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Interest Rates 10 Years From Now

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Very interesting thread.

I just wonder if this discussion was started in 2007 anyone would have come up with the scenario of 0.25% in August 2016 with the corrosponding levels of debt and asset bubbles, underpinned by QE and 40% HtB, tax credits and the current 'full (16 hour per week)' employment situation with net migration of 300,000 per year. I suspect not and is there a rational logical path from 2007 through to today or are we here due to a series of knee jerk reactions, if so maybe the future will also be unchartable due to more knee jerk reactions.

I for one would never have guessed we would be in this state of affairs almost ten years later.......still, I wouldn't have done anything differently had I known. ;)

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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.

Well, then my time spent on this thread has been well worth it. If only that were more often the case...

Worth it in this case because I am aware of and admire your passion and drive. I hope you can work some of what we have talked about into that in future.

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.)

Good grief, the mind boggles!

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Very interesting thread.

I just wonder if this discussion was started in 2007 anyone would have come up with the scenario of 0.25% in August 2016 with the corrosponding levels of debt and asset bubbles, underpinned by QE and 40% HtB, tax credits and the current 'full (16 hour per week)' employment situation with net migration of 300,000 per year. I suspect not and is there a rational logical path from 2007 through to today or are we here due to a series of knee jerk reactions, if so maybe the future will also be unchartable due to more knee jerk reactions.

I think I did manage to predict more or less that in 2009 didn't I?

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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.)

I was in my school's team for this, back when it was Target Two Point Five. I look forward to seeing how the kids do in Target Zero Point Two Five in the future.

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Well, then my time spent on this thread has been well worth it. If only that were more often the case...

Your patience and equanimity are always appreciated.

Edited by Bland Unsight

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I was in my school's team for this, back when it was Target Two Point Five. I look forward to seeing how the kids do in Target Zero Point Two Five in the future.

Fingers crossed for the emergence of Target Two Point F*cked wherein students are asked to propose measures likely to result in a Fight Club style reset (without the illegality and destruction of property, of course).

end-of-fight-club-o.gif

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Congrats, Scepticus and Blandy, for the most interesting thread on hpc in 2016.

If I may just take it back to housing for a moment, could I ask if Scepticus has a view on how much housing is currently overvalued based on the model described of prevailing interest rates tending towards the negative ? I can understand the position being put across and don't disagree, but as above you have the impression shelter is currently overvalued, even in the context of a system heading inexorably towards NIRP.

So I guess my layman's questions are 1) do you have a view on the level of overvaluation in the current market (Londonis perhaps easiest reference point) and 2) why do you think this is sustaining - illiquidity/signal noise, or something more fundamental ?

Thanks again for a v interesting read - this place obviously has its flaws but threads like this make it a better place :)

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My hand-waving view is like I said before, the simple answer is that when rates without support from central banks would have hit zero and then gone negative ought to be the long run fair value for asset prices. One view is that this ought to have happened in about 2002 after the dot com crash but actually rates were not zero then so there was still room to cut. On that latter basis the high point is probably 2006.

However, if that still seems a bit high for your liking we could ask the question of whether inequality in western economies was at a long run sustainable level (economically and politically) in 2002 and 2006. Because if it wasn't, and I think there is a good case (made by Piketty in his recent seminal work) that it wasn't, then I think the high point could be moved further back in time.

So I would say take your pick of one of these three high points and then consider that a long run level at which asset prices could stabilise.

The other issue is how long it takes for asset prices to give up their excess value, and I think the answer to that is likely to be a very long time, measured in decades. On the upside I can imagine a short to medium term over-correction in which prices fall quite a bit and there is a lot of volatility before eventually approaching over many years to some level of stability.

All of which assumes no really bad stuff happens like energy crises, wars with china etc!

Reads like a 1980's weather forecast doesn't it? You should probably treat the above accordingly!

Great user name by the way :)

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However, what I understand you to be arguing is that maybe it's not about credit.

Correct that is what I have argued. I have previously suggested that a multi variable hypothesis for house prices is an alternative to the standard credit bubble hypothesis. It's not my idea - I've read this idea elsewhere. I think part of the confusion has come from me refusing to fully back the theory. This is deliberate because I am trying to view the world through alternative hypothesis (and assigning probability) rather than absolute truths. That said, I am strongly leaning to the view that house prices (outside of London) are not in a 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.

