It turns out that the US was never at the zero bound

Matt Yglesias has a very interesting new post:

Something really weird is happening in Europe. Interest rates on a range of debt “” mostly government bonds from countries like Denmark, Switzerland, and Germany but also corporate bonds from Nestlé and, briefly, Shell “” have gone negative. And not just negative in fancy inflation-adjusted terms like US government debt. It’s just negative. As in you give the German government some euros, and over time the German government gives you back less money than you gave it.

In my experience, ordinary people are not especially excited about this. But among finance and economic types, I promise you that it’s a huge deal “” the economics equivalent of stumbling into a huge scientific discovery entirely by accident.

Indeed, the interest rate situation in Europe is so strange that until quite recently, it was thought to be entirely impossible. There was a lot of economic theory built around the problem of the Zero Lower Bound “” the impossibility of sustained negative interest rates. Some economists wanted to eliminate paper money to eliminate the lower bound problem. Paul Krugman wrote a lot of columns about it. One of them said “the zero lower bound isn’t a theory, it’s a fact, and it’s a fact that we’ve been facing for five years now.”

And yet it seems the impossible has happened.

If I wanted to quibble I’d say Yglesias slightly exaggerates the element of surprise here. Some of us knew that US T-bill yields fell a couple of basis points below zero around 1939-40.  But on the bigger issue he’s right.  I never would have expected negative 0.75% nominal interest rates.  In retrospect, I underestimated the cost of storing large quantities of cash.  I’d guess it’s much higher than 100 years ago, when banks routinely dealt with large quantities of gold, and currency notes with denominations as large as $100,000.

And most other economists were even further off base.  Indeed back in 2009 I used the cost of storing cash as an argument in favor of negative IOR, and some Keynesians disagreed with me.  They said negative IOR would merely cause ERs to transform into safety deposit boxes full of currency.  I said the American public didn’t want to store trillions of dollars in currency and coins.  There’d be at least a modest hot potato effect.

As Matt points out, the key takeaway is that the US was never at the zero bound:

The big one is that central banks, including the United States’, may want to consider being bolder with their interest rate moves. For years now, the Federal Reserve’s position has been that it “can’t” cut interest rates any lower because of the zero bound. Instead, it’s tried various things around communications and quantitative easing. But maybe interest rates could go lower? Unlike the European Central Bank, the Federal Reserve pays a small positive interest rate on excess reserves. Fed officials normally say this doesn’t make a difference in practice, but it looks like negative rates on excess reserves may be the key to negative bond rates.

It’s no longer an issue of “just 25 basis points.”  German 5-year bond yields are currently negative, which is considerably lower than the 0.60% that they bottomed out at in America.  If we were never at the zero bound, then the foes of market monetarism have pretty much lost their only good argument for fiscal stimulus.

Now for the curve ball.  I am not saying the Fed should have tried to replicate the negative 5-year bond yields of Germany.  I view negative long term bond yields not as an expansionary monetary policy, but rather as a sign of failure.  Never reason from a bond yield.  A truly expansionary monetary policy might well have raised long-term bond yields.  My claim is different.  I’m saying that for those who do think nominal interest rates are a good indicator of the stance of monetary policy, it’s now clear that the Fed could have cut rates much more sharply.

But that’s not why I believe the Fed was never out of ammunition.  I relied on an entirely different reasoning process.  I noticed that Ben Bernanke never once suggested that the Fed had run out of paper and green ink.


Tags:

 
 
 

83 Responses to “It turns out that the US was never at the zero bound”

  1. Gravatar of Charlie Jamieson Charlie Jamieson
    26. February 2015 at 06:24

    Ha!
    Lowering rates to zero didn’t work, so instead of perhaps examining why it didn’t work, some economists want negative rates!
    And we’re supposed to listen to experts who are surprised that rates have gone negative in some places.
    A lot of this confusion flows from the error in thinking that banks lend reserves. And that you can force consumers into taking loans when their incomes are stagnant.

  2. Gravatar of jj jj
    26. February 2015 at 06:37

    Eventually, banks will figure out how to store large quantities of cash. They’ll build the infrastructure if this situation persists. As an example look how Goldman Sachs was shuttling aluminum around between warehouses to make a few bucks.

  3. Gravatar of jj jj
    26. February 2015 at 06:47

    And hopefully interest rates won’t be the intermediate target, by then.

    Is intermediate the right terminology, there? I’m referring to to a central bank whose [b]tool[/b] is buying and selling bonds, to [b]target[/b] an interest rate, which is used to [b]target[/b] an inflation rate.

  4. Gravatar of TravisV TravisV
    26. February 2015 at 06:51

    Off-Topic: Dear Commenters:

    Here is a simple model: When expected future NGDP growth increases, the 30-year Treasury yield increases and vice versa.

    Is it as simple as that or is the Market Monetarist model more complicated than that?

    It appears David Beckworth thinks there’s more to it than just that. Please Google his post “Don’t Worry, Be Happy: Falling Treasury Yields Edition” (I can’t paste the link here for some reason).

    That’s my general question but here are two specific questions: (1) What do Market Monetarists think drives the “Term Premium”? (2) Is there any difference between the Equity Risk Premium and the “Term Premium”?

    P.S.: In my mind, “Equity Risk Premium” is a vague investor calculation of “Probability that a deep recession will happen soon”…..

  5. Gravatar of benjamin cole benjamin cole
    26. February 2015 at 06:57

    It is simple. As Bank of Japan Governor Harada says, “We have to print more money.”

    I have been saying for years the Fed and other central banks needs to blow the doors off the printing presses.

    Did anyone listen to me?

    Nooooooo. Now you have Japan in Europe and people sniveling about secular stagnation in the U.S.

    I would have had you in Fat City.

  6. Gravatar of Giovanni Giovanni
    26. February 2015 at 07:09

    Every deposit a normal person does into his checking account is a loan with negative interest rate, if you think about it. You give the bank money, it gives you back some time later with fees deducted from it.

  7. Gravatar of Majromax Majromax
    26. February 2015 at 07:47

    Persistent negative interest rates on government debt are a sign that the responsible government is behaving suboptimally.

    If Germany is facing negative yields, then the public purse benefits by issuing as much debt at negative yields as possible, and using the profit to offset or retire interest-bearing securities.

