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Fed’S Kocherlakota Says More Debt Can Lift Long-Run Real Rates

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http://www.bloomberg.com/news/articles/2015-07-09/fed-s-kocherlakota-says-more-debt-can-lift-long-run-real-rates

Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said it could be a good idea for the U.S. government to issue more debt as this would help lift the economy’s long-run neutral rate of interest.

Increasing the supply of assets available to investors “would push downward on debt prices, and so upward on the long-run neutral real interest rate,” Kocherlakota said Thursday in Frankfurt in remarks prepared for delivery at a conference hosted by Germany’s Bundesbank.

Lifting the so-called neutral rate, which prevails when Fed policy is neither stimulating nor restraining growth, would in turn benefit Fed policy makers by creating more space between the benchmark federal funds rate and zero, he said.

Fed officials have said they will likely raise rates this year for the first time since 2006 in response to falling unemployment and firming inflation. The central bank has kept its benchmark rate near zero since December 2008.

The solution to everything is more debt. In a credit based monetary system the only way to keep growth going is to issue more debt.

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http://www.bloomberg.com/news/articles/2015-07-09/fed-s-kocherlakota-says-more-debt-can-lift-long-run-real-rates

The solution to everything is more debt. In a credit based monetary system the only way to keep growth going is to issue more debt.

Not so much everything as zirp.

Assuming there is a long run equilibrium real rate (debateable) it would also mean the corollary must be true. i.e. reducing debt (Hello Osbourne!) must depress the real equilibrium interest rate. Probably.

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So the neutral rate is now 0.25% and the fed isn't stimulating the economy (at 0.25%). Does that mean the economy is dead?

What does he want? More interest paid from the future to stimulate the economy while the fed holds rates at a non-stimulation rate of 0.25%?

To do what? Give them room to print more money and then drop even the future rate into a guaranteed rate of 0.25% non-stimulation mode?

If I was him, I would shut up. When are they going to buy back all the QE money?

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Kocherlakota wrote this:

"Societal benefits of illiquid bonds": http://www.dklevine.com/archive/refs4506439000000000300.pdf

I regard it as a seminal paper which is right on the money (forgive the pun).

However it jars somewhat with his recent statement. Presumably he feels that more issuance of US federal debt will make US federal debt less liquid and thus raise the natural rate. However if said debt remains backstopped by the FED I don't see how it can achieve those goals.

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More debt issued lowers rates....if there is a central bank due to the policy transmission mechanism. And if there is no fear of default.

Yes, exactly. Not sure what has changed in Kocherlakota's mind. Looking for an easy path to retirement presumably.

Shame.

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More debt issued lowers rates....if there is a central bank due to the policy transmission mechanism. And if there is no fear of default.

Why?

To my (admittedly simple) mind if, say, Osborne runs higher deficits i.e. increases govt. debt that will increase agg. demand, employment, inflation and so on pushing the equilibrium real interest rate up not down & BoE would be able to raise the short rate to offset it (again, assuming there is any such thing as an equilibrium real rate & tinkering with any of these levers does very much)

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