Tight money doesn’t help savers

Miles Kimball has a new post entitled:

Should We Have Tight Monetary Policy in Order to Help Virtuous Savers?

Unfortunately, there doesn’t seem to be a post, just a title.  So I’ll provide the post.

1.  Tight money does not raise interest rates, at least over the relevant time frame for welfare considerations.  Interest rates in the eurozone today (0.5%) are almost certainly lower than they would have been had the ECB not adopted a tight money policy in 2011, raising rates from 0.75% to 1.25%.  That policy drove the eurozone deeper into recession, pushing rates even lower. The same thing happened in America in 1937-40.  That’s right, low rates can reflect tight money.  Even low real rates.  The low real rates in America today partly reflect the recent recession, which was caused by ultra-tight monetary policy in 2008-09.

2.  Savers might also be helped by a lower rate of inflation.  In practice, savers are hurt more by the drop in RGDP (and real interest rates) associated with tight money, than they are helped by the lower inflation.  Economics is not a zero sum game.  A smaller pie hurts both savers and borrowers.

3.  Tight money hurts saving nations in other ways.  For instance, the ECB policy that caused eurozone NGDP to grow by 2.7% over the past 5 years (instead of the normal 22%), has dramatically worsened the sovereign debt crisis.  As a result of this crisis, savers and taxpayers in high saving countries like Germany will suffer enormous losses.

4.  Thus the central bank should not help virtuous savers, nor should it try to help non-virtuous savers.  But the tax authorities should help both groups, by eliminating all taxes on investment income.


Tags:

 
 
 

13 Responses to “Tight money doesn’t help savers”

  1. Gravatar of Morgan Warstler Morgan Warstler
    10. June 2013 at 10:13

    It sucks that we can’t solve this problem with trying to redefine and marginalize everything.

    Let’s grant that Tight Money Hurts Virtuous Savers

    Let’s further grant we want to help Virtuous Savers.

    Now then…

    Is there a way we could have QE4 and HELP Virtuous Savers directly?

    YES!

    The newly printed money could go exclusively to them and keep going to them exclusively until one of them says “I now have saved enough” and start to spend it.

    —-

    I mention this bc if we are going to be talking about a NGDP Futures market…

    That’s a brand new thing, something we we can from the getgo say “HEY, let’s benefit X over Y!”

    Since so many think that who touches the money first MATTERS, and even Scott admits it does marginally help Goldman Sachs…

    Let’s start off by sticking it to Goldman Sachs on this new thing.

    Let’s run NGDP Futures as the SMB owner hedge:

    http://www.morganwarstler.com/post/37140255525/who-gets-the-new-money

    As long as the house is losing just enough on every bet made by SMB owners…

    We’ll easily have the top 5% of SMB owners betting monthly, and there’s will be plenty of action to move the mark up or down towards 4.5%.

  2. Gravatar of Morgan Warstler Morgan Warstler
    10. June 2013 at 10:17

    Econ must admit that Big Government is an unfactored negative externality of Big Business.

    Just as being a Republic and not a democracy requires a frame work like the US Constitution…

    Being Free Market really does require a frame work that makes Big Business SUFFER MORE than SMBs from Big Government.

  3. Gravatar of Luis Pedro Coelho Luis Pedro Coelho
    10. June 2013 at 10:18

    There is one group which is helped by as low inflation as possible: those with nominal contracts who know their contracts will not get renegociated. Unfortunately, these are large and powerful groups.

    In Portugal, pensions above a certain value were grandfathered in, but do not get updated and probably never will. Most old-style public service contracts with semi-automatic raises were similarly grandfathered in, but no longer offered to young people. They will not be updated even if inflation rises.

    In Portugal, there is historical memory for this: in 1983-84, at the time of the last IMF bailout, public pensions were frozen, while inflation was ~20% for a few years. Those people never recovered the value of their pensions: they went from middle-class to making half of minimum wage in 4 years (½ of min wage was the minimum pension for a while).

    For these people, which Tyler Cowen might call the PIGS insiders, Draghi’s comments make sense: “with no inflation, they can buy more things.”

    You can argue that these were all political choices, but nominal rigidities in the political sector are very big too.

    *

    Unrelated, but did you see this Spiegel article?

    http://www.spiegel.de/international/europe/german-high-court-considers-challenge-to-ecb-bond-purchases-a-904745.html

    A few choice quotes on the German view of monetary policy:

    “Murswiek contends that the key difference between permitted monetary policy and prohibited national budget financing lies in the goal of a given initiative. ‘Does it safeguard price stability? This indicates monetary policy.'”

    “Monetary policy relies on psychology, and precision is generally damaging” (from the journalist themselves)

    In contrast, this one is pretty good:

    “After all, monetary policy tools are like instruments of torture: It’s often enough just to demonstrate their existence.”

