NIRP: The Marshmallow Test?
In a 1936 essay in Esquire Magazine, F. Scott Fitzgerald offhandedly said that...
Not unrelated, some quoted excerpts from Stefania Perrucci's cogent, compelling and must read missive "Rates, portfolio preferences, money creation and aggregate demand" followed by our Natterings.
As we are oft reminded by a mentor, the manner in which a debt was financed, and more so, the economic purpose for which it was incurred or contracted, is of in estimable value in evaluating its impact viz. financial transactions are not random. CB's incognizance of this fact...
Common misconceptions: Low interest rates reflect and/or will induce greater demand for credit (loan funds), generate economic growth and spur aggregate demand.
Derivative: the stock (money supply), flows (turnover) and aggregate demand (R-Gdp) of an entire economy can be controlled by targeting interest rates; interest rate cuts are insurance against economic downswings; the Phillips Curve (NAIRU), we could go on with a litany of errors...
These are just a few fundamental misconceptions or mistakes which permeate schools of economics and their acolytes indoctrination. False doctrine, bad signals (econometrics to anchor expectations) and the resulting misinterpretations mask cause, affect and effect.
Until those major "telemetry" issues are cleared up, accurate, effective and efficient navigation will be difficult to say the least? Any central banking by "braille" might infer that one would have more hope with Helen Keller at the helm? But I ramble...
To infer that interest rates are the sole or most influential determinant in market clearing prices and the economy, ignores a multitude of other significant factors i.e. income changes and autonomous demand are much larger influences in driving both investment and saving decisions.
Truths: Demand deposits are the result of lending, not the other way round. Incomes and savings are a consequence of credit based financing and productive investment, not the other way round. Interest rate cuts are ex post warnings.
Since dot.com, the FOMC has been r-ZIRP, since GFC QE r-NIRP. ECB QE r-ZIRP, r-NIRP since 2009. Japan has been QE r-ZIRP r-NIRP since 1995. QE, ZIRP, NIRP has not worked as the theory goes: increase demand for loans, incentivize productive investment and foster consumer spending.
In fact, accommodation, reserve and interest rate targeting have resulted in: disintermediation in interbank loans, market making, productive economic lending, stagnation of real incomes and a contraction of economic capacity.
And now central banks want to repeat the very steps which have lost decades in Japan, and a decade in the EU and US? For the low interest rate addict, ADD afflicted and cognitive dissonant, step into the hole again much? But I digress... back to our title and said marshmallow test....
In psychology, cognitive dissonance is the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, ideas, or values at the same time, or is confronted by new information that conflicts with existing beliefs, ideas, or values. Sound familiar? There's always a catch...
Those who through their own bias, consciously choose to ignore or not reconcile information which conflicts with current beliefs viz. the state of having inconsistent thoughts, beliefs, or attitudes, especially as relating to behavioral decisions and attitude change; walk through life with blinders on and in a blissful state, one of misinformed ignorance. Along those stubborn biased lines...
like eating the marshmallow of rate cuts, ZIRP, NIRP and QE. Blissful indeed and Santayana was right.
Recommended Nattering:
For What Ails Our Economy:
The Nature Of Transactional Velocity?
For Seeking Knowledge and Truth:
Man's Got To Know His Limitations?
“the test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.”Can economists and CB's (central banks) advocating ZIRP, NIRP monetary policy pass the marshmallow test?
Not unrelated, some quoted excerpts from Stefania Perrucci's cogent, compelling and must read missive "Rates, portfolio preferences, money creation and aggregate demand" followed by our Natterings.
"monetary policy is more effective in shifting portfolio preferences than incentivizing consumption or productive investments in the real economy."Indeed as through monetary policy, ZIRP, NIRP, IOER (remuneration of IBDD's) and ON RRP all which affect NIM's; and regulatory induced Basel, LCR mandates which affect balance sheet capacity, the resulting shift in "liquidity" preference has disintermediated the commercial and non banks. Derivative...
"Negative real rates have some distributional effects (to the benefit of debtors, which may increase propensity to consume) but also contribute to financialization and renter’s delight."QE and the aforementioned "preferences" encourage and have channeled savings, credit and investment into financialism as opposed to real economic endeavor. How so?