  8. Gravatar of ssumner ssumner
    26. February 2015 at 07:54

    Charlie, This time you are so wrong that you have gone beyond wrong to almost right. Like you’ve gone around a big circle.

    jj, The terminology on targeting is hopelessly confusing. I wish it were clearer.

    Travis, It’s more complicated.

    Majormax, Are the German bonds callable?

  9. Gravatar of Ray Lopez Ray Lopez
    26. February 2015 at 07:57

    @benjamin cole – for a while I figured you as a diehard Sumner disciple. Now I see you’re just a parody of a disciple. Nice trolling.

    Sumner’s post as well as Krugman’s post on 2/24/15 “Phantom Phiscal Crises” show that what economists thought they understood is false. Yet they persist in coming up with schemes such as NGDPLT that could wreck the entire world. That institutions are willing to take a negative interest rate is not hard to understand, considering there’s no secure infrastructure for storing large amounts of cash. However once such infrastructure is built, banks could no longer offer negative rates, so firms will have to cut prices to compete for the cash. The only reason that’s not yet done is due to central banks inflating money beyond its natural rate.

    As for Sumner’s “print more green inked paper” proposal, essentially it’s a variant of the discredited “real bills” doctrine of Fed policy, which says the Fed can never err if it issues dollars in exchange for paper that is generated by actual customers of banks. This is not true, as it encourage reckless borrowing (since banks know they can sell the Fed this toxic, worthless paper, in exchange for dollars). Further, from a monetarist point of view, it’s pro-cyclical, encouraging excess. Indeed the Fed now holds something like over 40% of it’s balance sheet in toxic, worthless, mortgages from the Great Recession. Sumner would have the Fed hold even more of this type paper, maybe to approaching 100%? The implications for the real economy are obvious (and apocalyptic).

  10. Gravatar of Kevin Erdmann Kevin Erdmann
    26. February 2015 at 08:05

    I can see how bonds in the secondary market could have negative rates, by paying a high enough market price.

    But, how would newly issued bonds pay negative rates? Do the bondholders send a check to the borrowers every 6 months? Or do they adjust the market price at issuance? Do they, for instance, issue $100 bonds with a 0.25% coupon, but sell them for $105?

  11. Gravatar of Andrew_FL Andrew_FL
    26. February 2015 at 08:09

    “If we were never at the zero bound, then the foes of market monetarism have pretty much lost their only good argument for fiscal stimulus.”

    Scott, why would you use “foes of market monetarism” as a synonym for “Keynesians”?

  12. Gravatar of J Mann J Mann
    26. February 2015 at 08:23

    Andrew, my guess is that Scott believes there are other foes, however, those foes don’t have good arguments.

  13. Gravatar of ssumner ssumner
    26. February 2015 at 08:25

    Andrew, I’m not sure, maybe J Mann is right.

    Ray???? Reals Bills???? It’s no longer even funny. You need to up your game if you don’t want to be ignored. At least make your wrong argument slightly plausible.

  14. Gravatar of Jim S. Jim S.
    26. February 2015 at 09:14

    I wish you would drop the “Never reason from XXX” phrase. I don’t find it helpful. I would prefer a simple declarative statement like “Changes in XXX are most often an effect, not a cause.”

  15. Gravatar of Don Geddis Don Geddis
    26. February 2015 at 09:49

    @Jim S.: What a terrible suggestion. The two phrases obviously mean the same thing, semantically. (Even you know what they mean.) And, “never reason from a price change” is far, far more quotable and memorable.

    It’s rare that someone is able to invent a catch phrase that is both pithy and intellectually significant, even once in their life. Sumner has a great success here. Your idea would be horrible marketing.

  16. Gravatar of Don Geddis Don Geddis
    26. February 2015 at 10:18

    @Ray Lopez: “central banks inflating money beyond its natural rate

    Would be fascinating to hear your theory of what the “natural rate” of inflation is, for a fiat currency, managed by a central bank.

  17. Gravatar of David de los Ángeles Buendía David de los Ángeles Buendía
    26. February 2015 at 10:31

    Dr. Sumner,

    The discussion in your blog centers on how to respond to a Liquidity Preference of Dr. Keynes and whether it is a real phenomenon anymore. The experience in Europe suggests that the opposite is the case, that people would rather hold less liquid bonds over currency.

    Dr. Krugman’s explanation of this phenomenon seems useful:

    “…is basically the same as saying that even a zero short-term interest rate isn’t low enough to produce full employment “” is a situation in which increasing the monetary base has no effect on aggregate demand, because you’re substituting one zero (or very low) interest asset “” monetary base “” for another zero or low interest rate asset, short-term government debt.”[1]

    Today, if I were to have one million one dollar Federal Reserve Notes (FRNs), I could put that money into a safety deposit box and earn an effective interest of zero (or actually less than zero since I have to pay rent on the box) or I could purchase United States Treasury (UST) Bills and earn an effective interest rate of zero (or actually less than zero since the nominal interest rate minus inflation is less than zero). In 2007 this was not the case, the effective interest rate paid by UST Bills was higher than on holding FRNs. The Federal Reserve Bank (FRB) could influence interest rates through Open Market Operations (OMO) based on the differential between currency and securities, in this case lower interest rates. Today that leverage is lost, the FRB cannot lower interest rates further, if there were in fact a Liquidity Trap.

    However is this the case? The UST routinely auctions off securities at very low interest rates and the FRB has purchased them from buyers through auction. People do convert currency into debt, even though the latter is not only less liquid but also paying less interest. The European experience confirms this.

    In the United States money is not actually equivalent to UST Bills, Bonds, Notes, &c, the latter enjoys a significant legal preference to currency. UST securities are exempt from a number of core provisions of bankruptcy law[2]. These “safe harbour” provisions create a significant preference for UST securities over currency. I do not know if European governments have similar provisions but in the United States, there are definitely reasons to favour UST securities over currency.

    [1] http://bit.ly/14dZdBF

    [2] http://nyti.ms/1xJt7cx

  18. Gravatar of Cliff Cliff
    26. February 2015 at 10:36

    Don, the problem is that one statement is opaque and without meaning until it is explained (the explanation seldom accompanies the phrase) while the other carries informational content in and of itself and does not require that you have separately read an explanation.

  19. Gravatar of JP Koning JP Koning
    26. February 2015 at 10:37

    “I underestimated the cost of storing large quantities of cash.”

    Right, and one of the next steps is to play around with these storage costs to provide even more room for rates to go negative.

