Is the US getting addicted to extremely low interest rates ?
Uber wonk Matt O’Brien writes about The “weird way people talk about zero interest rates”
He discusses Gillian Tett discussing her conversations with those who O’Brien calls the “the masters of the universe.” They don’t like the Fed’s extremly low interest rate policy. They can’t claim that loose monetary policy has causes excessive inflation, so they have to be creative. I don’t think they did a very good job.
“they think the real risk, as Tett puts it, is that ‘low rates become ingrained into the consumer and corporate psyche” and “become increasingly hard for policymakers to remove.'”
I guess the word “psyche” is usefully abstract. I can’t prove that this hasn’t happened without reading consumers’ and corporations’ minds (especially hard in the case of the corporations which don’t, technically, have a psyche. However, it is possible to see if housholds or corporations (as 2 wholes) are becoming addicted to extremely low rates. An entity is dependent on low rates when it builds up debt which it can’t service at higher rates.
So has the period of extremely low interest rates lead to a dangerous buildup of debt ? The answer is obviously no (especially to masters of the universe).
Here is the ratio of the debt of households and non-profits to GDP
This is a household (and non-profit) sector kicking the debt habit, or, more exactly, being kicked by the debt built up before the extremely low interest rate policy started. The effect of extremely low rates engrained in consumers’ psyches is that they borrow short term or at flexible rates. This was a problem back when safe interest rates were well above zero. It isn’t now.
How about the corporate psyche balance sheets ? Here is a graph of total liabilities o and financial assets of non financial corporations
(sorry I am having some trouble with browsing to add a new series in new Fred so financial assets are calculated as total assete minus non financial assets). Notice that they have higher financial assets than total liabilities. This is not a non financial corporate sector addicted to extremely low interest rates. Also note that liabilities were greater than assets when the Fed started extreme monetary policy.
This is an economy in which households are deleveraging and corporations are building up financial assets in spite of extremely low interest rates. Obviously O’Brien is right
The mistake that Wall Street, and even some famous economists, make is getting this causality backwards. They think that lower rates are what’s messing up the economy, rather than reflecting the fact that it’s already messed up, and that raising rates will make this better.
I only doubt his polite assumption that it is a sincere mistake. Either they are fools or they are trying to fool us. I know how I’d bet.
“They think that lower rates are what’s messing up the economy, rather than reflecting the fact that it’s already messed up, and that raising rates will make this better.”
This is the problem with equilibrium thinking, it concentrates only on levels on not on the path to those levels. A more dynamic economics would not make this mistake.
I keep saying that economics is a special case of ecology (human ecology). Doing economics, the way we do it is like trying to do population dynamics without a model of deaths or of births.
IMHO, QE, only value is force risk taking in the Market.
Meanwhile in Canada…
“Bank of Montreal lowers interest rate on 5-year, fixed mortgage to 2.79%”
http://www.cbc.ca/news/business/bank-of-montreal-lowers-interest-rate-on-5-year-fixed-mortgage-to-2-79-1.2997939
Why would interest rates rise, if most people’s income doesn’t rise and is unlikely to rise in the foreseeable future, and when there’s a decent chance that job loss and restructuring could interrupt stable income streams through no fault of the borrower’s?
The talk by the Fed of raising rates seems to be possibly having a positive effect on investment by non-financial corporations.
http://blogs.wsj.com/economics/2015/03/16/despite-oil-fears-spending-by-major-businesses-set-records-in-december/?mg=blogs-wsj&url=http%253A%252F%252Fblogs.wsj.com%252Feconomics%252F2015%252F03%252F16%252Fdespite-oil-fears-spending-by-major-businesses-set-records-in-december
“and in fact, business investment by major companies overall hit new records in December.”
It’s partly a game of incentives… Let’s see if it works.
i wonder if “deleveraging” means this
a farmer going bankrupt…homeless bankrupt…because the recession (and dock strike) left him unable to pay his loans, which appear to be a normal and necessary part of farming.
somehow the banks seem to profit from this.
re “Reason,” I think he is probably right. In the real world, if not economics textbooks, everything causes everything else. you might have a chance of understanding what is happening in the short run if you look for proximate causes. i think fortunes are made on betting on short term imbalances in causes-effects. But economics is only good for “predicting” long term if all else is equal marginal relationships. meanwhile that “good for the economy” policy leaves millions of workers (and farmers) on the street for long terms on the scale of human life.
“incentives” is the act of faith in pushing on a string. do we really know what the “incentives” are for too big to fail banks and corporations? frankly i don’;t think we do.
Just another person thinking rates need to “normalize”.
http://finance.yahoo.com/news/jim-grant-heres-why-fed-120146777.html
I think rates should be normalized. By changing the path of government spending and so increasing inflation expectations.
Reason
if i understand that…. yes. i wish i thought of it myself.