  4. Gravatar of Doug M Doug M
    10. June 2013 at 10:36

    If you are a fixed-income investor, would you like to see higher rates or lower rates?

    A higer rate means more coupon income over time — a good thing…
    A higer rate also means that your existing fixed-income investments are earning a below market rate. Which means that the current mark-to-market is negative… a bad thing.

    If you are savy investor, you would have matched the duration of your fixed-income invesments with your time horizon. The negative impact of the price risk would be offset by the positive impact of higher re-investment income.

    Many fixed-income investors, particularly small investors have purchased investments with too short short a time horizon. They think that short is safe, because short has less price volitilty. But, being too short is in fact very risky. Don’t put 100% of your retirement savings in T-bills, or 1 year CD’s, if you need your retirement savings to last you for 30 years!

  5. Gravatar of Doug M Doug M
    10. June 2013 at 10:42

    Morgan,

    “The newly printed money could go exclusively to them and keep going to them exclusively until one of them says “I now have saved enough” and start to spend it.”

    I would never say that I have saved enough. I make a decent salary and save a significant percentage of it. If you doubled my income, my spending would increase a very small percent and my savings would increase significantly. If you gave me $1 million, I would assume that I am never going to receive such a windfall again and would expect to protect that endowment and make it work for me for the reaminder of my life. If you gave me $10 million, I would say that I can now afford a moderately more lavish lifestyle, and spend might spend an extra couple of hundred thousand dollars. If you gave me 50 million, I might think about living large, or I might endow a charitable organization, who would spend 5% per year.

  6. Gravatar of Don Don
    10. June 2013 at 10:51

    People don’t understand that interest on savings is market based. They think the govt. sets them like they set the increases in social security payments. If people could be educated they would understand that their savings would be more valuable in a vibrant economy.

    A tax on investment income is a poor proxy for a tax on wealth, which should make up half of all taxes. The other half should come from a sales tax. A 10/1 plan to save the country!

  7. Gravatar of Tight money doesn’t help savers « Economics Info Tight money doesn’t help savers « Economics Info
    10. June 2013 at 12:00

    […] Source […]

  8. Gravatar of maynardGkeynes maynardGkeynes
    10. June 2013 at 12:41

    @Don: Once the Fed sets the short term rate, I suppose that it could be said that the amount of interest banks pay is established through a market mechanism. If the Fed is setting a short term rate, which is what it says it is doing, I find it hard to look at that as market based pricing.

  9. Gravatar of ssumner ssumner
    10. June 2013 at 14:09

    Luis, Good point.

  10. Gravatar of Geoff Geoff
    10. June 2013 at 17:08

    “Tight money does not raise interest rates, at least over the relevant time frame for welfare considerations.”

    False. Tight money can raise interest rates for extended periods of time, just like loose money can lower interest rates for extended periods of time.

    It all depends on how much and to what extent the additional money printing finds its way to raising the prices of final goods, that coaxes lenders and borrowers into adding an inflation premium to interest rates.

    It does not follow from low interest rates that money *is* this or that, or even *has* been this or that.

    Never reason from interest rates

    “Interest rates in the eurozone today (0.5%) are almost certainly lower than they would have been had the ECB not adopted a tight money policy in 2011, raising rates from 0.75% to 1.25%.”

    Ah, so you’re not 100% extremist, only 99.9%. “Almost certainly” means not necessarily. And why not necessarily? Because we all know that when money supply inflation takes the form of primarily long term and continuous credit expansion, as it does in our monetary system, the downward pressure on interest rates can continue to overrule the upward pressure on rates from inflation premiums.

    It is reckless and playing people for labrats to conclude that the Eurozone should have had more inflation to raise interest rates, or could have done so. One cannot predict a priori which form the additional money spending takes. More credit and low rates, and delayed final goods price inflation, or less delayed final goods price inflation and higher inflation premiums?

    “That policy drove the eurozone deeper into recession, pushing rates even lower.”

    Tight money causes recessions for the same reason loose money now leads to central banks tightening money later on to avoid accelerating inflation, which would be necessary to maintain the distorted capital structure (see Australia’s money supply M3 throughout the 1990s up to 2008).

    “The same thing happened in America in 1937-40.”

    Notice how there is an evasion of the loose money during the 1920s, and 1933-1937. Tight money during 1937 followed loose money prior, and that loose money changed the capital structure to make it dependent on accelerating inflation once again, which the central bank refused to do.

    “That’s right, low rates can reflect tight money.”

    Notice the “can” here. Not 100%. Yet over and over again, we’re told that historical examples are low interest rates and tight money, not loose money.

    Which market monetarist is looking at total money supply growth during the 1920s?

    “Even low real rates. The low real rates in America today partly reflect the recent recession, which was caused by ultra-tight monetary policy in 2008-09.”

