue declines, which leads to more laid off workers, etc.

Deflation is great until you lose your job.

 

[realibrad]

That's totally irrelevant. Dullard is not arguing about Keynesian economics, he's trying to run with the argument that raising interest rates INCREASES inflation. That is the point on which he is in disagreement with almost the entire field of economics.

It can in the short run. As interest rates go up, consumption goes down. Prices for goods can sometimes go up when producers try to make up for lost revenue with the lower consumption. In the long run it will smooth out though.

 

[glenn1]

No, you do not understand the logical fallacy you are trying to claim. If anything it would be an appeal to authority, as I am talking about the opinions of economists, not the overall popularity of the idea. Even in that case it is incorrect however as I am citing the opinion of experts in their area of expertise.

That's totally irrelevant. Dullard is not arguing about Keynesian economics, he's trying to run with the argument that raising interest rates INCREASES inflation. That is the point on which he is in disagreement with almost the entire field of economics.

Ok, we'll just continue with the Japan ZIRP for a while longer (might need to rename it now since rates are now negative, NIRP anyone?) and maybe after another few decades it will finally work. Not my concern as in this country politicians always quickly abandon Keynesian policies after long. Speaking of appeal to experts, why do you think Presidents as varied as FDR to Obama quickly deduced your ideas were full of shit and stopped doing them? Were they just too stupid also?

 

[fskimospy]

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.

Can you point me to a statement by any fed official or any comment in the fed's minutes that says raising interest rates will increase inflation?

 

[Spungo]

That's totally irrelevant. Dullard is not arguing about Keynesian economics, he's trying to run with the argument that raising interest rates INCREASES inflation. That is the point on which he is in disagreement with almost the entire field of economics.

The biggest problem is that people don't see economics as a series of cycles even though human activity is highly cyclical. Just look at fashion trends. Fashion is never a straight line, and things that were popular decades ago suddenly become popular again. That cyclicality applies to everything humans do, and economics is no exception.
It's not accurate to say lower interest rates only cause inflation or that they only cause deflation. They cause both, but not at the same time. Greenspan dropped interest rates to 1%, and it caused extreme inflation. Housing prices doubled within a few years. Of course, every bubble pops eventually, so this lead to severe deflation. Housing prices were cut in half. Do you see how that cyclicality works? The price doubles due to the low interest rate, but it reverts back to the mean through deflation.

Higher interest rates are no different. The immediate effect of high interest rates would be extreme deflation like we saw in 2008. Tons of mortgages and other debt would be unaffordable, millions of houses hit the market, business go into liquidation, prices fall dramatically. The mean reversion in this case would be when the economy adjusts itself and gets going again. Instead of the economy favoring people who borrow up to their eyeballs then file for bankruptcy, it would favor people who save their money.

Right now, retired people are cutting expenses to the bone because the interest income they receive from bonds barely keeps up with inflation. The richest generation in human history is forced to cut spending as much as possible because the interest rates are low. Do you think that would cause inflation or deflation? Probably deflation. Central bankers are complaining about low inflation, and then they invoke policies that would logically cause deflation. Of course there's deflation. If baby boomers are not spending, and young people don't have jobs, where is the demand supposed to come from?

 

[fskimospy]

Ok, we'll just continue with the Japan ZIRP for a while longer (might need to rename it now since rates are now negative, NIRP anyone?) and maybe after another few decades it will finally work. Not my concern as in this country politicians always quickly abandon Keynesian policies after long. Speaking of appeal to experts, why do you think Presidents as varied as FDR to Obama quickly deduced your ideas were full of shit and stopped doing them? Were they just too stupid also?

Good news for both you and me, neither FDR nor Obama deduced that Keynesian stimulus was full of shit. As a fellow Keynesian I'm sure you'll be happy to hear this.

I'm not sure why you're so enraged by this, the facts are just the facts.

 

[fskimospy]

Right now, retired people are cutting expenses to the bone because the interest income they receive from bonds barely keeps up with inflation. The richest generation in human history is forced to cut spending as much as possible because the interest rates are low. Do you think that would cause inflation or deflation? Probably deflation. Central bankers are complaining about low inflation, and then they invoke policies that would logically cause deflation. Of course there's deflation. If baby boomers are not spending, and young people don't have jobs, where is the demand supposed to come from?

Interest income provides a very small proportion of overall income, even for seniors. Interest income is only a substantial proportion of overall income for the top 1% or perhaps even the top 0.1%.