  20. Gravatar of TallDave TallDave
    26. February 2015 at 10:37

    Again, it’s fun to consider the case where the Fed adopts a -20% inflation target. Over a few decades, where do interest rates end up?

  21. Gravatar of Andrew_FL Andrew_FL
    26. February 2015 at 11:30

    @J Mann, ssumner-Okay I see the problem now. Word order matters. Here’s how I would have phrased your sentence if I wanted to convey your meaning:

    If we were never at the zero bound, then the foes of market monetarism who support fiscal stimulus have pretty much lost their only good argument.

    “Foes of market monetarism who support fiscal stimulus” is essentially a synonym for “Keynesian.”

    That sentence, however, parses differently from they way you phrased it. “Foes of market monetarism” is a set that includes people who support, and people who oppose fiscal stimulus. It contains people who make zero lower bound arguments (who favor fiscal stimulus) and people who don’t (because they aren’t in favor of fiscal stimulus and have unrelated issues with market monetarism).

    The way it was originally phrased anyone who doesn’t argue for fiscal stimulus because of the zero lower bound, was conscripted into the market monetarist cause. Well maybe, in this context they’re “fellow travelers” and not “foes.” But in other contexts, not so much.

  22. Gravatar of Doug M Doug M
    26. February 2015 at 11:38

    Rates are negatives…everyone is going to put their money into their mattresses… Mass hysteria…

    Some rates are negative…Most rates are positive. There are still plenty of assets to invest in with a positive expected return. This 0% threshold is largely psychological.

  23. Gravatar of Jerry Brown Jerry Brown
    26. February 2015 at 11:59

    Isn’t the market telling a government able to borrow at a negative nominal interest rate to SPEND? I would think that that is as clear as it gets. Governments who could should at the very least borrow until the interest rate came up to zero, even if all they spent was the money they made from the borrowing. I mean that is a totally free lunch. If you were to give me $1000 today and all I had to do was give you $900 back in six months, I’m pretty sure I would take it and spend the $100 profit I make from borrowing. I realize I would have to keep the $900 safe for six months, but a national government should have no problems or costs to do that. Or am I missing something here? Is this another case where analogy between a household and a government is flawed?

  24. Gravatar of Andrew_FL Andrew_FL
    26. February 2015 at 12:13

    @Jerry Brown-You’re reasoning from a price change.

    If the price of gasoline drops because everyone’s car suddenly becomes 100X more fuel efficient over night, is the market telling people to buy more gas?

    Nevermind why a price is signalling to the Government specifically and not “people” in general.

  25. Gravatar of LK Beland LK Beland
    26. February 2015 at 12:20

    JP Koning

    Many of these measures are overly complex for my taste. Simply:

    1) Get rid of large denomination bills.
    2) Tax currency holdings (say for corporations and other entities required to file annual financial reports).
    3) Tax insurance against currency theft.

    These three measures will significantly increase the cost of holding cash.

  26. Gravatar of Jerry Brown Jerry Brown
    26. February 2015 at 12:36

    Andrew FL, thanks for the reply. But I don’t think that is the same thing. If you gave me 1000 gallons of gasoline and I had to give you back 900 gallons later, I might make the deal depending on how hard it would be to store the gasoline. If you gave me $1000 dollars and I had to give you $900 back, then its a no brainer, especially if I had a central bank and a printing press. I could just shred $900 and print up $900 when it was time to pay you back. And spend the $100 in the meantime. Very minimal costs and less if it was all electronic money.

  27. Gravatar of Andrew_FL Andrew_FL
    26. February 2015 at 12:48

    @Jerry Brown-it’s the same because low levels of spending (rather, low demand for credit) (by everyone) is the reason the (nominal) interest rate is low, in the same way that the price of gas is low because people use less gas (in the scenario I described). If you shift the Government’s demand for credit to the right, even if we assume you have no effect on private demand for credit by doing so, you cause the interest rate to go up. In other words, the interest rate only went negative because demand to borrow money is low and you are calling for an increase in demand to borrow money as if that would have no effect on the interest rate.

  28. Gravatar of Charlie Jamieson Charlie Jamieson
    26. February 2015 at 12:56

    What are negative interest rates telling us?
    Could it be that I will lend you $1,000 and get back $995 in a year because in a year my $995 will buy me what $1,000 buys today?

  29. Gravatar of Derivs Derivs
    26. February 2015 at 13:28

    “Could it be that I will lend you $1,000 and get back $995 in a year because in a year my $995 will buy me what $1,000 buys today?”

    Think of the fun of buying things, and the merchant wanting you to pay him in 6 months to a year, and you insisting he takes the money today. You can demand a discount to pay later!!

    Welcome to what I see.

  30. Gravatar of Philo Philo
    26. February 2015 at 13:34

    So the so-called zero bound is really the minus-one bound, or the minus-three-quarters bound–in general, the minus-n bound for some positive n? (By the way, what *is* the value of n?)

  31. Gravatar of ssumner ssumner
    26. February 2015 at 13:43

    Jim, It’s going to be carved into my tombstone. So I’m afraid you won’t get your wish.

    David, I think Krugman gets things exactly backward. Low rates are not a sign that monetary policy has run out of ammo, it’s a sign that monetary policy is too tight.

    Jerry, You said:

    “Isn’t the market telling a government able to borrow at a negative nominal interest rate to SPEND?”

    You are reasoning from a price change. Why are rates low? Maybe there aren’t many good infrastructure projects out there.

  32. Gravatar of ssumner ssumner
    26. February 2015 at 13:43

    Philo, It depends. It changes over time and space.

  33. Gravatar of Jerry Brown Jerry Brown
    26. February 2015 at 13:58

    Andrew, yes that is sort of what I was saying originally. To the extent that interest rates are determined in a market, then a government able to borrow at a negative rate should borrow until those rates were up to zero. They should attempt to shift the demand curve or whatever to the right. And if any of that governments citizens would benefit from spending the “profit” from the negative interest rate, then that government should be spending that profit at the very least. The “market” is offering a totally free lunch in this case. It would be irresponsible and almost cruel to not do so. If I was offered a free lunch at no cost to anyone shouldn’t I take it to give to the hungry person next to me even if I myself wasn’t hungry? I still think the market is telling these governments to SPEND. I know that has implications that might not be popular but so what.