"Those portfolio preferences are not directly linked to credit creation or decisions in the product economy"Not being linked as such has deleterious macro (secular "strangulation": diminished capacity through arrested stocks and flows) and pernicious socio-economic (income level) consequences. Correlated...
As we are oft reminded by a mentor, the manner in which a debt was financed, and more so, the economic purpose for which it was incurred or contracted, is of in estimable value in evaluating its impact viz. financial transactions are not random. CB's incognizance of this fact...
"Why is it so difficult for monetary policy... It is a matter of interest rates not being the only, or the most important... cannot be changed by rates in the money economy alone... the emphasis on the monetary mechanism of low rates, and QE as well, may be part of the problem."We concur. Many forget, interest rates are the cost of loan funds, not the price of money, which is reflected in FX pair rates and indices. Thus, interest rates are oft conflated with the price of money.
Common misconceptions: Low interest rates reflect and/or will induce greater demand for credit (loan funds), generate economic growth and spur aggregate demand.
Derivative: the stock (money supply), flows (turnover) and aggregate demand (R-Gdp) of an entire economy can be controlled by targeting interest rates; interest rate cuts are insurance against economic downswings; the Phillips Curve (NAIRU), we could go on with a litany of errors...
These are just a few fundamental misconceptions or mistakes which permeate schools of economics and their acolytes indoctrination. False doctrine, bad signals (econometrics to anchor expectations) and the resulting misinterpretations mask cause, affect and effect.
Until those major "telemetry" issues are cleared up, accurate, effective and efficient navigation will be difficult to say the least? Any central banking by "braille" might infer that one would have more hope with Helen Keller at the helm? But I ramble...
To infer that interest rates are the sole or most influential determinant in market clearing prices and the economy, ignores a multitude of other significant factors i.e. income changes and autonomous demand are much larger influences in driving both investment and saving decisions.
Truths: Demand deposits are the result of lending, not the other way round. Incomes and savings are a consequence of credit based financing and productive investment, not the other way round. Interest rate cuts are ex post warnings.
Since dot.com, the FOMC has been r-ZIRP, since GFC QE r-NIRP. ECB QE r-ZIRP, r-NIRP since 2009. Japan has been QE r-ZIRP r-NIRP since 1995. QE, ZIRP, NIRP has not worked as the theory goes: increase demand for loans, incentivize productive investment and foster consumer spending.
In fact, accommodation, reserve and interest rate targeting have resulted in: disintermediation in interbank loans, market making, productive economic lending, stagnation of real incomes and a contraction of economic capacity.
And now central banks want to repeat the very steps which have lost decades in Japan, and a decade in the EU and US? For the low interest rate addict, ADD afflicted and cognitive dissonant, step into the hole again much? But I digress... back to our title and said marshmallow test....
In psychology, cognitive dissonance is the mental stress or discomfort experienced by an individual who holds two or more contradictory beliefs, ideas, or values at the same time, or is confronted by new information that conflicts with existing beliefs, ideas, or values. Sound familiar? There's always a catch...
Those who through their own bias, consciously choose to ignore or not reconcile information which conflicts with current beliefs viz. the state of having inconsistent thoughts, beliefs, or attitudes, especially as relating to behavioral decisions and attitude change; walk through life with blinders on and in a blissful state, one of misinformed ignorance. Along those stubborn biased lines...
"(More) negative rates, if you think they will help, i.e. if you think that they are an effective tool; monetary policy choice based on a view; based on an opinion; believe; convinced; rational; in their minds... CBs (central banks) do not know where the lower bound is or if it has been crossed already. "Again, we concur. Despite having been there, the CB's do not know, and there you have it. At the end of the day, rather than F. Scott Fitzgerald's first rate intelligence or "genius", it is cognitive dissonance which prevents one from knowing any better, and committing the same mistakes, over and over again...
like eating the marshmallow of rate cuts, ZIRP, NIRP and QE. Blissful indeed and Santayana was right.
Recommended Nattering:
For What Ails Our Economy:
The Nature Of Transactional Velocity?
For Seeking Knowledge and Truth:
Man's Got To Know His Limitations?
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