Any increases in interest income that would come from raising rates would almost certainly be offset to a much, much greater extent by job losses that would occur. You talk about young people not having jobs, well they would have a lot fewer of them if we raised rates.

Lowering interest rates increases inflation in the aggregate. This is a point of basically universal agreement among economists.

 

[Blackjack200]

That's totally irrelevant. Dullard is not arguing about Keynesian economics, he's trying to run with the argument that raising interest rates INCREASES inflation. That is the point on which he is in disagreement with almost the entire field of economics.

It's kind of hard to understand how he could still be arguing this. I have a house on a 4.5% loan, the payment is almost $1,400. If I drop the rate to 3% my payment goes down to $1250 and I have an extra $150/month to spend. Now multiply that by every mortgage holder in the country.

The problem is that right now people have a hard time taking advantage of low rates because they're underwater on their houses (or other assets). America badly needs a consumer bailout, which means getting money into the hands of spenders financed by taxes on high income earners and wealth.

Little chance of that happening with the current political climate though.

 

[fskimospy]

It's kind of hard to understand how he could still be arguing this. I have a house on a 4.5% loan, the payment is almost $1,400. If I drop the rate to 3% my payment goes down to $1250 and I have an extra $150/month to spend. Now multiply that by every mortgage holder in the country.

The problem is that right now people have a hard time taking advantage of low rates because they're underwater on their houses (or other assets). America badly needs a consumer bailout, which means getting money into the hands of spenders financed by taxes on high income earners and wealth.

Little chance of that happening with the current political climate though.

Yes, it is a pretty strange argument. I think what he's saying is that an increase in interest rates will cause so much damage to the supply side of the equation and that output will drop so much that prices will increase in spite of decreased disposable income. Again though, I'm not aware of any research that says as much.

Not to mention the fact that raising prices by decimating your supply side would be a horrible outcome anyway.

 

[realibrad]

Yes, it is a pretty strange argument. I think what he's saying is that an increase in interest rates will cause so much damage to the supply side of the equation and that output will drop so much that prices will increase in spite of decreased disposable income. Again though, I'm not aware of any research that says as much.

Not to mention the fact that raising prices by decimating your supply side would be a horrible outcome anyway.

So am I to take it you dont believe in push pull inflation? With more disposable income, the demand for x good/service can now be expressed. With more money, people buy things. The lag in production means that prices in the short run may go up.

 

[Kwatt]

Lowering interest rates increases inflation in the aggregate.

Japan has been lowering theirs since the early 90's.

How long does this take?

This is a point of basically universal agreement among economists.

Historically speaking quoting a bunch of scholars is not an impressive way to make a point. At least not to me.


.

 

[fskimospy]

Japan has been lowering theirs since the early 90's.

How long does this take?

Interest rates are not the only thing that affects inflation. The question you should be asking is if inflation would be higher or lower if they raised rates.

Historically speaking quoting a bunch of scholars is not an impressive way to make a point. At least not to me.
.

Well that's fine, but on a point as elementary as this there really shouldn't be much more that's required. It's like when people say evolution is a lie, mentioning the fact that functionally every biologist in existence accepts it is a shortcut way to telling you how solid the evidence is for it.

Regardless, I already provided you with a thought experiment that showed why deflation is bad. It encourages hoarding money which in turn causes a deflationary spiral that leads to massive unemployment, etc. It's bad news.

 

[Blackjack200]

So am I to take it you dont believe in push pull inflation? With more disposable income, the demand for x good/service can now be expressed. With more money, people buy things. The lag in production means that prices in the short run may go up.

Huh? Isn't that exactly what he's saying? More disposable income --> More demand --> Higher prices --> Increased production --> Economic growth.

Isn't that what we're going for here?

 

[fskimospy]

So am I to take it you dont believe in push pull inflation? With more disposable income, the demand for x good/service can now be expressed. With more money, people buy things. The lag in production means that prices in the short run may go up.

Yes, we agree exactly. Lower interest rates increase disposable income, people spend more, prices go up.

 

[glenn1]

It's kind of hard to understand how he could still be arguing this. I have a house on a 4.5% loan, the payment is almost $1,400. If I drop the rate to 3% my payment goes down to $1250 and I have an extra $150/month to spend. Now multiply that by every mortgage holder in the country.