  34. Gravatar of Jerry Brown Jerry Brown
    26. February 2015 at 14:16

    Hi Professor, thanks for the reply. Saw it after I replied to Andrew. Why would there need to be good infrastructure projects before that money was spent? There would only be some need somewhere, maybe not even in that particular country even, that could be lessened by spending that “profit”. It costs the spender nothing in this case or am I wrong about that? This is truly a bizarre circumstance and must mean that something is screwed up. Reasoning from a price change? How so? The market is giving out a freebie, why not take it.

  35. Gravatar of Majromax Majromax
    26. February 2015 at 14:18

    @ssumner:

    > You are reasoning from a price change. Why are rates low? Maybe there aren’t many good infrastructure projects out there.

    I don’t think that’s exactly the case. It would be sensible with a negative real interest rate, but not a negative nominal rate.

    A persistent negative nominal rate offers an arbitrage possibility, whereby the debt-issuer can get a free lunch by issuing debt and making full repayment with only part of the amount borrowed. The resulting profit could go to reduce taxes, increase transfer payments, or simply to throw a large birthday party for Merkel.

    That Germany is not taking advantage of this arbitrage possibility raises one of two possibilities:

    *) The negative rates may be unexpected, and the government believes them to be ephemeral. Arbitrage appears to be a possibility, but it cannot in fact happen

    *) Or, the government is artificially restricted in the amount of debt it is willing to issue. This could be the case legally (with, say, the US debt ceiling or international agreements in the Eurozone) or politically (whereby hypothetically Germany would find it a PR negative to significantly increase its gross debt).

    The first case is plausible, but it suggests we shouldn’t read too much into the negative rates. If they are indeed ephemeral, then they may also not be useful as a policy tool. (That is, the ECB couldn’t *engineer* negative rates.)

    The second case is more complicated. It suggests an economic efficiency, where obvious welfare-improving trades (between creditors who want to hold bonds instead of cash and the government) are not happening.

  36. Gravatar of Andrew_FL Andrew_FL
    26. February 2015 at 14:21

    I just realized the only way to make sense of arguments like the one Jerry is making is to understand them to be saying the government’s demand for credit *should* have a sharp asymptote near zero interest. It’s a normative belief about what Government control edit demand curves “should” look like.

    Well fine, but that’s *your preference* not “what the market is telling the government.”

  37. Gravatar of Jerry Brown Jerry Brown
    26. February 2015 at 14:32

    The market is telling these governments that it wants to pay them to store money. It costs governments almost nothing, if not nothing, to store money. Why can’t I argue that the market is telling them to spend this payment?

  38. Gravatar of Andrew_FL Andrew_FL
    26. February 2015 at 14:40

    Jerry, the minute the market thinks the Government will take the “freebie” it will stop offering it. If it keeps offering the freebie (if the interest rate remains negative) then the government failed to increase over all credit demand. If it succeeds, no actual borrowing for free occurs.

  39. Gravatar of Andrew_FL Andrew_FL
    26. February 2015 at 14:44

    Jerry, the market doesn’t tell the government what it’s preferences should be anymore than the market price of chocolate ice cream dictates the shape of my demand curve for it.

  40. Gravatar of Philo Philo
    26. February 2015 at 16:29

    What is it (n, in the n-bound) here and now?

  41. Gravatar of ThomasH ThomasH
    26. February 2015 at 16:34

    Whether negative interest rates are possible or not (they are) is not relevant to the issue of fiscal stimulus. The issue is what the monetary authority’s real reaction function is. In 2009-2014, monetary authorities were acting as if could not provide more monetary stimulus than they were already providing. That does not imply that they would in fact have offset larger fiscal deficits undertaken as “stimulus.” Of course in fact fiscal policy, far from being stimulative, did not even undertake the activities with present costs and future benefits that have positive NPV’s, (“austerity.”

  42. Gravatar of Randomize Randomize
    26. February 2015 at 16:35

    If the real zero-bound is the cost of storing cash, I would look to the cost of existing secure storage services to guestimate that cost. Funds like GLD and IAU store and transfer gold much like a bank would try to handle cash in a negative interest rate environment. These service operate for annual fees of .4 and .25%, respectively. It’s probably safe to assume that their expenses are correlated to some combination of weight, volume, and value of the product they store. So keeping value equal and using the power of Google, it looks like stacks of $100 dollar bills would weigh about 40% as much as their equivalent value in gold but take up 8.5 times as much volume. If volume is even close to as expensive to provide storage for as weight (and I’m guessing volume is much more expensive), then it’s safe to assume that the real zero bound of money could be considerably lower than the negative .25-.4% that these funds charge for storing, handling, and insuring gold.

  43. Gravatar of Jerry Brown Jerry Brown
    26. February 2015 at 16:42

    Andrew, I agree that “the market” doesn’t tell the government (or anyone else) what the government’s preferences are. The market might determine what the costs of those preferences will be though. If the market is willing to offer loans at negative interest rates then the market, at the very least, is saying that spending the ‘profit from borrowing’ is free. If a government had a preference for improving the lives of its citizens, and if spending that cost free money could improve lives in any way, then why wouldn’t it do that? And the understanding I get from Yglesias’ post is that the market is in fact willing to loan money to select governments and corporations at negative interest rates. So I don’t understand your comment at 14:40 at all.

  44. Gravatar of Major.Freedom Major.Freedom
    26. February 2015 at 17:18

    The -0.75% “interest rate” on Euro denominated government debt is not actually an interest rate at all. It is a tax, or service charge for holding money.

    Banks are prevented by law from holding demand deposit accounts for their excess reserves. They must choose between government bonds, or be charged a fee to hold them as excess reserves with the ECB, which is a tax, or find a way to store the money in the form of currency notes, which would also be costly. Given the tax on reserves, Euro bonds are the only feasible option.

    These “negative interest rates” are not interest rates at all. They are taxes and charges.

    Charges being levied for holding someone’s money, which is what people are today calling “negative interest rates”, is actually more normal and closer to what would occur on a free market. Decades of demand depositors being given money for depositing money into demand deposit accounts is actually a deviation away from normalcy, as the “interest” is being given in part so as to make the demand deposit appear as a debt instrument when economically it was never a debt instrument at all. The historical context here is that banks (with government backing) wanted to lend demand deposit money despite the fact that they are economically the property of the depositor.