    Notice the term “partly” here. Not 100%. The hope is to attract straw men, while still retaining the belief, and hoping to convince others, that low interest rates means insufficient money printing.

    “Savers might also be helped by a lower rate of inflation. In practice, savers are hurt more by the drop in RGDP (and real interest rates) associated with tight money, than they are helped by the lower inflation.”

    The drop in RGDP is not only “associated” with “tight money”, if one does not only look at RDGP with current money looseness or tightness. Just like MMs are trying to convince others to look at current rates and past monetary policy, so too should they be trying to convince themselves that low RGDP today is “associated” with past loose money.

    Money is loosened. A boom ensues. Accelerating inflation is required to keep the boom going. The CB chooses save the currency and bring on the recession sooner rather than later, and we have a very strong historical “association” between loose money and low RGDP.

    “Economics is not a zero sum game. A smaller pie hurts both savers and borrowers.”

    Money printing is not an all sum game. Money printing has costs that neither you nor any other MM are seriously considering, other than paying lip service to it but not really believing it, and only reluctantly mentioning it when pressed: Non-market money printing distorts economic calculation. Money printing positively harms the economy despite the fact that it gooses various aggregate statistics, even though the crucual processes occur with relative pricing, as well as what is not easily observable (which is why it is ignored by the positivist oriented intellectuals). This not easily observable set of data, in which there are no constants, is the temporal structure of capital investment.

    Capital can be consumed despite the fact that RGDP can go up temporarily due to a money printing boom. But once the capital scarcity is discovered, there are corrections, which is typically followed by re-assessments, delays, layoffs, increases in money holding (which are positively beneficial in that it reveals bad investments the way a receding tide reveals who isn’t wearing bathing suits).

    “Tight money hurts saving nations in other ways. For instance, the ECB policy that caused eurozone NGDP to grow by 2.7% over the past 5 years (instead of the normal 22%), has dramatically worsened the sovereign debt crisis. As a result of this crisis, savers and taxpayers in high saving countries like Germany will suffer enormous losses.”

    There is no mathematical or physical law of the universe that says once debt expands, it can never contract.

    The losses were actually incurred during the boom, when money was loose. That’s when real resources were wasted, when they were misallocated. We can’t reverse time. Once real resources are invested poorly, that’s it, it’s an immediate loss. But these losses are not able to be revealed as soon as they otherwise would have been revealed, precisely because inflation gooses the nominal metrics in the malinvested lines and makes people believe they are wealthier than they really are.

    Every time there is mention of tight money now, it is bordering on intellectual dishonesty to ignore the loose money prior as having any negative side effects.

    “Thus the central bank should not help virtuous savers, nor should it try to help non-virtuous savers. But the tax authorities should help both groups, by eliminating all taxes on investment income.”

    Inflation still punishes savers in the short run, and both savers and spenders in the long run once the errors are revealed.

  11. Gravatar of jknarr jknarr
    10. June 2013 at 19:11

    The interest rate is simply a reflection of the second-best investment alternative.

  12. Gravatar of Edward Edward
    10. June 2013 at 20:49

    “precisely because inflation gooses the nominal metrics in the malinvested lines and makes people believe they are wealthier than they really are.”

    Then we should be workin g harder to get back to where we thought we were in terms of wealth, not less. Employment should be up, not down.

    “False. Tight money can raise interest rates for extended periods of time, just like loose money can lower interest rates for extended periods of time.”

    Now I know you are Major Freedom. No one else but him and Lord Keynes begin rebuttals of statements like robots with one word answers like “FALSE” 🙂

    “Inflation still punishes savers in the short run, and both savers and spenders in the long run once the errors are revealed.”

    As to the first part, only cash holders and people on fixed incomes. Stocks go up with inflation. Bondholders can sell their bonds for a higher capital gain if the bonds pay well enough in a period of low interest rates. So do derivatives. The second part of your sentence is the usual gibberish.

    “Money printing is not an all sum game. Money printing has costs that neither you nor any other MM are seriously considering, other than paying lip service to it but not really believing it, and only reluctantly mentioning it when pressed: Non-market money printing distorts economic calculation. Money printing positively harms the economy despite the fact that it gooses various aggregate statistics, even though the crucual processes occur with relative pricing, as well as what is not easily observable (which is why it is ignored by the positivist oriented intellectuals). This not easily observable set of data, in which there are no constants, is the temporal structure of capital investment.”

    Again the usual gibberish. It is ignored not only by positivist intellectuals, but by impartial people

  13. Gravatar of Columnist confusion about the Fed, QE and Janet Yellen | AEIdeas Columnist confusion about the Fed, QE and Janet Yellen | AEIdeas
    11. November 2013 at 07:10

    […] 4.) And as for Will’s point about punishing savers with low interest rates … well, I will let Scott Sumner handle this one: […]

Leave a Reply