The problem is that right now people have a hard time taking advantage of low rates because they're underwater on their houses (or other assets). America badly needs a consumer bailout, which means getting money into the hands of spenders financed by taxes on high income earners and wealth.

Little chance of that happening with the current political climate though.

Bingo, we have a debt overhang that caused a bubble in capital assets due to the housing bubble and Chinese industrialization (which also drove inflation in raw material prices for so long). Demand continues for sectors like consumer staples etc. which get purchased no matter what which is why we saw huge inflation in food and other non-capital goods. Unless and until Keynesians recognize you can't stimulate your way to infinite demand when oversupply is already the driving factor, they'll continue to make the same mistakes with ZIRP and other policies that have already failed Japan for 2 decades plus.

 

[Blackjack200]

Japan has been lowering theirs since the early 90's.

How long does this take?

How long does what take? Dullard and eskimospy have already discussed some of the structural challenges they face. Setting interest rates correctly does not mean your economy rockets to the moon.

Krugman has suggested that ZIRP might be the normal correct policy for developed nations that face prolonged periods of low growth, and all this fussing about getting back to 4-5% prime might be completely misguided. It makes sense. Asset prices are high, so if people are going to be able to afford things like houses and cars, interest rates need to be very low.

 

[fskimospy]

Bingo, we have a debt overhang that caused a bubble in capital assets due to the housing bubble and Chinese industrialization (which also drove inflation in raw material prices for so long). Demand continues for sectors like consumer staples etc. which get purchased no matter what which is why we saw huge inflation in food and other non-capital goods. Unless and until Keynesians recognize you can't stimulate your way to infinite demand when oversupply is already the driving factor, they'll continue to make the same mistakes with ZIRP and other policies that have already failed Japan for 2 decades plus.

Except of course we didn't see huge inflation. Are you an inflation truther now too?

 

[glenn1]

Yes, it is a pretty strange argument. I think what he's saying is that an increase in interest rates will cause so much damage to the supply side of the equation and that output will drop so much that prices will increase in spite of decreased disposable income. Again though, I'm not aware of any research that says as much.

Not to mention the fact that raising prices by decimating your supply side would be a horrible outcome anyway.

Yeah, because maintaining zombie companies or uninhabited Chinese cities indefinitely is much better. Heaven forbid we allow failures, we gotta keep paying people to dig holes and fill them in just to keep the dollars flowing no matter how long it takes.

 

[fskimospy]

Yeah, because maintaining zombie companies or uninhabited Chinese cities indefinitely is much better. Heaven forbid we allow failures, we gotta keep paying people to dig holes and fill them in just to keep the dollars flowing no matter how long it takes.

Ah so now we've gotten to the inevitable straw man and emotional ranting part of glenn's argument.

 

[zephyrprime]

There is only two ways to get out of the problem Japan and to a lesser extent the entire western world + china are in and that is to either write off debt (default aka jubilee) or print fiat money - NOT FIDUCIARY money!

The problem is too much debt with is the inevitable consequence of a debt based monetary system. Most people think we have either a groundless monetary system (fiat money) or a gold backed system (we left the gold standard long ago). We do not. We have a debt based monetary system (fiduciary money). We literally cannot create new money units without creating it as debt via the origination of new loans. Eventually everyone has too many loans and the system fails. Only mass default or true money printing can solve this problem. QE is only debt based money printing and has to be repaid by the central bank to itself which is deflationary.

 

[Kwatt]

It's like when people say evolution is a lie, ...

I was thinking along the same lines. Like when when the scholars knew the Earth was flat and was at the center of the universe.


.

 

[theeedude]

Wouldn't want to be a US exporter now.

 

[glenn1]

Except of course we didn't see huge inflation. Are you an inflation truther now too?

My exact statement you quoted was "that's why we saw huge inflation in food and other non-capital goods," are you're going to argue that the costs of the non-capital goods components of the CPI didn't experience inflation? Hell, basically everything but housing went up, some like medical care, energy, and education went up hugely. You can refer to DMcOwen's "$5 gasoline" or "$10 milk" threads if you want to refresh your memory.

 

[fskimospy]

I was thinking along the same lines. Like when when the scholars knew the Earth was flat and was at the center of the universe.
.

Anyone can be wrong about anything, it's all a question of what is probable. If you think an appeal to all of the experts is unconvincing let me tell you how convincing an appeal to geocentrism is, haha.