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

which can be found where this leads.

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.







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I did manage to wade through the first link...ummm...mostly - and I have a couple of thoughts.

Eliminating currency?  Bad idea. 

How would you like to be completely dependent on the same banks that have been scalping consumers so rapaciously via credit cards and separate fees every time some bean-counting genius can isolate another "service" they have been performing for free until now - for every transaction?  Any consumer protections written into the enabling bill will be evaded, eroded - or eventually - repealed.  The author did make a case for eliminating 50s and 100s, though.  How about this instead?  Legalize and regluate drugs instead - eliminating the cartel's cash cow.

The war on drugs has already eviscerated the fourth amendment, creating "No knock" laws (seems rather quaint now, but cops [pre Nixon] actually had to knock on your door and serve a warrant before they came crashing in).  Originally, this was supposed to be exclusively about drug dealers.  Civil libertarians warned that these laws would be applied in other areas once the precedent was set; proponents said that was silly and alarmist.  Guess who was right?  What I see in that proposal is another tool of the police state - justified as an anti-drug measure.

Another point:  What deflation?  A big screen TV may be cheaper now, but mom is on Social Security and can't afford one.  What she has to have - food for example, gasoline, car repairs - is still going up.  Plus her cola has been steadily shrinking in real terms as the government has a vested interest in underestimating inflation.

I don't trust the banks; I don't trust the government to measure inflation honestly; it isn't evenly spread in it's effect on the lowest sectors of the economy vs the highest.

But housing?  Those prices are crashing - right?  Mom rents - but her cola is adjusted downward because of the assumption that she owns.  She has no other income, BTW.  And we live in Texas.  Housing prices here are relatively stable - but she is lumped in with California and Florida.  In the long run, some of that will even out.  But mom is 80 - not a lot of long run left.

Hopefully that gets resolved this year - but frankly, I'm not terribly optimistic about that this year - and for this reason:  Whatever the final product that makes it out of the congressional sausage grinder turns out to be, it by the nature of it will have tremendous and well-financed opposition, from the industry and from the anti gov crowd.  Whether it is a liberal plan or a conservative one, this opposition is a constant.  Think "Harry and Louise" and the opposition to Hillary's very conservative and industry friendly plan.  Contrary to popular belief, IMHO, it wasn't conservative opposition that killed "Hillarycare," the complete lack of liberal support and the lukewarm to downright hostile reaction of the general public did it in.  IOW, it was a plan nobody loved and many hated.


Fortunately, the rest of the links weren't as dense as the first one - it almost scared me away entirely.  They  served to alleviate a very real concern I have had re the dollar.  I have been very concerned that the Chinese would dump the dollar, starting a general run that could render our currency close to worthless in very short order.  The enormous amounts of cash and credit we are shoveling to the bankrupts of Wall Street have put us at enormous risk already.  We don't need China throwing us an anchor at the moment.

That still could happen - and rather suddenly.  Think Taiwan.  Since we have almost routinely exchanged (veiled) threats of nuclear war over that island, I don't find that notion as implausible as many seem to.  Destroying our economy in an afternoon with a keyboard would hurt the Chinese also - and they know that - but it would be one helluva lot cheaper than a nuclear exchange - and they know that too.  It would also be passed off as a purely economic "cutting of the losses," making any sort of really damaging retaliation unjustifiable.  It's hard to imagine us nuking Beijing over it, for example.

Clinton forced China to back down over Taiwan in the beginning of his administration when he sent the sixth fleet into the Taiwan strait.  Bush, Greenspan and the Republican congress handed China a weapon so powerful - and unanswerable - that they may have made that kind of war inevitable by disrupting the existing balance.  Oh, and China is expanding it's fleet of nuclear subs.

I sure wouldn't want to be president right now, and for the first time ever, I wouldn't even want to be dictator! 

Just to be clear: I'm not an advocate for any of these things, nor do I think they should or will happen. It is a discussion that is going on, I think, to take note of. What I think should happen, or am afraid of, or looking forward to is pretty much irrelevant because in a sea of many one more isn't worth a hill of beans,not until people have a sense of a viable alternative to what is going on, but that is not what any of this is about.l

And that's just what I wanted to do - discuss.

I understood that your links weren't endorsements.  And while I tend to be pretty definite in my opinions, I will tolerate disagreement.