    There are very good reasons why someone might be willing to pay a bank a fee to hold their money. This is not negative interest rates, even if the law says those deposits become the property of the bank, and if the demand depositor says they are willing to risk incurring a loss by having the bank loan the demand deposit out to a third party (deposits greater than the insured amount).

    A checking account agreement whereby the bank gives money to the depositor rather than vice versa, is actually the “weird” scenario, and a sign of “failure” in the economy.

    Imagine a storage facility (that stores people’s furniture, vehicles, paintings, etc) that paid for the “privilege” of holding other people’s stuff. That would be weird. Normalcy would have the storage facility owner charging a fee, not paying a fee.

    The ambiguity and confusion from decades of legalese that treats demand deposits as loans, whereby property ownership is transferred, has resulted in the upside down notion that fees being levied to hold cash is the weird scenario.

    Now I am not saying the specific reasons for why there are “negative interest rates” are morally justified or solely free market driven, only that “negative interest rates” for demand deposits is normal, and “positive interest rates” is not.

  45. Gravatar of Charlie Jamieson Charlie Jamieson
    26. February 2015 at 17:47

    Government bonds from Europe and the U.S. are considered quite safe — safer than deposits, really — and there is actually more demand for such bonds than there is supply, especially with the central banks competing in the marketplace for these bonds.
    Could just be as simple as that.
    The EU is trying to drive down interest rates and overshot.
    Buying government bonds is the equivalent of putting your money under your mattress.
    If there was any kind of major equity correction, I think you would see negative rates even in money market accounts.

  46. Gravatar of Major.Freedom Major.Freedom
    26. February 2015 at 18:17

    Charlie:

    “Buying government bonds is the equivalent of putting your money under your mattress”

    If they were equivalent then there would be no incentive to doing one over the other.

    One important difference is that putting money under your mattress doesn’t obligate your spouse (or bedmate) to steal from other people if you want your money back.

  47. Gravatar of Andrew_FL Andrew_FL
    26. February 2015 at 18:28

    @Jerry Brown-“If a government had a preference for improving the lives of its citizens, and if spending that cost free money could improve lives in any way, then why wouldn’t it do that?”

    Well, in the first place it’s highly questionable whether any government has ever had a preference for improving the lives of it’s citizens and even more questionable whether they could do so by borrowing money. From “the market”-you know, the citizens?

    Of course governments have downward sloping demand curves for credit. Everyone does. The question who decides just what the shape and position of those curves are. Is it you? Well, obviously not, you’re unhappy with the shape of their demand curves and or their position.

    The question is:

    If you want the demand for credit to shift rightward (in which case, additional borrowing, as opposed to *current* borrowing, does not occur at the current rate, it occurs at a higher, probably not “free” rate. Or do you want the government to have a radically different set of preferences, ie a different shape to it’s demand curve for credit? In this case the rate the government ends up paying still won’t be the rate currently being offered, but a higher one.

    But it’s not enough to say “the government *should* have these preferences, it’s a free lunch!” If someone was giving chocolate ice cream away for free would it follow that I should have an infinite demand for chocolate ice cream? No, because I don’t like chocolate.

    In other words, if we want to talk coherently about the government’s preferences, we have to talk about what they are specifically. Which is what Scott was getting at when he said “Maybe there aren’t many good infrastructure projects out there.”

  48. Gravatar of Ray Lopez Ray Lopez
    26. February 2015 at 18:32

    Notice Sumner ignores David de los Ángeles Buendía ‘s post, which was well reasoned, and responds to everybody else, including me. Apparently Sumner is afraid of those better versed in economics. Peck peck peck chicken!

    And indeed Sumner’s NGDPLT is a form of ‘real bills doctrine’. As for Buendia’s post, he’s quite right, and in the 19th century, when notes and bills and IOUs were treated the same as cash (discounted but treated as ‘cash’ by the public) this distinction was more pronounced. Hence, back then, any ‘open market operations’ would be effectively neutralized, at the margin, since the public treated bonds as cash anyway.

    @Don Geddis– you’re a smart fellow, use your imagination about the ‘natural rate’ of money. It’s what the business community comes to expect. Stable money base. That said, businesses can adapt if money supply changes (money is neutral) though there is a small menu cost and/or small sticky wage and smaller sticky prices.

    PS: “Okun, with his sluggish wages and sticky prices, seems to be the source for the view that in the current year output responds by 90 percent and prices by only 10 percent of a change in nominal GNP. Yet in the U.S. in World War I and its aftermath, the division was much closer to 10″”90 than 90″”10” – Robert J. Gordon, Working Paper No. 847, NATIONAL BUREAU OF ECONOMIC RESEARCH, January 1982

  49. Gravatar of Ray Lopez Ray Lopez
    26. February 2015 at 20:24

    Brad DeLong, 2.25.2015 – “Taylor says the Federal Reserve kept interest rates two percentage points to [sic, ‘too’] low for three years. If you are buying a long-duration asset like housing, such an interest rate break leaves you willing to pay 6% more than you would otherwise have been willing to pay. Are we really supposed to build a 50% nationwide housing bubble on top of the 6% impetus? Only a market already fully infected with the bubble disease could see such a small impetus have such a large impact.”

    Imagine DeLong’s reaction to Sumner’s claim that the tiny several months ECB EU interest rate boost in 2011 caused the EU to have today’s depressed condition, despite the fact that subsequent to this boost the ECB cut rates to all-time lows today. It’s like those ludicrous real-business cycle / rational expectations claims that the Wall Street Crash of 1987 was caused by obscure law proposals in Congress at the time that would have slightly shaved off some wealth from stock holders. Ludicrous, like monetarism itself. In fact, ‘animal spirits’ (as implied by DeLong above, “already fully infected…”) is the real reason for the business cycle. And you cannot eliminate animal spirits by printing money (Sumner take note).

  50. Gravatar of Jerry Brown Jerry Brown
    26. February 2015 at 21:00

    Andrew, I don’t follow your argument at all. I get that you don’t trust government to spend in a beneficial way even when people are giving that government that spending of their own free will and the government is spending at no real cost. That is not an argument about economics, that is an argument about politics only. And its a silly argument.

    Let you be the one who can borrow at a negative interest rate. Would you turn down the offer of my loan for $1000 if you only had to pay back $900? Even if you didn’t want it for some reason, is there no one you know anywhere in the world who could benefit from that $100 difference? You could keep it or you could give it away for all I care. All I want is $900 back at the end of the loan.

