Tuesday, April 21, 2009

Helicopters

It May Be Time for the Fed to Go Negative

Professor of economics at Harvard says we need negative interest rates and has cunning plan to prevent money hoarding. Fits the trend of destroying every bit of capital left in the US.

Posted by mountain goat @ 09:31 PM (3708 views)
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26 thoughts on “Helicopters

  • Cool, lets have it…right between the eyes!

    Be great for gold!

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  • Actually the article says at the bottom….
    ”N. Gregory Mankiw is a professor of economics at Harvard. He was an adviser to President George W. Bush.”

    That means he is an absolute idiot, and doesn’t know what he is talking about!

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  • There is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

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  • crashpad4me says:

    And of course if you have friends in high places you can be damn sure that your notes won’t have the black spot. Alternatively I suppose we could all start renting basements to carry the weight of hoarded coins.

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  • And then in year 2 another 10% are no longer valid, and by year 10 no money is valid? Doh!
    Or the notes that aren’t valid change every year so you just sort them and use the valid ones. Doh again.
    I can see why the lecturer protected his student’s identity

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  • The Baldman says:

    What an idiot. My own belief is that low interest rates are reducing spending as savers are maintaining capital by not spending

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  • little professor says:

    The problem with negative interest rates, however, is quickly apparent: nobody would lend on those terms. Rather than giving your money to a borrower who promises a negative return, it would be better to stick the cash in your mattress. Because holding money promises a return of exactly zero, lenders cannot offer less.

    Unless, that is, we figure out a way to make holding money less attractive.

    At one of my recent Harvard seminars, a graduate student proposed a clever scheme to do exactly that. (I will let the student remain anonymous. In case he ever wants to pursue a career as a central banker, having his name associated with this idea probably won’t help.)

    Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

    That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

    If all of this seems too outlandish, there is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.

    Everyone’s gone mad!!!

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  • For the Fed to pursue inflation as he suggests sounds like a good idea until people start factoring in that inflation in terms of supplier costs and wages and then before long, zeroes need to be added to the currency, people start bartering and the looting begins.

    Loopy-Lou economics.

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  • @paul

    Loopy-Lou problems beget Loopy-Lou solutions.

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  • As always, the real problem here is not that people aren’t spending, it’s that people aren’t spending enough to make our economic system work properly, an economic system that works spectacularly well for a few people and not so well for the rest of us, or for future generations, or for the planet.
    Schemes such as this are effectively naked desperation and robbery – when cash is hoarded and deflation takes place, power swings to the wider public from the ‘elite’, who need you and I in debt, while they hold the assets.
    This, of course, can never happen, yet the real challenge being to strike the delicate balance of perception – the public know they are being shafted in the big picture, but they need to be doing well enough themselves to tolerate it.
    But as many have pointed out, what happens when everyone is spent out, in debt and broke? But then, of course, isn’t that one of the fundamental rules of the whole system – there’s always another mug – homeowner, President, Prime Minister, CEO, son, daughter etc. to sort it all out.

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  • flintster1994 says:

    Well said shipbuilder. Our current system, to quote the guys accross the pond, SUCKS!

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  • there’s always another mug…

    Is there, shipbuilder?

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  • 10. devo said…

    “there’s always another mug…
    Is there, shipbuilder?”

    Of course, there has to be for it all to continue, and it will – you know it, I know it…you’ll be going to work and the shops tomorrow?….what a laugh our concern for our children….

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  • I must have missed something. Isn’t this current policy here in the UK with a base rate less than CPI? Doesn’t it work?

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  • @11 shipbuilder

    I thought your ‘greater fool’ comment was rhetorical. Clearly it wasn’t.

    The mugs have either wised up or spent up.

    Therefore, the game’s up.

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  • Well it seems that the Americans can not get it. Normal working people need no big credit to buy many houses or invest. Normal people want a job, an affordable house to grow thier family and live happily. Trying to get these people into investors is not the right thing to do, not that some of them would say no or they are not able to invest.

    So the money is not need and easy money is the problem here. The money must be driven by wise people where is needed and only if it is needed other wise it is called bubble.

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  • 12. devo said…

    “The mugs have either wised up or spent up.

    Therefore, the game’s up.”

    I wish I could believe that.

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  • With respect mander, did you read my post?

    I said THE GAME’S UP!

    New balls please.

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  • general congreve says:

    We will surely follow suit with this madness over here.

    I’ve said it before and I’ll say it again…

    GORDON OR GOLD?

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  • @ shipbuilder

    What’s not to believe?

    We shouldn’t be surprised if the powers-that-be think of ever more ingenious ways to keep the plates spinning.

    But this circus act is wearing pretty thin.

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  • 16. general congreve said…

    “GORDON OR GOLD?”

    So which one isn’t about the same old, same old of surfing the next wave to come out on top over everyone else?

    GORDON IS GOLD.

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  • @shipbuilder “surfing the next wave to come out on top over everyone else”

    Who wants to surf on a stagnant pool?

    The financiers have taken everything. Very few want to play any more.

    Forgive the mangled metaphors.

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  • matt_the_hat says:

    I had this argument with my father-in-law, he said negative interest rates wouldn’t work and he would withdraw his cash and put it under the mattress if that happened – then I explained to him that he earns interest 2% on savings and CPI is 4%, i.e. -2% in real terms – needless to say his money is still in the bank -2% p.a. – That’s how negative interest rates work Mr Harvard, and until people learn about real not just nominal returns the frog will continue to boil and the middle class (sorry working class with debt) will pay for the lifestyles of a small elite!

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  • general congreve says:

    Shipbuilder @22 – “So which one isn’t about the same old, same old of surfing the next wave to come out on top over everyone else?”

    See your point, however, anyone who is sensible should protect what they have in the face of the coming economic disaster, this is a time for survival not philosophy. My point being, do you back the idiotic policies of Crash Gordon by staying 100% in sterling, or put some of your money into to something more dependable? I don’t believe any currency or anything that is backed by paper money will prove safe by the end of this crisis, so the only real safehaven is gold and/or silver.

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