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.
(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.