Interest Rates 10 Years From Now

[Bland Unsight]

No you misunderstand me. I am not saying that bank balance sheets can be risk free and funded risk free. Of course bank balance sheets are inherently risky due to maturity transformation - no argument there! What I am saying is that from a depositors point of view who makes a deposit under the FSCS limit, he or she is taking no nominal risk, and thus should get no nominal return. Certainly the FSCS itself is taking risk by providing the insurance, but the depositor herself is not taking any risk at all. That is what I mean by risk free investments.

If I recall correctly, we used to have a system where this was true. A current account paid no interest and in fact you were charged for the service the bank was providing, and the level at which deposit insurance kicked in was really quite low. Banks were boring little businesses and their share of UK corporate profits was very modest, relative to the levels it reached just prior to the GFC.

Again, you are taking the present structure for granted (deposit insurance to something batshit mental like £75k per banking group and interest on current accounts at 1.5% on a £20k balance with some lenders). However the present structure is an artefact of the madness of the banks prior to the GFC. It's also an artefact of attempting post-GFC to deny the truth of King's aphorism, WTTE of "Where there are debtors who cannot pay, there are creditors who will not be paid".

Academics and commentators in the US and the UK poured scorn on post-bubble Japan and suggested that they should just take their medicine and sort their banks out. You are doing the opposite now that similar problems have emerged in the US and UK banks. You are suggesting that the structure of a totally broken banking system is in fact not broken but is somehow telling us the truth about what a system of money should be.

If you allow such an excess of debt to accumulate that your banks fall over and then you deal with the consequences by pretending a crisis of solvency is really a crisis of liquidity (at least in terms of public communication to the people in the cheap seats), then interest rates will have to fall. However, to infer from falling interest rates that the system is working its way towards its only possible end state is a kind of crass historical determinism (that might appeal to an unreconstructed Marxist*) applied to constructing a There Is No Alternative justification for our terrible banking system.

It seems to me ZIRP reflects (an understandable) technocratic decision taken in order to stave off old school debt-deflation and the attendant economic depression, but the debt comes first. In the UK a massive role in burdening the economy with the debt it is now struggling with was played by the private banks. There was (and is) a problem with the banking system.

* Laying it on a bit thick, just having fun with it. Sorry.

[Bland Unsight]

If that is true then how can you make the assertion that current interest rates are not correct? Given that I *think* you have asserted that the current interest rate is the wrong one, you ought to be able to say how you know that.

I don't recall asserting that the current interest rate is not "correct". I'm contesting your assertion that the interest rate on credit money has to be zero.

[scepticus]

If I recall correctly, we used to have a system where this was true. A current account paid no interest and in fact you were charged for the service the bank was providing, and the level at which deposit insurance kicked in was really quite low. Banks were boring little businesses and their share of UK corporate profits was very modest, relative to the levels it reached just prior to the GFC.

Yes, this was introduced after the first great depression in the 30s (at least in the US), along with deposit insurance. They realised that by providing risk free deposit accounts, backed by the taxpayer, it was not only financially dangerous to allow those accounts to pay interest, they recognised the moral hazard inherent in doing so.

Again, you are taking the present structure for granted (deposit insurance to something batshit mental like £75k per banking group and interest on current accounts at 1.5% on a £20k balance with some lenders). However the present structure is an artefact of the madness of the banks prior to the GFC. It's also an artefact of attempting post-GFC to deny the truth of King's aphorism, WTTE of "Where there are debtors who cannot pay, there are creditors who will not be paid".

We have interest-paying insured accounts for decades and recently additional taxpayer backstops like that iceSave debacle. I agree that the FSCS limit is way too high, and that only one insured account should be allowed per person, and insured accounts should not be permitted for non living legal entities. What I am saying is that given we have had this structure for more than half a century, that this is the reason we end up where we are.

Academics and commentators in the US and the UK poured scorn on post-bubble Japan and suggested that they should just take their medicine and sort their banks out. You are doing the opposite now that similar problems have emerged in the US and UK banks. You are suggesting that the structure of a totally broken banking system is in fact not broken but is somehow telling us the truth about what a system of money should be.

What I have been saying is the the monetary system is broken and this has in turn broken the banking system, not the other way round. There are three problems with the monetary system that have led to this impasse:

* Deposit-insured nominal risk-free accounts paying interest, often quite high real rates of interest, 1945-circa 2013

* Nominal risk free government bonds paying interest, often quite high real rates of interest, 1945-circa 2013. This is essentially the same issue as the first bullet, but with additional insidious feature that there is NO LIMIT to the amount of funds that can be protected in this way. You might think that sovereign bonds do carry nominal risk of default but I would argue that in practice and in the mind of almost 100% of the investing market there is no such risk in USTs, Gilts, Bunds etc.

* Issuance of nominal risk free government debt is more or less equivalent to money-printing since from a high net worth saver/corporate POV, both money and govvies qualify as more or less interchangable risk free parking places for accumulated wealth.

So what I am saying is that to fix banking, HPI, moral hazard etc the inherent flaws and hazards in the overall system need to be fixed first.