I'm not arguing the above because it is not necessary for my position. I've found Scepticus's views on NIRP absolutely fascinating but I'd be lying if I said I fully understood them. With respect to long term interest rates, what I can do is outsource the hard work to the bond market - it is telling me clearly that interest rates are very, very low. It is also telling me that interest rates will stay very, very low for a very, very long time. The point I am making is that we don't need credit to explain current house prices.

I've asked this question dozens of times but - what 'should' the yield on property be when: the 30 year Gilt is yielding 1.33%, housing supply utterly insufficient with net migration c. 300K pa? The bond market my be 'wrong' (which is what I was asking in my question above about the 3 different scenarios / explanations for the world) and the housing market could be in a bubble as a result. But I don't think this is very likely.

The implication of the above is that, rather than being a force that propels house prices higher, availability of credit is acting as an anchor - "house prices 'want' to rise but are not being allowed to". If we truly wanted to address high house prices we might consider - large scale building programs, restriction of migration, and reform of the monetary system that has led to low Gilt yields (as suggested by Scepticus).

Further, I'd argue that the dominance of the 'credit bubble hypothesis' could be actually socially damaging in that it has led to tighter, more restrictive credit to individuals. The result of tightening credit would not be / and has not been a lowering of house prices but a concentration of these appreciating assets by the rich. i.e. Credit affects the distribution of ownership and the rate of increase but not the absolute price of housing. After all, current house prices would be far, far less socially corrosive if ownership were more widely distributed. With respect to credit (in the context of the dysfunctional housing and monetary system) - We need to limit credit to landlords, increase transaction taxes on the rich and make credit more available (e.g. HTB) to individuals.

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Very interesting thread.

I just wonder if this discussion was started in 2007 anyone would have come up with the scenario of 0.25% in August 2016 with the corrosponding levels of debt and asset bubbles, underpinned by QE and 40% HtB, tax credits and the current 'full (16 hour per week)' employment situation with net migration of 300,000 per year. I suspect not and is there a rational logical path from 2007 through to today or are we here due to a series of knee jerk reactions, if so maybe the future will also be unchartable due to more knee jerk reactions.

If I'd known what was to come I certainly would have bought the house I nearly did in 2010 for 80K less than similar houses are selling for today. At the time I was convinced the market was still overvalued and there would be further falls, as the one we had was not anything like enough. I never thought the propping would continue ten years later. But this makes me even more convinced that when it comes the crash will be the mother of all.

Edited by bear.getting.old

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Its true that during the gold standard sometimes interest rates did get quite low (a couple of percent) and during the much of the gold standard period most average people could never afford to buy a house regardless of the rate of credit. Growlers seems to have a similar angle to my saying leverage itself is an insufficient explanation because housing affordability has been similarly bad as it is now at points in the past which had much less leverage. A reading of Picketty is enough to convince oneself of that; anyone who is interested in this stuff and hasn't read it, should do so.

What is different now is that we have a credit-monetary system, not a monetary one. There is no 'money' now because all the things we think of as money bear interest. This is definitely a factor, but I have said that one cannot hope to use a credit-money-system to emulate a money-system.

When the gold standard system generated over-concentration of assets it tended to create expansionary wars that relieved pressure for the winners, reducing inequality a bit and generated more equality in the loosers by making them all poor. In the 18th and 19th centuries there was still plenty of room to expand via overseas migration and urbanisation.

I hope that our current monetary system offers at least the possibility of reducing inequality without war and without chaotic confiscation of assets in an era in which there is not really any room to expand. Yes we could build more houses but that alone isn't enough, houses need infrastructure to be socially viable.

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Thanks Scepticus, most interesting as always. For me , even a price level similar to 2006/2007 would feel sustainable, it is the last few years that have taken it out of reach even for very high earners and at relatively low lending rates.

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I hope that our current monetary system offers at least the possibility of reducing inequality without war and without chaotic confiscation of assets in an era in which there is not really any room to expand. Yes we could build more houses but that alone isn't enough, houses need infrastructure to be socially viable.

You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time.

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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.)

Don't give them ideas.

They've got to be desperate using the kids to try to come up with free ideas on how to run the economy.

Edited by billybong

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I'll add my thanks to Scepticus and BU for a great, challenging thread. I've just read it through a second time and hopefully understand your thinking now Scepticus.