  51. Gravatar of Andrew_FL Andrew_FL
    27. February 2015 at 00:22

    Jerry-no one is offering *additional* credit at negative interest rates. They’re offering the current quantity demanded at the current interest rate. Additional credit demand will not be given away.

    I’m not imputing my preferences on to the market or the government. That’s what *you* are doing.

    You’re speaking as though the interest rate isn’t currently clearing the market, or as though there were a horizontal supply curve.

    Think of it this way. There are *already* taking up the offer you ate suggesting. If I come and say, I’d like free money to, suddenly it won’t be free anymore. But there’s not some supply of credit going unclaimed at the current rate just because the government doesn’t get what you think is an obvious point.

  52. Gravatar of Andrew_FL Andrew_FL
    27. February 2015 at 00:34

    Jerry, now you’re speaking as though the current interest rate doesn’t clear the market. As though you believe there’s a huge surplus of loanable funds waiting to be claimed at the present interest rate.

    And I’m not imputing my preferences on the market, that’s what *you* were trying to do.

    Look at it this way. Lenders don’t send the signal “I’m willing to lend more money to more people at this interest rate.” Lenders are *already* lending what they will at the current interest rate. If the government decided it wanted to borrow more, and it increased net borrowing by doing so, it would borrow at a *higher* rate than presently.

    So the reality is, I just *saw* you give someone a loan at a negative nominal rate, and if I come to you saying I *also* want a loan, you won’t offer the negative rate to me, I represent a rightward shift in demand for the funds you are supplying.

    There’s no unexploited opportunity here if only everyone were as smart as you to realize a point that’s so obvious.

  53. Gravatar of Derivs Derivs
    27. February 2015 at 03:16

    “Taylor says the Federal Reserve kept interest rates two percentage points to [sic, ‘too’] low for three years. If you are buying a long-duration asset like housing, such an interest rate break leaves you willing to pay 6% more than you would otherwise have been willing to pay.”

    Ray,
    Check your math. It’s not a cumulative adjustment and it is not 1 for 1, particularly for someone like me who will ignore principal payments. But even for those that insist they matter (and they do, on a cash flow basis), your math is still quite a bit off.

  54. Gravatar of Dan Kervick Dan Kervick
    27. February 2015 at 03:52

    It seems to me that what these negative rates indicate is that many investors in Europe are anticipating a round of bank failures, nationalizations, government defaults, deposit seizures or something else along those lines, and are willing to accept modest long-term nominal losses rather than hold deposits at institutions they think will deliver even larger nominal losses.

    Even if the business costs of converting to cash and storing it are low, that doesn’t mean much if the place you are storing it is not easily accessed, or may find itself subject to capital controls.

  55. Gravatar of Derivs Derivs
    27. February 2015 at 04:51

    “It seems to me that what these negative rates indicate is that many investors in Europe are anticipating a round of bank failures, nationalizations, government defaults, deposit seizures or something else along those lines”

    I vote for a combination of 1- some entities are legally required to hold assets in government fixed income instruments, and 2- I’ll lean here more to the greater fool theory of investing, front-running the belief that the ECB is about to go on a paper buying binge. (I use the word “paper” to refer to notes, bills, and bonds)

    Wouldn’t it be funny if negative rates force people to hold cash, and breaking and entering crimes increase 1,000 fold. The Fed causes a crime wave!!

  56. Gravatar of Nick Nick
    27. February 2015 at 05:02

    Dervis,
    At least we would get a novel test of broken windows in a ‘liquidity trap’?

  57. Gravatar of ssumner ssumner
    27. February 2015 at 06:56

    Jerry, No, it’s not free money if you spend it, you still have to repay the loan with tax money, which involves deadweight losses.

    Thomas, You said:

    “In 2009-2014, monetary authorities were acting as if could not provide more monetary stimulus than they were already providing.”

    I can’t understand why people keep saying this when it’s so clearly wrong. When fiscal austerity was on the horizon in late 2012 the Fed responded with much more aggressive monetary stimulus. We had on and off QE throughout that period. Bernanke consistently said the Fed could do more. They did do more in 2013. What more evidence do people need?

    Ray, You said:

    “Imagine DeLong’s reaction to Sumner’s claim that the tiny several months ECB EU interest rate boost in 2011 caused the EU to have today’s depressed condition, despite the fact that subsequent to this boost the ECB cut rates to all-time lows today.”

    I actually agree with DeLong. Now I’d guess you are really confused. Hint, the two cases are totally different—monetary policy vs. credit policy.

    And you are sticking with your “real bills doctrine” claim? Really? :)

  58. Gravatar of Majromax Majromax
    27. February 2015 at 07:22

    @ssumner:

    > Jerry, No, it’s not free money if you spend it, you still have to repay the loan with tax money, which involves deadweight losses.

    My apologies, but I’m really not following here.

    At the margin, it appears that Germany could issue a new 5-year bond at a negative yield. Presume for the sake of argument it issues a single, 5-year, zero-coupon bond to pay €1000 in 2020, receiving €1100 today.

    If Germany spends €100 on unproductive consumption and then keeps €1000 in its treasury to repay the bond at maturity, where does this result in a new deadweight loss? If instead of consumption it refunds €100 in some sort of tax rebate, does that not reduce the deadweight loss of taxation?

    I agree that spending the full €1100 proceed could result in new deadweight losses from additional taxation in 2020, but I don’t see how keeping €100 profit represents anything but risk-free, utility-improving arbitrage.

  59. Gravatar of Thomas Aubrey Thomas Aubrey
    27. February 2015 at 08:14

    For those interested in negative nominal yields this paper from Willem Buiter in 2009 is interesting.

    http://www.willembuiter.com/zlb.pdf

    “A number of economists have suggested that, using calculations based on variations of the Taylor rule and ignoring the zero lower bound, the official policy rate in the US early in 2009 should have been as low as minus 5 percent or even minus 7.5 percent”

  60. Gravatar of Nick Nick
    27. February 2015 at 08:34

    +1 to Majromax
    Isn’t this profit essentially earned from the govts unimaginably low cash carrying costs? Forget that they don’t actually have to store the cash (could just be a bully and keep govt emoney at a 0 rate while other emoney rates are negative), even if they did they could beat any private rate.