If you allow such an excess of debt to accumulate that your banks fall over and then you deal with the consequences by pretending a crisis of solvency is really a crisis of liquidity (at least in terms of public communication to the people in the cheap seats), then interest rates will have to fall. However, to infer from falling interest rates that the system is working its way towards its only possible end state is a kind of crass historical determinism (that might appeal to an unreconstructed Marxist*) applied to constructing a There Is No Alternative justification for our terrible banking system.

The banking system is capable of both creating and destroying credit money. The fact that it created more than it destroyed is because so many of the deposits are actually or implicitly insured. Because destroying credit money necessarily means destroying deposits. Likewise to focus entirely on credit money entirely ignores the potentially more important role of vast quantities of nominal risk free bonds.

It seems to me ZIRP reflects (an understandable) technocratic decision taken in order to stave off old school debt-deflation and the attendant economic depression, but the debt comes first. In the UK a massive role in burdening the economy with the debt it is now struggling with was played by the private banks. There was (and is) a problem with the banking system.

* Laying it on a bit thick, just having fun with it. Sorry.

ZIRP reflects the fact that we get what we deserve. It might be nice to think that hard working savers could never lose their deposits and get a fair return for their efforts but the reality is that this principles has been extended to pension funds, corporates with multi trillion cash piles, sovereign wealth funds etc.

The problem is with the monetary system which created perverse incentives for all players: banks, depositors, borrowers, sovereigns etc. Banking cannot be fixed until these perversions are removed.

[scepticus]

I don't recall asserting that the current interest rate is not "correct". I'm contesting your assertion that the interest rate on credit money has to be zero.

I assert that is must tend to zero (or rather to slightly less than zero) in the long run, given the existing features of the monetary system which I outlined above. If you dispute this, you should be able to suggest how you think it could evolve over the long run. Simply describe a plausible scenario.

I do agree that the return on credit money can and should deviate from zero, but only once the inherent constraints and imbalances of the existing underlying monetary system are resolved.

Even then, I would still assert that the real return on credit money cannot exceed the real rate of economic growth over the long run. Here I define the rate of return on credit money as the average rate of return experienced by the average participant. Real rates of economic growth tend to be around the 0.5 - 1% mark in good times thus this does suggest quite a tight range.

[Bland Unsight]

I assert that is must tend to zero (or rather to slightly less than zero) in the long run, given the existing features of the monetary system which I outlined above. If you dispute this, you should be able to suggest how you think it could evolve over the long run. Simply describe a plausible scenario.

If that was a gallant attempt at accepting that I didn't say that the current interest rate is not "correct" I have to say that I am a little underwhelmed. Further you are now explicitly attempting to direct discourse. You are are suggesting that I accept that the existing system is immutable (or that at least I take it for granted for the purposes of discussion) so that we can press on with talking about what you want to talk about. That's bad darts. My sustained line of argument is that we should not accept this system, we should strive to reform it. I've already discussed in detail how I think we should begin this process and to the extent that banks do now hold a little more capital and the rules on the assessment of risk-weighted assets have tightened up a little there has been a small amount of progress in that direction out in the real world.

This has been very interesting and you've given me some things to think about.

I worry very much about the idea that "we get what we deserve", as you put it. Mervyn King is a comedy villain on HPC for many, or just a villain I suppose, but I'm not convinced by that assessment.

I would like to persuade you all of two propositions. First, it is very important for the United Kingdom to have a plan to reduce our structural deficit over the next five years. Without that I think we would have risked our credibility in international financial markets, and you can see that in the yield. Secondly, that the real cost of this crisis is being borne by people who were in absolutely no way responsible for it. In the past you could look at recessions in the UK, and we could have said in the past, "Look, some of the jobs are in unsustainable industries being supported by taxpayers, nationalised industries that shouldn't be in this business". There were inefficiencies; there was weak management; there were trade union restrictive practices.

Most of the downturns in the past, in the post-war period, we could genuinely say that the downturn gave an opportunity for creating greater efficiency in our economy and there were some benefits we might get from it. None of that applied on this occasion. We had had a much more flexible labour market; management had been improved. Most of the structural weaknesses of the UK economy over the previous 30 years had been eliminated, I think, by Governments of both major parties making changes over a period of years. We had reached a position where we had quite a successfully operating economy, but the people whose businesses went out of existence, the people whose jobs were destroyed, were in no way responsible for the excesses that we saw in the financial sector and the causes of the crisis.

I think that is a very difficult point to get across and it is why I have every sympathy with Mr Mudie's constituents who cannot look at this and say, "Okay, I accept that something was wrong and needed to be put right, and this is the price of putting it right". They are paying the price themselves and they are people that don't get bonuses of the scale that people in the financial services sector get, they are on much lower incomes and they are paying the price. I think this is a big political problem for you, because the cost of this crisis is only now beginning to be felt. It may have been 2008 and 2009 when the headlines and the television bulletins were full of stories about the financial crisis, but now is the period when the cost is being paid, and I am surprised that the degree of anger hasn't been greater than it has been.