A question* if I may - within your framework, what do you think the short-term impact of the cut to UK interest rates for savers will be. More saving? Or more savings being moved to riskier investments? More spending, which would push up consumer prices? Or more buy-to-lets (albeit conservatively leveraged)?

And how about the supposedly massive reserves of cash being hoarded by corporates? Isn't that cash much closer to being NIRPed than retail deposits? Where will it go?

*well, it started out as one question but they kept coming (sorry)

Edited by Patient London FTB

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I'll add my thanks to Scepticus and BU for a great, challenging thread. I've just read it through a second time and hopefully understand your thinking now Scepticus.

A question* if I may - within your framework, what do you think the short-term impact of the cut to UK interest rates for savers will be. More saving? Or more savings being moved to riskier investments? More spending, which would push up consumer prices? Or more buy-to-lets (albeit conservatively leveraged)?

And how about the supposedly massive reserves of cash being hoarded by corporates? Isn't that cash much closer to being NIRPed than retail deposits? Where will it go?

*well, it started out as one question but they kept coming (sorry)

Large corporate cash piles are already starting to get charged to deposit (most recently by RBS), especially in Europe. Big funds and cash piles being kept in government bonds are getting widely nirped already as well. One would expect NIRP to start 'at the top' and work its way down. Banks will start passing on some charges to depositors (and borrowers) I think whether or not rates are cut. NIRP could arrive in the form of more fees for current accounts etc, bigger charges for credit etc.

Long run, I don't think any of this will result in more spending since while mortgage rates may come down a bit, many mortgage rates won't come down much further and charges for personal credit will likely go up a bit; spreads will widen, and wages won't be going up any many are lready maxed out on credit. In general NIRP won't encourage more risky investments across the board but it will enable some few companies and governments to engage in projects that could never have gotten funded when rates were higher. Tesla, spaceX are good examples...

But a lot depends on if/when deflation bites. It will do eventually but maybe not for another 5 years or so, and I guess we could see some volatility in spending patterns and asset prices etc during that time while people get to grips with this new reality, should it come to pass. Likewise a sudden change in global government thinking to move away from austerity and start doing big fiscal projects could delay it even more. However its hard to see this happening in a big way given the political polarisation everywhere.

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Steve Keen offers us a vision of permanent stagnation unless/until we reduce the the level of debt in the world's economies + why an education isn't like buying Muesli.

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^ Steve Keen link. Very interesting.

On the issue of private debt starting to escalate when Thatcher got to office.

No doubt that coincidence of timing is true and maybe if someone else had got to office instead then the escalation might not have been so dramatic in Britain (maybe) but it seems to ignore the fact that the escalation in private debt was also happening at around the same time in the US - and likely elsewhere around the world.

It was more of a global phenomenon rather than solely a British one just due to Thatcher. It was likely something from even above and beyond Thatcher and which she willingly cooperated in rather than invented/designed herself. She was happy to have her name associated with it.

screen%20shot%202013-04-09%20at%2011.27.

His comments are generally thought provoking and typically the gift society rather than the barter society and at the end surpluses.

Edited by billybong

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Large corporate cash piles are already starting to get charged to deposit (most recently by RBS), especially in Europe. Big funds and cash piles being kept in government bonds are getting widely nirped already as well. One would expect NIRP to start 'at the top' and work its way down. Banks will start passing on some charges to depositors (and borrowers) I think whether or not rates are cut. NIRP could arrive in the form of more fees for current accounts etc, bigger charges for credit etc.

Long run, I don't think any of this will result in more spending since while mortgage rates may come down a bit, many mortgage rates won't come down much further and charges for personal credit will likely go up a bit; spreads will widen, and wages won't be going up any many are lready maxed out on credit. In general NIRP won't encourage more risky investments across the board but it will enable some few companies and governments to engage in projects that could never have gotten funded when rates were higher. Tesla, spaceX are good examples...

But a lot depends on if/when deflation bites. It will do eventually but maybe not for another 5 years or so, and I guess we could see some volatility in spending patterns and asset prices etc during that time while people get to grips with this new reality, should it come to pass. Likewise a sudden change in global government thinking to move away from austerity and start doing big fiscal projects could delay it even more. However its hard to see this happening in a big way given the political polarisation everywhere.

Scepticus, I'm keen to understand your NIRP views in more detail and will read your past posts on the subject.