  61. Gravatar of LK Beland LK Beland
    27. February 2015 at 08:37

    The Hypermind market is pretty bullish, considering the super-low Inflation expectations (under 1%, probably close to 0.5%). Hypermind is basically predicting 3.5% real GDP growth for 2015.

  62. Gravatar of Bob Murphy Bob Murphy
    27. February 2015 at 10:40

    Scott, I’m not trolling you, I’m sincerely asking for clarification:

    The last I checked, your zinger against Krugman et al. was to say, “They keep blaming things on the ZLB, but in Europe interest rates have been quite positive the whole time. Morons.”

    Now you are saying the opposite.

    Is it just that European interest rates have quite recently dropped quite a bit?

  63. Gravatar of Vivian Darkbloom Vivian Darkbloom
    27. February 2015 at 10:45

    “Now you are saying the opposite”

    I don’t get why this would be the “opposite”. If interest rates had further to drop (to zero) why would it be “the opposite” if it turns out that they had even further than zero to drop? The direction is the same, or not?

  64. Gravatar of Bob Murphy Bob Murphy
    27. February 2015 at 11:06

    Vivian you don’t agree with me that these are fairly labeled as “opposite” criticisms of Krugman et al.?

    (A) “They say the world’s economic problems are due to central bank’s losing traction at the ZLB, but interest rates in Europe are well above zero.”

    (B) “They say the world’s economic problems are due to central bank’s losing traction at the ZLB, but interest rates in Europe are well below zero.”

  65. Gravatar of Vivian Darkbloom Vivian Darkbloom
    27. February 2015 at 11:11

    Sorry, I’m afraid not, Bob. Like I said, the main point is that interest rates still had some scope to fall. Not only do I not view it as “opposite”, I don’t even view it as inconsistent. Call me dense, but the fact that they fell even lower than expected isn’t. in my view, an inconsistency, much less an “opposite”.

  66. Gravatar of Bob Murphy Bob Murphy
    27. February 2015 at 12:37

    ? Vivian, I’m not saying Scott contradicted himself; that’s why I’m asking him to clarify. For example, one obvious explanation is that we’re looking at different time periods, and that from (say) 2009 – mid-2014, European interest rates were well above 0%, so no ZLB problem, while from late 2014 to now, European interest rates were well below 0%, so no ZLB issue.

    Or, another explanation is that we’re talking about different interest rates.

    But I don’t remember a period where Scott blogged, “OK, right *now* Krugman’s point about the ZLB in Europe would make sense, even though it didn’t for the last several years.” So was the crossover really fast?

  67. Gravatar of Nick Nick
    27. February 2015 at 13:12

    Bob,
    He always said things could go below zero, and that there were options at zero. He used to point out that krugman was acting like Europe was at zero (since krugman thinks zero is a problem) even though it wasn’t.
    It’s a case of, ‘but even if my opponent is right about X, Y is not X’
    Now we know his opponent was also wrong about X

  68. Gravatar of Nick Nick
    27. February 2015 at 13:22

    Bob,
    Sorry, forgot to fully answer. I guess the date you are looking for is the cuts they did in September. But when they did those they made it pretty clear they thought there was more they could do.

  69. Gravatar of ssumner ssumner
    27. February 2015 at 13:28

    Majromax, Yes, that may be right, although I suppose that issuing more debt might influence the interest rate, if they have any monopoly power.

    LK, I’d say about 3% RGDP growth, and 1.1% – 1.2% inflation. (I’d expect a bit less RGDP growth, BTW.)

    Bob, You asked:

    “Is it just that European interest rates have quite recently dropped quite a bit?”

    Yes, and this isn’t “my opinion.” It’s all in the public record. I generally criticize Krugman for assuming eurozone rates were zero in the 2008-13 period, when they were not.

  70. Gravatar of Jason Jason
    27. February 2015 at 15:40

    Scott,
    Matthew Yglesias also has this post:
    http://www.vox.com/2015/2/26/8107517/walmart-tj-maxx-raises

    I’ve always found the Nairu to be one of Milton Friedman’s WORST ideas that actually caught on. The case for it is WAY overstated. The 1990’s blew the concept right out of the water empirically Other than the 1990’s the Fed has been too quick to tighten money, when unemployment lowers below its IMAGINED natural rate, never mind that inflation is quiescent.

    The Fed should wait until wages substantially accelerate. Leading to market predictions of accelerated inflation or actual measured inflation, not the Fed’s imagined nonsense.

    With what its been doing, tightening in the face of wage increases absent CPI inflation, the Fed dramatically lowering real wages and contributing to increasing inequality.

  71. Gravatar of Major.Freedom Major.Freedom
    27. February 2015 at 16:36

    Sumner:

    “Yes, and this isn’t “my opinion.” It’s all in the public record. I generally criticize Krugman for assuming eurozone rates were zero in the 2008-13 period, when they were not.”

    But didn’t you say, or maybe it was one of your posters, that the ZLB problem was not about rates actually hitting zero, but the lack of inflationary “traction” at a sufficiently low rate? That a central bank “loses control” not when rates actually hit zero, but when they hit a sufficiently low level?

    Krugman’s position was not that rates were actually at zero in the Euro area, but that “monetary policy” was no longer “effective”. You can say he was wrong about what positive rate actually represented the ZLB, but you can’t say he doesn’t know the difference between 2% and 0%.

  72. Gravatar of ssumner ssumner
    27. February 2015 at 18:01

    Jason, So far as I know Friedman opposed the NAIRU, and instead proposed the Natural Rate Hypothesis (which in my view has held up much better than the NAIRU (a theory I also hate.)

    I don’t believe the Fed has any substantial impact on inequality

  73. Gravatar of W. Peden W. Peden
    28. February 2015 at 04:00

    Probably a good time to ask for people to clarify the NAIRU hypothesis vs. the NRU hypothesis. Is the key difference that the NRU hypothesis is the claim that there is a horizontal short-run Phillips Curve but a vertical long-run Phillips Curve?

    Friedman’s focus seems to have been the idea that, except maybe hyperinflations and hyperdepressions, the rate of inflation and the rate of unemployment would be independent in the long-run. That’s a difference hypothesis from superneutrality of money i.e. that any CHANGE in the rate would not affect the long-run Phillips Curve. The NRU hypothesis, like the QTM (understood in a Patinkin way, i.e. a one-time change in the quantity of money does not affect the long-run rate of output) is a relatively modest claim compared to superneutrality of money, but a stronger claim that neutrality of money.