Source

People are not getting what they deserve. Take my hobby-horse, the interest-only buy-to-let mortgage. It's conspicuously a debacle in finance and unwinding it is proving to be a very tricky problem. It has been an engine of generational inequality and the households being stiffed have done nothing to deserve being stiffed. The people working in so-called structured finance kept their bonuses for enabling the lending of shite that should never have been lent. Through UKAR the state is most likely still extending credit to Fergus Wilson on excellent terms. If you abstract too much, the resulting elisions can remove so much that you've assumed away the seeds of genuine social strife.

I accept that you have particular thoughts about our monetary system, that they are cogent and that there's nothing wrong with seeking to get a view from a great distance, but what if all this venom around the Brexit vote is just a sign of things to come? The road that we are on has brought ever more frequent crises and the magnitude of those crises is seemingly increasing each go around. I'm by disposition an optimist (though I think the charges of idealism levelled against me sometimes on here in the past miss the mark) but your 'ZIRP to the new equilibrium' narrative instils in me a great deal of apprehension. We've been going down that road for a while now, and the results are not pretty for those on the receiving end, no matter how wonderful it has been for the people who've gotten the right side of this tsunami of inequality.

[scepticus]

Thanks for the chat BU, and thanks for the last paragraph. Your concerns are not misplaced and I share them; I am, after all, an HPC-er and I want to live in a sensible economy as much as anyone else here does. I just don't think it is going to happen the way many might like or expect, and thus far at least I have been more or less correct in my predictions. Yes, I abstract my thinking as far as possible and generally stay out of the moral jousting about what is fair and isn't - there are plenty of others to carry that torch - and I would rather focus on the art of the possible.

ZIRP (and NIRP) are not in themselves supportive of asset prices going forwards, all else equal (I mean, look at Japan). QE, fiscal measures, tax wheezes, housing benefit etc, nominal GDP targeting are. Without all these, ZIRP would not have been sufficient to prevent asset price declines and deflation. These latter boon-dogles are, along with the more fundamental boon-dogles of deposit insurance etc, are where attention should be focused. Interest rates are just easier and less complex to talk about, I guess.

[scepticus]

The question I ask is, how is an observer (me) able to discern between the following scenarios / explanations for the world:

1) 'Ineffective CB world' - A world with stagnant growth where central banks have kept rates 'artificially' low, leading to lower long term interest rates (than they would otherwise be), 'artificial' higher asset prices (bubbles) but no / limited impact on growth.

2) 'Neutral CB world' - one where central banks had responded to stagnant growth and 'followed' market rates down. Asset prices are higher but are durable and set by the economy and not the CB.

3) 'Negative CB world' - a world where central bank action has led to and caused the stagnation (economic strangulation as a side effect through means TBC) and therefore lower interest rates and therefore higher asset prices [which persist so long as the CBs retard growth.]

Yes, an excellent question indeed; you have defined the very nub of the debate here.

Unfortunately there isn't a clear answer here. Certainly I think there is an extremely strong case for (2) in the sense that it is quite well established that market rates tend to turn up or down first (and even before the market rate turns, the signs are visible in the velocity of money metrics) and the CB follows. A good test of this assertion will come when the FED raises its rate. If I am correct, the market will push against that which will result in an inverted yield curve and the FED will have to either bring rates down again or try some unconventional measures to steepen the yield curve by trying to push the long end of the curve up at the same time they raise rates. Lets wait and see. I think the FED knows that this is the case which is why they are reluctant to raise rates - because if all they do is invert the yield curve this will badly damage their credibility.

Incidentally, their credibility rests in large part on people believing that (1) is true - e.g. that the FED sets rates and the markets follow. I know that this is not the case, and I think they know this is not the case, but many/most people seem to still believe that the FED has this power. It is in the FED's interest not to give people a glimpse behind the curtain.

So I don't think there is a good case for (1); where CBs have been keeping rates artificially low.

That said, there is more to CB policy than just rates. The purpose of non conventional CB policy combined with unconventional fiscal measure (e.g. Abenomics in Japan) has been to try push rates and inflation up, not down, so as to drive growth. In this area, I would say that CBs have failed, and not only that they have made matters worse. These measures have exacerbated inequality and pumped up asset prices in a way that merely leaving rates at zero can not accomplish. So I would say there is definitely a strong element of (3) as well, but perhaps not in the way you would have expected.

When there is strong real growth it makes sense to invest in the assets of tomorrow, not today. When there is not any real growth, it makes sense to compete for todays assets because tomorrows assets won't be much better or more numerous, and they will be more risky. Low global growth is going to result in high asset prices - it has always been this way.

Not much can be done about that really and like I said above to BU, strong real (inflation adjusted) rates of growth over the long run would be at best about 1-2% per annum, not 3 or 4% and definitely not 7%. So how could we go back to say a 4% base rate and have price stability? It simply cannot be done.

[Growlers2]

Yes, an excellent question indeed; you have defined the very nub of the debate here.

Unfortunately there isn't a clear answer here. Certainly I think there is an extremely strong case for (2) in the sense that it is quite well established that market rates tend to turn up or down first (and even before the market rate turns, the signs are visible in the velocity of money metrics) and the CB follows. A good test of this assertion will come when the FED raises its rate. If I am correct, the market will push against that which will result in an inverted yield curve and the FED will have to either bring rates down again or try some unconventional measures to steepen the yield curve by trying to push the long end of the curve up at the same time they raise rates. Lets wait and see. I think the FED knows that this is the case which is why they are reluctant to raise rates - because if all they do is invert the yield curve this will badly damage their credibility.