A question that came to mind was - how do you categorise / define you economic philosophy? In terms of the schools of thought - Keynsian, monetarist, marxist, Austrian, institutionalist.... etc. What is the underlying framework that you use? Furthermore, would you consider your view hetrodox to mainstream economist and academics? i.e. do you think that central bankers really subscribe to views similar to your own but are prevent from essentially being honest and this would limit their room for maneuver.

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Well my school of thought is Scepticism, obviously...

As far as economics is concerned, I'll provide these notions:

  1. The Mediocrity Principle (which is an antithesis of anthropocentrism). The vast majority of economic views are highly anthropocentric/homocentric whether left or right. (https://en.wikipedia.org/wiki/Mediocrity_principle)
  2. Complex Systems (http://www.ted.com/talks/eric_berlow_how_complexity_leads_to_simplicity?language=en)
  3. Modern Monetary Theory. I'm not an advocate of this approach and don't agree with their policy prescriptions but these people were responsible for educating me in the first instance with respect to basic economic constraints like sectoral balances and the importance of taxation is establishing value for fiat money, and the actual mechanics of financial accounting. Actually none of these ideas are new but the MMT types explain them better than anyone else. The MMT folks believe that the rate of interest on public money ought to be zero, but they are strongly anti-NIRP. (https://anautonomousagent.com/2013/01/mmt-modern-monetary-theory/).
  4. Most of what Gary Gorton has written. This all ties into Information theory. (https://www.amazon.co.uk/Invisible-Financial-Management-Association-Synthesis/dp/0199734151). Again I agree with his analysis but not his policy ideas.

I think that the reason that I end up with a different framework to the MMT folks and from Gorton is because I combine what are really quite trivial observations on financial accounting with bullets 1 and 2 above. I think some central bankers share my views but not most, although I do think more of them are coming round - we hear them talking a lot about complex systems these days for example.

One Central Banker who I think is pretty close to my views is Naranya Kocherlakota. In fact it was a paper of his titled something like 'On the societal benefits of illiquid bonds' that cemented my own views on ZIRP.

I would say my views are probably uncommon in economic circles (after all I'm not an economist and have never claimed to be) but not that uncommon in that scientific community that kind of sits at the fringes of economic thought and basically has other stuff to do for a day job, much like myself.

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Well my school of thought is Scepticism, obviously...

As far as economics is concerned, I'll provide these notions:

  1. The Mediocrity Principle (which is an antithesis of anthropocentrism). The vast majority of economic views are highly anthropocentric/homocentric whether left or right. (https://en.wikipedia.org/wiki/Mediocrity_principle)
  2. Complex Systems (http://www.ted.com/talks/eric_berlow_how_complexity_leads_to_simplicity?language=en)
  3. Modern Monetary Theory. I'm not an advocate of this approach and don't agree with their policy prescriptions but these people were responsible for educating me in the first instance with respect to basic economic constraints like sectoral balances and the importance of taxation is establishing value for fiat money, and the actual mechanics of financial accounting. Actually none of these ideas are new but the MMT types explain them better than anyone else. The MMT folks believe that the rate of interest on public money ought to be zero, but they are strongly anti-NIRP. (https://anautonomousagent.com/2013/01/mmt-modern-monetary-theory/).
  4. Most of what Gary Gorton has written. This all ties into Information theory. (https://www.amazon.co.uk/Invisible-Financial-Management-Association-Synthesis/dp/0199734151). Again I agree with his analysis but not his policy ideas.

I think that the reason that I end up with a different framework to the MMT folks and from Gorton is because I combine what are really quite trivial observations on financial accounting with bullets 1 and 2 above. I think some central bankers share my views but not most, although I do think more of them are coming round - we hear them talking a lot about complex systems these days for example.

One Central Banker who I think is pretty close to my views is Naranya Kocherlakota. In fact it was a paper of his titled something like 'On the societal benefits of illiquid bonds' that cemented my own views on ZIRP.

I would say my views are probably uncommon in economic circles (after all I'm not an economist and have never claimed to be) but not that uncommon in that scientific community that kind of sits at the fringes of economic thought and basically has other stuff to do for a day job, much like myself.

Thanks for providing those. I found MMT insight on money really interesting - I don't think I viewed money in those terms before. I can see how this approach to viewing the economy is anti homocentric - it seems to ignore individuals and focusing just on the plumbing [Perhaps this is the approaches major failure / weak point - i.e. to exclude people from a social science].

