Deflation and Negative Interest Rates. Some Light Reading for a Holiday Weekend.
I thought it might be useful to share these few links. They are about a subject which has been revisited by a number of people on this site over the last couple of years, namely deflation. For the question had come up, more than once, about what deflation is and what can be done about it.
Three of the pieces are from Willem Buiter at the London School of Economics and who I think writes with a certain kind of flair, though his arguments might not be to the taste of the dialectically or critically minded, trenchant, even biting though he might be.
He is writing about the present discussion of negative interest rates, and whether it is possible for rates to fall below zero. He shows that this is indeed a possibilty, on condition that "money" buys more at the end of the time frame considered than it did at the beginning. For the discussion of negative interest rates concerns who to deal with deflation when money, under circumstances falling prices, becomes more valuable to hold. Under these circumstances the central bankerscan fee free to "charge" the rest of us for the privilege of holding cash money in the form of savings for at zero interest rates every investment becomes equivalent to a cash value.
Anyway Buiter has been writing about this, giving speeches about it, talking about it with the European Central Bank. He first wrote about the subject on May 7th in a piece called
Negative interest rates: when are they coming to a central bank near you?
this link will take you there. Then on May 19th he wrote up an account of a visit to the European Central Bank under this title
The Wonderful World of Negative Nominal Interest Rates, Again
which can be found here. Yesterday he took up the subject again in this way
Negative interest rates, Sharia law and tech stocks
I understand this can be seen as pretty heavy, even boring stuff. I think the thematic repetition is itself instiructive. I know that we still have an outrageous bankiing crisis and all that, but it is time to be thinking down the road, to where we are headed given the "accommodations" that have been made with the principalities and powers of the world in their incorporated form, now dependent on the Fed and Treasury more than ever.
Paul Krugman dealt with the same subject in his blog when he got back from his recent trip to China. On May 15th he wrote a piece called
China and the liquidity trap
which was a take off on a piece on China written by David Leonhardt. He provides a link there. What Krugman had to say might be quite surprising. But I still think that Buiter's lengthier treatments provide the essential background to Krugman's pithier piece.
The third Buiter piece contains a link to a contribution on this subject by a student of Brad DeLong.