Incidentally, their credibility rests in large part on people believing that (1) is true - e.g. that the FED sets rates and the markets follow. I know that this is not the case, and I think they know this is not the case, but many/most people seem to still believe that the FED has this power. It is in the FED's interest not to give people a glimpse behind the curtain.

So I don't think there is a good case for (1); where CBs have been keeping rates artificially low.

That said, there is more to CB policy than just rates. The purpose of non conventional CB policy combined with unconventional fiscal measure (e.g. Abenomics in Japan) has been to try push rates and inflation up, not down, so as to drive growth. In this area, I would say that CBs have failed, and not only that they have made matters worse. These measures have exacerbated inequality and pumped up asset prices in a way that merely leaving rates at zero can not accomplish. So I would say there is definitely a strong element of (3) as well, but perhaps not in the way you would have expected.

When there is strong real growth it makes sense to invest in the assets of tomorrow, not today. When there is not any real growth, it makes sense to compete for todays assets because tomorrows assets won't be much better or more numerous, and they will be more risky. Low global growth is going to result in high asset prices - it has always been this way.

Not much can be done about that really and like I said above to BU, strong real (inflation adjusted) rates of growth over the long run would be at best about 1-2% per annum, not 3 or 4% and definitely not 7%. So how could we go back to say a 4% base rate and have price stability? It simply cannot be done.

Thanks for taking the time to respond.

I don't think I really have much to add to the above. I don't think I disagree with anything you've written in particular although this isn't my area of expertise. The next 18 months are quite likely to be very interesting from a macro economics perspective. Perhaps we will have some more insight on the above.

I agree with your sentiments earlier in the thread about morality - why let it cloud your judgement? - let us try to understand the world as best as we can. Ultimately things are as they are *And I write this as a 33 year old long term London renter*. I think the whole 'credit bubble hypothesis' for UK property should be open to more scrutiny generally. Not least because people make decision based on what they read and they should be presented with all available arguments and counter arguments.

That said, I'd like to highlight - based on the above, and you own acknowledgement - you may well be wrong! And, It (literally everything) might all turn out to be one ******-off massive CB bubble!

You are right about (3), your point was not what I had expected. I was being deliberately vague but the points I meant included:

+ Collateral scarcity - and it's impact on non bank (shadow bank / Eurodollar) credit creation. [http://www.alhambrapartners.com/author/jsnider/]

+ Income inequality - CB actions and their impact on inequality (perhaps easier to establish) and the associated differentials in marginal propensity to consume between rich and poor.

+ 'Austrian' criticism - non specific critic around 'misallocation of resources' as a result of miss-pricing of credit. [i don't subscribe to this view but found Mises's view interesting in so far as I could understand them *have you ever tried to read human action!?*]

[Bland Unsight]

Yes, I abstract my thinking as far as possible and generally stay out of the moral jousting about what is fair and isn't - there are plenty of others to carry that torch - and I would rather focus on the art of the possible.

For what it is worth I'd offer you a word of caution here. What you call "moral jousting" I think of as attending to the fabric of our society; "never send to know..." and so on. These ideas about fairness are utterly fundamental to what people are and though "moral jousting" may fall outside the purview of a certain kind of model, disregarding "moral jousting" from the model as a consequence of slavishly answering an unwarranted ontological commitment is a dark, dark road. Chamberlain went off to look for "the possible" and so too did the people who made their peace with Stalin. You are trying to set aside the only question that matters; how should we live?

Edited September 1, 2016 by Bland Unsight

[saderic]

Many thanks for the very interesting discussion, to all involved. This is why I lurk on this forum.

For what it's worth, what skepticus says makes an awful lot of sense to me. I've yet to hear a convincing argument on why he/she is wrong on why rates are the way they are, which after all was the topic of this thread. Let's leave idealism out of this one thread and focus on understanding the world as it is. Surely it's only then one can have a sensible debate on how to fix it?

[Bland Unsight]

Many thanks for the very interesting discussion, to all involved. This is why I lurk on this forum.

For what it's worth, what skepticus says makes an awful lot of sense to me. I've yet to hear a convincing argument on why he/she is wrong on why rates are the way they are, which after all was the topic of this thread. Let's leave idealism out of this one thread and focus on understanding the world as it is. Surely it's only then one can have a sensible debate on how to fix it?

If shifting the level of debt to equity in the private banks' funding mix is considered "idealism", then we're prey to an intellectual kind of financial capture that's even worse than the mechanical kind described so well by Engelen et al in After the Great Complacence.