I'm still finding the contours of area but it is interesting. I think most people know that the monetary system is fiat / credit based but I think most assume (myself included) that the natural result of this arrangement would be higher nominal interest rates eventually perhaps following / during a period of inflation resulting from excess (definition TBC) money creation as individuals demand compensation to hold the currency. Mentally I think that is how I saw house prices mean reverting for a number of years.

It's interesting to me that the opposite could be true although I struggle to understand the mechanics of how this would work. How does the unconstrained supply of a commodity (fiat money) lead to its fall in price. What occurred to me as I wrote that is that the above statement would be accepted immediately for any other commodity - e.g. An unconstrained increase in the supply of bananas led to a fall in the price of bananas. The trouble with the banana comparison is that money servers a store of value purpose in addition to a medium of exchange.

I found the following on Wikipedia describing this mechanism:

Under an MMT framework where government spending injects new reserves into the commercial banking system, and taxes withdraw it from the banking system, government activity would have an instant effect on interbank lending. If on a particular day, the government spends more than it taxes, reserves have been added to the banking system (see vertical transactions). This will typically lead to a system-wide surplus of reserves, with competition between banks seeking to lend their excess reserves forcing the short-term interest rate down to the support rate (or alternately, to zero if a support rate is not in place). At this point banks will simply keep their reserve surplus with their central bank and earn the support rate.

The alternate case is where the government receives more taxes on a particular day than it spends. In this case, there may be a system-wide deficit of reserves. As a result, surplus funds will be in demand on the interbank market, and thus the short-term interest rate will rise towards the discount rate. Thus, if the central bank wants to maintain a target interest rate somewhere between the support rate and the discount rate, it must manage the liquidity in the system to ensure that there is the correct amount of reserves in the banking system.

Source: https://en.wikipedia.org/wiki/Modern_Monetary_Theory#Policy_implications

So unconstrained supply of fiat credit leads to lower rates through a mechanical supply / demand arrangement for funds [underlying assumption of the above is that demand for funds is unaffected by fiat money creation].

I had two questions from the above:

  1. Why NIRP - why does the equilibrium rate end up at slightly negative? Why not zero for example.
  2. Surely there is a risk that the end result *long term* of this arrangement is not NIRP but hyperinflation?
    • As noted above, this framework ignores demand for funds (and the people demanding them).
    • It assumes that fiat credit will be created and pumped into the banking system and that individuals will continue to accept this arrangement.
    • At what point do individuals give up on the currency in question and refuse to accept it even for short periods of time?
    • History has a number of examples of fiat credit regimes and the result of these has been a destruction of the currencies themselves.
    • I watched and interesting interview on MMT with Bill Mitchell and the above point on Hyperinflation (Weimar and Zimbabwe) were raised - I found his refutations pretty unconvincing (he seemed to blame the supply side of the economy rather than the money creation).
    • So perhaps, we get ZIRP / NIRP briefly followed by PIRP in a big way.

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Thanks for providing those. I found MMT insight on money really interesting - I don't think I viewed money in those terms before. I can see how this approach to viewing the economy is anti homocentric - it seems to ignore individuals and focusing just on the plumbing [Perhaps this is the approaches major failure / weak point - i.e. to exclude people from a social science].

MMT is extremely homocentric, more so in my view than orthodox economics, one reason why I'm not enamoured of MMT. MMT is a study of plumbing of human financial systems, they totally ignore the plumbing of the world we live in. They also seem to me entirely ignorant of the discipline of complex systems, which is why their basic message is so very simple. Their simple message about sectoral balances and financial accounting is correct but in and of itself these accounting identities don't explain anything or offer actionable policy guidance. In my opinion.

I'm still finding the contours of area but it is interesting. I think most people know that the monetary system is fiat / credit based but I think most assume (myself included) that the natural result of this arrangement would be higher nominal interest rates eventually perhaps following / during a period of inflation resulting from excess (definition TBC) money creation as individuals demand compensation to hold the currency. Mentally I think that is how I saw house prices mean reverting for a number of years.

Back in earlier times, especially in 1500-circa 1800, most money was metal and it circulated without much credit. In those days yes creating more money was very inflationary, as brining gold and silver from the New World proved to be, or the french experience with paper money. These days, no new money comes into existence without a debt attached, and that creates the tension which holds inflation in check beyond what one would expect if thinking just about quantity of money theories. We also have to remember that we are all in debt for tax all the time, and tax collecting mechanisms are now far more effective than they were 100 years ago. This is why MMT proposes the raising of taxes purely as a means of controlling inflation (the taxes are collected then deleted, rather than re-spent), instead of using interest rates.