    The NAIRU is the claim that there is a unique equilibrium rate at any one point in time, and the rate of inflation will be determined by the positioning of actual unemployment relative to the NAIRU.

    Would one difference be that, in the NRU hypothesis, unemployment can theoretically fall below the natural rate without an immediate rise in inflation, whereas the NAIRU precisely IS the rate at which a fall in unemployment can only be achieved at the cost of accelerating inflation?

    There were some differences that were just differences of emphasis e.g. Friedman stressed that the NRU was hard to measure and not usable at an instrument of macroeconomic policy, whereas the point of the NAIRU was precisely to adapt Keynesian demand management ideas? In that sense, the NAIRU was an extension of the output gap-style thinking that dominated the post-war period. The interesting difference is that policymakers seem to have persistently overestimated the output gap in the post-war period, whereas they persistently have underestimated it since about the late 1990s, and especially in recent years.

    (The claim that there is a unique equilibrium rate of unemployment is there in Friedman 1968 as well, of course, but it’s not essential to the NRU hypothesis.)

  74. Gravatar of Nick Nick
    28. February 2015 at 07:09

    I second W Peden. Someone educate me, please

  75. Gravatar of ssumner ssumner
    28. February 2015 at 07:47

    W. Peden and Nick, AFAIK, this is the difference:

    1. The NAIRU view is that there is a fairly stable NAIRU that can be used for policy evaluation. When unemployment falls below the NAIRU, inflation will rise, and vice versa.

    2. The natural rate view suggests that monetary policy drives inflation, not unemployment. In this view whenever inflation is more than expected, unemployment will fall below the natural rate, and vice versa. The natural rate of unemployment is not stable, and cannot be used for policy evaluation.

  76. Gravatar of Major.Freedom Major.Freedom
    28. February 2015 at 08:39

    Sumner:

    “I don’t believe the Fed has any substantial impact on inequality”

    Don’t worry folks! The impact is “not substantial”, whatever the heck that is supposed to mean. Maybe “not as much as some random unnamed extremists claim”? That is doing the lord’s work.

    Let’s ignore the papers that use the Sumner approved methodology which find evidence that monetary policy causes inequality to increase.

    Let’s also ignore the fact that central banks were created in the first place to bring about more wealth inequality in favor of bankers and politicians.

    Millions of people all over the country are working to produce goods and services for the sole benefit of those closest to the money spigot in terms of exchanges. They are doing more for less, and that doesn’t show up in aggregates.

  77. Gravatar of marcus nunes marcus nunes
    28. February 2015 at 09:47

    NAIRU was an acronym created in 1975 by Modigliani. The reason was to convince monetary policymakers that since unemployment was above NAIRU, they could “pump up the economy” without fear of igniting inflation (which, note, was already high and rising).

  78. Gravatar of W. Peden W. Peden
    28. February 2015 at 10:03

    Scott Sumner,

    Thanks!

  79. Gravatar of ssumner ssumner
    28. February 2015 at 18:53

    Thanks Marcus.

    W. Peden, What I said may be slightly off, but I think it’s pretty close.

  80. Gravatar of bill woolsey bill woolsey
    1. March 2015 at 06:35

    I think that the natural rate of unemployment is the level of unemployment consistent with the labor market clearing. It depends on real factors. It can and does change. It is impacted by government policies like unemployment insurance or the minimum wage.

    Friedman argued that changes in the growth rate of the quantity of money (and so, the trend growth rate of nominal GDP and inflation rate) would not impact the unemployment rate. The market system would be able to adjust such that labor markets clear and the unemployment rate would equal the natural unemployment rate.

    Implicit in this view is a normative notion that a better monetary regime is one that causes the least deviation of the unemployment rate from the natural rate.

    I think the non-accelerating rate of unemployment is supposed to be similar, but without this normative element. There is no notion that there is anything good about this particular unemployment rate. However, the use of demand management to try to keep the unemployment rate persistently below this rate will result in accelerating inflation. Assuming accelerating inflation (all the way too hyperinflation) is unacceptable, then we are stuck with this unemployment rate. It can and does change. And supply side policies could reduce it.

    I guess there might be some notion with NAIRU that it would be a good thing for the unemployment rate fall below it, but trying to keep it there will lead to disaster. So, a monetary regime that allows the unemployment rate to fall below NAIRU temporarily is a good thing.

    My understanding of Sumner’s view is that both views are wrong. He appears to believe in a long run phillips curve because of money illusion. It is because no one will accept wage cuts. And so, more rapid trend growth in nominal GDP results in lower unemployment. HE favors trading that benefit off against additional distortions due to capital income taxation.

    The short run phillips curve would be flatter than this long run phillips curve. Slower growth in nominal income will result in higher unemployment due to inflation. Very slowly, wage growth will adjust downward and the unemployment rate will fall. However, it will not fall all the way to the initial level because the slower wage growth trend would involve more frequent periods where some wages need to fall, and there will be layoffs in those circumstances.

    My own view is that avoiding distortion in the labor market is a criterion for a monetary regime. So, I use the natural rate of unemployment concept. As for the notion the market can adjust to any trend growth in the quantity of money/trend growth of nominal GDP, trend inflation, I have my doubts.

    When we start thinking about negative growth rates of nominal GDP, along with a unit of account defined in terms of hand-to-hand currency, then I have no confidence that the market system can adjust to allow for labor market clearing. Though the real problem is nominal interest rate.

    More generally, I think that more rapid inflation will lead to indexing, and indexing is very bad when there are supply shocks, and so any gains from exploiting money illusion can result in losses due to supply shocks. And further, I think exploiting money illusion is exploitation and a bad characteristic of a monetary regime.

  81. Gravatar of W. Peden W. Peden
    1. March 2015 at 10:44

    Bill Woosley,

    Interesting analysis.

  82. Gravatar of bill woolsey bill woolsey
    1. March 2015 at 11:50

    Thanks, but as usual, a major typo.

    Slower nominal GDP growth will result in higher unemployment and slower inflation in the short run. In the long run, wage growth will slow and unemployment will fall, but not to its initial level…

  83. Gravatar of ssumner ssumner
    2. March 2015 at 15:39

    Bill. Yes, I think the long run Phillips curve is roughly vertical, except at very low inflation rates, due to downward wage inflexibility. Wage cuts aren’t impossible, but they are difficult.

Leave a Reply