A central part of the thesis that Scepticus is offering is all about governments offering a rate of interest that was too high on their (supposedly) risk free debt. However, I think you could cobble together the argument that the governments were operating from 1990s until 2008 in a market for bonds which was very heavily influenced by the coming of things like the Eurodollar market where private banks effectively gamed existing systems to escape regulation and pay high rates of interest on bonds that were supposed to be 'just a bit more risky'. Of course, it turns out that many billions of dollars of these bonds which have been a part of the bond market the governments are operating in are just worthless crap. The wholesale money markets which funded Northern Rock also existed to subvert earlier rules on how much interest could be paid on insured deposit, again with the financial institutions who operated them pretending they were riskless (i.e. that they wouldn't "break the buck") even though the money was being lent to other financials that would face insolvency in the GFC even if liquidity wasn't a problem.

There is a deep, deep question here which is the lack of appetite for fundamental reform of the system. As I read it there is a line of the argument which Scepticus is making (which you are endorsing) which is essentially "This is just the way it is, get used to it." This was not the policy response that led to the Sherman Antitrust Act, or the Glass-Steagall legislation.

I worry that the matter of that which is to be reformed is sufficiently complicated that the private banks have been able to muddy the water enough to propose that it is all the fault of governments and it's now once again time to 'let the market sort it out'. All markets have rules. Proposing that markets have the best possible rules is not idealism, it's just common sense. Do you think that the rules that we have, still little changed from the rules that got us here, are the right rules?

I've got no beef with people wanting to carry on a conversation along the lines of "OK, if we leave the machinery as it is, what happens to interest rates?" but I think that your post, saderic, is problematic on two counts. Firstly, as I've already detailed, it has this "It's just the way it is" acceptance of a broken system. Secondly, a conversation like that has an "OK, so if I leave my hand in this flame what happens to the speed at which my fingernails grow" quality. It is the people on the margin of our society who bear the brunt of a financial crisis, and they are already very pissed off and perceiving themselves as having very little to lose. It is pragmatism to worry about that.

Edited September 1, 2016 by Bland Unsight

[saderic]

Thank you for calling my post 'problematic', it has given me the impetus to respond.

There is a deep, deep question here which is the lack of appetite for fundamental reform of the system. As I read it there is a line of the argument which Scepticus is making (which you are endorsing) which is essentially "This is just the way it is, get used to it." This was not the policy response that led to the Sherman Antitrust Act, or the Glass-Steagall legislation.

I worry that the matter of that which is to be reformed is sufficiently complicated that the private banks have been able to muddy the water enough to propose that it is all the fault of governments and it's now once again time to 'let the market sort it out'. All markets have rules. Proposing that markets have the best possible rules is not idealism, it's just common sense. Do you think that the rules that we have, still little changed from the rules that got us here, are the right rules?

No, I don't think anyone is saying that. But I agree with Skepticus that the problem at its root is the monetary system and that we are witnessing the tragic consequences of banks (and others) trying to operate within that system.

I'm merely pointing out that if we cannot get to the bottom of how we got here, we will struggle to see where we are going and how to best change that.

Having said that, I am not infinitely patient, and would be all for fundamental reform, be it of the monetary or banking system. If I had a vote and you were a politician, I would vote for you. But you are not a politician, this is not yet up for a vote, so I'm happy that we keep critically challenging the narrative (both that of the establishment and that which is currently prevailing on HPC).

[scepticus]

While we are on the subject of problematic posts, BU, please try and avoid misrepresenting my position. I have taken pains to point out that:

* I perceive the same problems that you do, namely unreasonably high real estate prices, bad financial behaviour and unsustainable inequality.

* I would like to see reforms that properly address these problems.

Given that we can agree on this it is wrong of you to suggest that my position is somehow morally ambiguous. This is the problem with the vast majority of reforming zeal espoused everywhere; one mans reform agenda is different from another's and will be based on differing assessments of not only what the best outcome is, but on what factors have prevented that outcome from being achieved. We have various reform agendas being pushed which are variously libertarian, socialist, technocratic, crypto-fascist, crony-capitalist and anarchic. Now, each representative of these various schools of thought will present their arguments as being both 'common sense' and 'for the people'. As such most all of them are based on ideals of what society should look like and this necessarily colours their view of past events and makes them unreliable narrators.

Given that we live in a democracy the only way to achieve reform is to somehow reconcile these varying views and IMO that can only be done by developing a much better understanding of how our social and economic systems operate, rather than simply making convenient assumptions about them. This is why I carefully avoid identifying with any of these -isms and instead seek to be a (more) reliable narrator and report what I perceive in our systems, wherever possible avoiding making emotional value judgements.

[Bland Unsight]

While we are on the subject of problematic posts, BU, please try and avoid misrepresenting my position.

I apologise if I have misrepresented your position. I think the process of trying to get a handle on another poster's position and the inevitable matter of reading things into posts which were not meant, possibly not even present, leads to the appearance of misrepresentation though the process might be more properly understood as plain old-fashioned error (hence I thoroughly approve of the way in which you point out at many stages above that I have misunderstood your position).

Perhaps you felt that the points you make explicit in the two 'bullets' kind of go without saying? Perhaps you've said them many times before? Perhaps you felt that they were so clearly implicit that they were damn well explicit? Anyway, it does clarify something for me, and means that I was drawing incorrect inferences.

If you feel that I've misrepresented you then I almost certainly have. I apologise.