So unconstrained supply of fiat credit leads to lower rates through a mechanical supply / demand arrangement for funds [underlying assumption of the above is that demand for funds is unaffected by fiat money creation].

As I said above, I'm not an MMT-er at all. The MMT means of controlling inflation is, as I also said above, taxation.

  • Why NIRP - why does the equilibrium rate end up at slightly negative? Why not zero for example.

Because in the real physical world absent money anything you might use to 'save', transport wealth into the future has carrying and maintenance costs and risks associated with it - housing needs maintenance, cash under mattress gets lost or stolen or burnt, food perishes, etc etc. Note that 'inflation' can affect the real value of all these assets too, so bear in mind they are NOT inflation protected either.

Fiat money is riskless in nominal terms and therefore it does not reflect physical reality that all physical wealth stores have carrying costs. Assuming that reality eventually intrudes after a long hiatus into a fiat economy, fiat cash would have to acquire a carrying cost to be in balance with the real economy.

  • Surely there is a risk that the end result *long term* of this arrangement is not NIRP but hyperinflation?
  • As above, nothing is without risk. My view is that continuing policy to support rates above the ZLB by QE etc run higher risks that NIRP combined with deflation. NIRP would only happen under circumstances of long stagnation and/or deflation.

    • As noted above, this framework ignores demand for funds (and the people demanding them).

    I don't follow.

    • It assumes that fiat credit will be created and pumped into the banking system and that individuals will continue to accept this arrangement.
    • At what point do individuals give up on the currency in question and refuse to accept it even for short periods of time?
    • History has a number of examples of fiat credit regimes and the result of these has been a destruction of the currencies themselves.

    As above, the MMT means for controlling inflation is taxation. You could say that NIRP is also just taxation, a tax on money as opposed to a tax on petrol for example. Arguably, petrol is more essential to our lives than bank deposits in Marlowe's hierarchy?

    The reason I don't buy the MMT idea is that democractic politics is far too unstable for state taxation to be a viable quick response means for dealing with inflation (or deflation, for that matter).

    • I watched and interesting interview on MMT with Bill Mitchell and the above point on Hyperinflation (Weimar and Zimbabwe) were raised - I found his refutations pretty unconvincing (he seemed to blame the supply side of the economy rather than the money creation).
    • So perhaps, we get ZIRP / NIRP briefly followed by PIRP in a big way.

I agree with you to some extent on Mitchell's views. Zimbabwe's problem was both a supply problem (Mugabe did destroy the country) AND a problem of insufficient debt. Too few people in Zimbabwe held debts against assets that would have restrained the impact of new money. The other huge difference, and this is the MAIN factor behind their hyperinflation is that in the western world CB money is used to buy government bonds from the private sector. Carney gives me a grand cash and I surrender a grands worth of government debt. Has my net worth changed as a result of this new money? Nope. Do I feel richer? Nope. This is one thing MMT gets right, there is precious little difference between gov bonds and cash from an inflationary perspective. That's why QE doesn't work to increase inflation.

MMT is IMO a great place to start understanding how our economy works, compared to the usual alternatives. However I don't believe it has any utility as a guide to why we are where we are or where we might be going.

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The way I see R* when all is said and done is as a guide to the level of quality assets the CB provides to the private sector (e.g. the CB's liabilities) should have. The important thing is that the CB supplied assets not be of such high quality that the private sector can't do better. The private sector needs to be able to sustainably produce better assets than the CB does, otherwise everyone crowds into the CB assets, which is bad for everyone. Employment and inflation are really just indicators as to the health of the private sector.

So when times are really really good you could have safe CB assets that perhaps pay a decent rate of interest. When times are not good, the liabilities of the CB need to be relatively poorer so that the private sector is incentivised to do its best. When rates were rising 2004 onwards, the private sector did its best to produce a better asset (MBS etc) and failed.

Difficult then to see low or even negative rates as any form of financial repression, though I note with regret that macroman has now placed himself firmly in that camp.

Stagnation in the private sector cannot be fixed by the CB increasing the quality of its safe assets to a level the private sector cannot match. This is what the FED is running scared of.

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  • 399 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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