A question on negative interest rates has arisen in response to Negative Interest Rates: Have They Backfired Already?
Reader Tim stated “I really don’t see why negative rates could not
occur naturally especially in a deflationary environment“.
In my article I stated upfront “Anyone with an ounce of common sense
knows that negative interest rates cannot occur naturally, can only occur
with government or central bank intervention, have nothing to do with free markets,
and must fail eventually.”
In light of Tim’s question, let’s explore that idea.
On June 12, 2016 the Wall Street Journal reported Fed Decision Makers Wrestle With
So-Called Natural Rate.
According to the textbooks, this so-called natural rate is the
inflation-adjusted rate that’s consistent with the economy operating at its
full potential, expanding without overheating. Also known as the equilibrium
or neutral rate, it balances savings and investment.
The natural rate can’t be observed directly; the Fed knows it has been
reached only by how the economy responds. “It’s like discovering Pluto: you
can only see the effect of the gravitational pull,” said Eddy Elfenbein, an
investor and blogger at the site Crossing Wall Street, comparing it to the
dwarf planet whose existence was inferred from the orbits of Uranus and
Neptune.
“We’re seeing no pickup, none whatsoever, in the natural rate even as the
economy has gotten back to full strength,” John Williams, the San Francisco
Fed president who has spent years studying it, said in a recent interview
with The Wall Street Journal.
“I think the current level of neutral or normal rates is pretty low,” Fed
Chairwoman Janet Yellen said in Philadelphia last week. She expects it will
rise over time, but said “that is something we’re uncertain about and have to
find out over time.”
Fed Vice Chairman Stanley Fischer this year predicted the natural rate
will remain low for the next few years, and warned that factors governing the
rate are “extremely difficult” to forecast.
“The answer to the question, ‘Will [the natural rate] remain at today’s
low levels permanently?’ is that we do not know,” he said in a January
speech. “Eventually, history will give the answer.”
Fed Nods to Negative Rates, Hurdles and All
On February 10, the Wall Street Journal reported Fed Nods to Negative Rates, Hurdles and All.
Federal Reserve Chairwoman Janet Yellen waded into fraught territory
before Congress, suggesting the central bank could turn to negative interest
rates in an economic downturn despite legal and other uncertainties.
When questioned about the possibility, however, she said it could be done
if necessary.
“I’m not aware of anything that would prevent us from doing it,” Ms.
Yellen said.
No Laws Prevent Stupidity
While nothing legally might prevent negative rates, please note that there
are no laws that prevent stupidity.
With that thought, let’s return to Tim’s question.
Negative Rates Logically Impossible
Negative rates are logically impossible because they imply a negative time
preference. That statement may be over the heads of most, so let me phrase it
a different way.
“Negative interest rates imply that one would rather have 90 cents
tomorrow than a dollar today!”
Phrased that way, negative interest rates are logical idiocy. I am not
trying to be harsh on readers like Tim. Indeed, I am thankful he brought the
question up.
It’s easy for many readers to fall into the trap of listening to
mainstream media.
However, Janet Yellen (or any economist) is either a clueless idiot or a
big liar or both, to ever state or imply that time preferences can ever be
negative or even zero.
Yet, this is what we are dealing with.
Natural Rate
In regards to the “natural rate“, economists note that it can
only be observed, not set. I agree. Yet central planner fools at the Fed
(central banks in general), all think they can set the natural rate.
The Bank of Japan and the ECB illogically set the rate negative, with
detrimental consequences.
The Fed sponsored asset bubbles in 2000, 2007, and again now in search of
the “natural rate”.
Frustration
This is all so obvious, it’s beyond belief. And it has been going on for
years. Yet, every Humphrey Hawkins meeting (when the Fed Chair addresses
Congress and Congress gets to ask the Chair questions), the Congressional
questions and comments have been beyond lame.
I would have crucified Bernanke and would do the same with Yellen. It’s a
trivial matter to do so actually.
Time and time again, Congressman Ron Paul launched into worthless tirades
instead of asking a series of pointed questions that would have trapped
Bernanke no matter how Bernanke responded.
Paul fans cheered. But with every one of his wasted tirades, I nearly thew
up at the lost opportunities.
Here’s the bottom line on Paul: He preferred hearing himself talk than
asking a series of questions sure to make Bernanke look like an idiot.
In the doubtful chance that any Congressman or Senator is interested in
hitting Janet Yellen hard with a series of no-win questions for her as
opposed to wasting time in meaningless rants, please get in touch.
Mike “Mish” Shedlock