[Bland Unsight]

Given that we can agree on this it is wrong of you to suggest that my position is somehow morally ambiguous. This is the problem with the vast majority of reforming zeal espoused everywhere; one mans reform agenda is different from another's and will be based on differing assessments of not only what the best outcome is, but on what factors have prevented that outcome from being achieved. We have various reform agendas being pushed which are variously libertarian, socialist, technocratic, crypto-fascist, crony-capitalist and anarchic. Now, each representative of these various schools of thought will present their arguments as being both 'common sense' and 'for the people'. As such most all of them are based on ideals of what society should look like and this necessarily colours their view of past events and makes them unreliable narrators.

Given that we live in a democracy the only way to achieve reform is to somehow reconcile these varying views and IMO that can only be done by developing a much better understanding of how our social and economic systems operate, rather than simply making convenient assumptions about them. This is why I carefully avoid identifying with any of these -isms and instead seek to be a (more) reliable narrator and report what I perceive in our systems, wherever possible avoiding making emotional value judgements.

FWIW what I was driving at is not that your position was morally ambiguous, but the idea that there are lots of people taking a real battering so at some point we are going to have to deal with the fact that we don't understand the system (we never have before) and do something because doing nothing makes marginal groups biddable to demagogues.

[scepticus]

I apologise if I have misrepresented your position. I think the process of trying to get a handle on another poster's position and the inevitable matter of reading things into posts which were not meant, possibly not even present, leads to the appearance of misrepresentation though the process might be more properly understood as plain old-fashioned error (hence I thoroughly approve of the way in which you point out at many stages above that I have misunderstood your position).

Perhaps you felt that the points you make explicit in the two 'bullets' kind of go without saying? Perhaps you've said them many times before? Perhaps you felt that they were so clearly implicit that they were damn well explicit? Anyway, it does clarify something for me, and means that I was drawing incorrect inferences.

If you feel that I've misrepresented you then I almost certainly have. I apologise.

Cheers. I would not say that my two bullets go without saying, but I have said these things many times in this conversation and in many other threads. Easy to miss though and you are not the only one to miss them, I suppose because I'm not offering the normal HPC line of argument and the tendency of all of us us to is focus on differences not similarities.

[scepticus]

FWIW what I was driving at is not that your position was morally ambiguous, but the idea that there are lots of people taking a real battering so at some point we are going to have to deal with the fact that we don't understand the system (we never have before) and do something because doing nothing makes marginal groups biddable to demagogues.

True. The essential problem as I see it is this:

Lets say we actually enacted the kind of reforms that might fix some of these issues. It is my contention that the reforms you want to see OR the reforms I would like to see, or both, would NOT result in rising interest rates, instead they would push rates further negative to the point at which banks would have to pass them onto retail customers.

The real reason why the Anglo-American axis of central banking (and the Japanese branch, to some extent) is so wedded to credit easing and QE is because they are absolutely terrified of 'NIRP on the street' (aka negative interest on retail deposits). Interestingly, the European's seem less bothered by it. I'm not sure exactly where this difference in philosophy comes from, but I think it may be down to the rather stronger vein of crony-capitalism that runs through the english speaking world versus mainland europe.

Of course, the dynamic we require to start reducing inequality and to put assets back on a sensible trajectory is deflation. Not uncontrolled deflation, even a gentle downward drift will work over time and would send the signal that what goes up can come down.

However when we get this dynamic throughout the english speaking economies it will definitely expose mom and pop and pensioners etc to negative rates (not large negative rates, but negative nonetheless). There is no way to have deflation and positive nominal rates (or even zirp) for any length of time under a general secular deflation and avoid complete economic and political collapse.

The problem is, NIRP on the street is culturally unacceptable in the US, the UK, other english-speaking economies and Japan. No matter that NIRP and deflation would reduce inequality and asset prices and raise the poor up relative to the well off, just as high interest rates and inflation have historically increased inequality, boosted asset prices, and benefited the rich over the last 40 years, people think (including the less well off who would actually benefit) that it would amount to stealing from them. Nowhere is this trend of thinking more clearly expressed than here on HPC.

Until this cultural blind spot has had time to sort itself out, I find it very hard to see what can be done. We may need to wait while deflation and NIRP force their way through into european economies and perhaps Japan so people have time to judge the impact more objectively.

[Bland Unsight]

Until this cultural blind spot has had time to sort itself out, I find it very hard to see what can be done. We may need to wait while deflation and NIRP force their way through into european economies and perhaps Japan so people have time to judge the impact more objectively.

I buy all of that. I'm not against NIRP on banks' central banks deposits, and I'm not against 'NIRP on the street' (nice way of putting it by the way) as direct consequence. The way that I make my peace with NIRP on the street is that our system of money is a debt-money system. One of the ways it can fail to be optimal is if it creates way too much debt-money, leaving you with a "debt overhang" (to employ Adair Turner's favoured label) and also lots and lots of credit money, chasing up asset prices. One way for the system to return to acting more like 'money' (i.e. performing the role of money successfully) is to destroy some of the money. NIRP on the clearing banks' central bank deposits (i.e. on their reserve accounts at the Bank of England) achieves this outcome.

To run over the ground you just mapped out, excessive expansion of the amount of credit money produces inequality. A NIRP facilitated unwinding of that position exacts losses on some people, however making NIRP the bad guy and claiming that it is immoral or wrong is tantamount to arguing that if the system misbehaves and I win as a consequence, that's fine, but when the system's path through a metaphorical phase space* means I lose, that's immoral and wrong. Seen in this way the introduction of questions of morality and fairness is going to be heavily influenced by whether you stand to lose or gain.

* Random ODE phase space from google image search because they're so cool.

Edited September 2, 2016 by Bland Unsight

[zugzwang]

True. The essential problem as I see it is this:

Lets say we actually enacted the kind of reforms that might fix some of these issues. It is my contention that the reforms you want to see OR the reforms I would like to see, or both, would NOT result in rising interest rates, instead they would push rates further negative to the point at which banks would have to pass them onto retail customers.

The real reason why the Anglo-American axis of central banking (and the Japanese branch, to some extent) is so wedded to credit easing and QE is because they are absolutely terrified of 'NIRP on the street' (aka negative interest on retail deposits). Interestingly, the European's seem less bothered by it. I'm not sure exactly where this difference in philosophy comes from, but I think it may be down to the rather stronger vein of crony-capitalism that runs through the english speaking world versus mainland europe.

Of course, the dynamic we require to start reducing inequality and to put assets back on a sensible trajectory is deflation. Not uncontrolled deflation, even a gentle downward drift will work over time and would send the signal that what goes up can come down.

However when we get this dynamic throughout the english speaking economies it will definitely expose mom and pop and pensioners etc to negative rates (not large negative rates, but negative nonetheless). There is no way to have deflation and positive nominal rates (or even zirp) for any length of time under a general secular deflation and avoid complete economic and political collapse.

The problem is, NIRP on the street is culturally unacceptable in the US, the UK, other english-speaking economies and Japan. No matter that NIRP and deflation would reduce inequality and asset prices and raise the poor up relative to the well off, just as high interest rates and inflation have historically increased inequality, boosted asset prices, and benefited the rich over the last 40 years, people think (including the less well off who would actually benefit) that it would amount to stealing from them. Nowhere is this trend of thinking more clearly expressed than here on HPC.

Until this cultural blind spot has had time to sort itself out, I find it very hard to see what can be done. We may need to wait while deflation and NIRP force their way through into european economies and perhaps Japan so people have time to judge the impact more objectively.

Is it a fear of NIRP on retail deposits, or a fear of the systemic consequences of deflation i.e. a repeat of the Great Depression?

For instance, I used naively to assume that UK private sector debt/GDP peaked in 2008 with the onset of the GFC, but in fact it kept on rising at a lick into 2010, driven upwards by economic contraction.

[Bland Unsight]

I'm merely pointing out that if we cannot get to the bottom of how we got here, we will struggle to see where we are going and how to best change that.

Having said that, I am not infinitely patient, and would be all for fundamental reform, be it of the monetary or banking system. If I had a vote and you were a politician, I would vote for you. But you are not a politician, this is not yet up for a vote, so I'm happy that we keep critically challenging the narrative (both that of the establishment and that which is currently prevailing on HPC).

A good point, well made.

One of the things that I've taken from a fair amount of reading around all this is that there are a whole lot of policy ideas being generated by very credible people.

However at the same time in lots of public discourse I also see an implicit but pervasive "There is no alternative" view that whatever we presently have is the best we could possibly have (because of an erroneous belief that what we presently have it is the fruit of some ideal free market, coupled perhaps to an naive ideological commitment to the idea that an ideal free market is free of regulation and rules imposed by an economic agent - possibly a government - who is 'kind of' outside that market; 'kind of' because no agent can truly be outside the system of money, even Sceppy's AI further up the thread needs to pay his/her/its electricity bill).

These things being the case (my beliefs, that is), I may occasionally 'jump at shadows'. Put it down to a lack of infinite patience!

[Bland Unsight]

I agree with your sentiments earlier in the thread about morality - why let it cloud your judgement? - let us try to understand the world as best as we can. Ultimately things are as they are *And I write this as a 33 year old long term London renter*. I think the whole 'credit bubble hypothesis' for UK property should be open to more scrutiny generally. Not least because people make decision based on what they read and they should be presented with all available arguments and counter arguments.

That said, I'd like to highlight - based on the above, and you own acknowledgement - you may well be wrong! And, It (literally everything) might all turn out to be one ******-off massive CB bubble!

If you argued that its not a credit bubble because the nature of the manner in which the monetary system is generating credit money and thus leading in turn to economic actor's bidding up asset prices is systemic, I would go along with that. If part of our bubble checklist is the requirement that there's a madness and delusions of crowds element wherein the only thing sustaining asset price inflation is people putting in money because the asset price is rising and they want a piece of the action, then you could argue that if the problem is systemic, it's not a bubble.

However, what I understand you to be arguing is that maybe it's not about credit, and I still cannot see how you can explain HPI without credit (one side of the accounting entries that generate our debt-based money - IIRC you have some double-entry book keeping under your belt) being a key part of the argument.

(Also, I'd strongly push back on the idea that morality clouds judgement. In many important cases morality may be the real reason for the judgement to be made. I'd argue that one of the reasons why things have gotten so out of whack in the UK is that it's taken a while until it started to impinge on people in the mainstream media who play a significant role in the construction of socially accepted narratives. "House price inflation is good" is a key example. One might say, "There is no role for morality in assessing whether HPI is good or bad" but I'm sceptical. One might also also say "We should not aspire towards a fair society, fairness is an ill-defined a moral question, thinking about it will cloud our judgement; we must build an economy that achieves Pareto efficiency." The research of evolutionary psychologists and then studies in behavioural economics make it very clear that dropping fairness out of the model because it's a moral question which will cloud your judgement will leave you with a real chocolate teapot model.)

[scepticus]

Is it a fear of NIRP on retail deposits, or a fear of the systemic consequences of deflation i.e. a repeat of the Great Depression?

For instance, I used naively to assume that UK private sector debt/GDP peaked in 2008 with the onset of the GFC, but in fact it kept on rising at a lick into 2010, driven upwards by economic contraction.

I think it's both.

As far as NIRP on the street goes, can you imagine the gnashing of teeth in torygraph headlines when their columnists are getting charged to deposit in RBS? The negative reaction won't be confined to the faux-capitalist sector either; the dirigiste left types see the crisis as an opportunity for the state to ride to the rescue with counter-cyclical spending on infrastructure projects etc and simply cannot understand why we might prefer nirp to a public-sector led attempt to keep rates and inflation above the water-line.

There is a more legitimate (IMO) fear among the more wonkish parts of the economic commentariat (and no doubt at the CBs) that NIRP/deflation is a negative spiral from which it is impossible to emerge once started (a bit like I suppose, how the great inflation since WWII went on for 60 years) that will end with the political and economic collapse of our democracies. For various reasons I don't think this is how it would play out but I do think this is one of the reasons why they steer so frantically in any other direction.

[scepticus]

I buy all of that. I'm not against NIRP on banks' central banks deposits, and I'm not against 'NIRP on the street' (nice way of putting it by the way) as direct consequence. The way that I make my peace with NIRP on the street is that our system of money is a debt-money system. One of the ways it can fail to be optimal is if it creates way too much debt-money, leaving you with a "debt overhang" (to employ Adair Turner's favoured label) and also lots and lots of credit money, chasing up asset prices. One way for the system to return to acting more like 'money' (i.e. performing the role of money successfully) is to destroy some of the money. NIRP on the clearing banks' central bank deposits (i.e. on their reserve accounts at the Bank of England) achieves this outcome.

To run over the ground you just mapped out, excessive expansion of the amount of credit money produces inequality. A NIRP facilitated unwinding of that position exacts losses on some people, however making NIRP the bad guy and claiming that it is immoral or wrong is tantamount to arguing that if the system misbehaves and I win as a consequence, that's fine, but when the system's path through a metaphorical phase space* means I lose, that's immoral and wrong. Seen in this way the introduction of questions of morality and fairness is going to be heavily influenced by whether you stand to lose or gain.

* Random ODE phase space from google image search because they're so cool.

Yup, you have correctly paraphrased my argument so at least now I can be sure you understand it as I have presented it (whether or not you agree with it is secondary IMO to understanding it).

The way I would explain NIRP to a typical HPC-er is to explain its exactly like how HPI makes it harder to trade up due to the widening price gap between each rung of the housing ladder, meaning that those on the bottom and middle rungs are disadvantaged vs the top even if they have nominally done quite nicely versus the rungs below. So nominal house price falls would benefit the bottom an middle tiers of the market for shelter, and NIRP is the same, it will benefit those with little or no savings and assets (i.e. the poor) at the expense of those with assets, savings or both. For those saving-to-buy, they ought to benefit because in the near term I would expect nominal house price falls to be considerably larger than any losses to savings due to NIRP on the street. And for sure no bank is going to offer NIRP mortgages in this scenario, except possibly for a short transitionary period in which trackers without floors might have the banks paying out for a while.

Since I personally own a house (just the one!) with plenty of equity and have quite a bit of money in pensions and savings I expect to lose out as a result of NIRP. Yet I will still advocate it.

[Bland Unsight]

Last word from me on the morality thing - well an attempt at it. Stephen King tweeted this a couple of hours ago from a Q4 2005 HSBC global research report, The Return of Political Economy (link to tweet).

[Bland Unsight]

Yup, you have correctly paraphrased my argument so at least now I can be sure you understand it as I have presented it (whether or not you agree with it is secondary IMO to understanding it).

I agree with it. I also buy your suggestion that on the balance of probabilities it will not become policy because of a fear of triggering the outcome you describe.

Just for a laugh: My line of work means that I get to talk to school kids competing in the Bank of England's Target Two Point Zero competition. A couple of years ago I was sounding out a very bright young man who later went off to read Economics at an elite university and just for a laugh suggested that presumably the Bank employees were shitting themselves about deflation, assuming that the joke would sail over his head, however his impression from the judging of the first couple of rounds was that shitting themselves didn't quite cover it. (Anyone trading on this information can cover their own losses.)