Mark Carney made a speech in the USA today in which he said:
For the past thirty years, a number of profound structural changes in the world economy have pushed down on the level of world real interest rates perhaps by as much as 450bps. Researchers at the Bank of England have estimated a decomposition of these changes, suggesting, in declining order of importance: slowing potential growth, the rise in saving due to demographic forces; higher credit spreads, lower desired investment given a lower relative price of capital, changes in income distribution; excess saving in emerging markets, and declining public investment. Collectively these factors could account for the lion's share of the 450bp fall observed in the past 30 years and suggest that global real rates may remain low — perhaps around 1% — in the long term.
(For those not familiar a bps is 1/100 of a percent, so 450bps is 4.5%)
Four things are important about this. First, there is a clear signal here that if rates rise in the UK it is not going to be my much: assuming inflation remains low (and I think that will be the case) he thinks to 1% in real terms the long term, which may be little more than that in actual terms.
Second, that implies that in effect monetary policy - which requires scope for changes in bank rate - is dead as a tool for delivering economic policy. That blows a massive hole in the armoury of most macroeconomists who hanker for a return to 'normal' so that they can pretend that their theories work again.
Third, this means that fiscal policy is now the only tool in town. Call it People's Quantitative Easing if you like.
Fourth, this leads to the question, what role is left for Central Banks in economic policy? (Hint: the answer embraces the words 'not a lot')
To put it another way, all those who hanker after the old 'normal' had better think again: the new 'normal' is unconventional fiscal policy.
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the real interest rate is code for debt burden capacity. What Carney is saying in a polite way is that there’s very little capacity to bear more debt (plus interest). Which is why people/migrants/refugees are so welcome nevermind the hands of the VSPs in destroying the places where people/migrants/refugees came from in the first place
Remember, interest paid if spent is taxed and that is then spent and taxed, etc
Bond Interest is just a type of welfare payment (to rich people and to top up private pensions.) The attribution of magical properties to it is odd.
Just set interest rates at zero, as Mosler and other MMTers suggest.
What would happen if no one did anything? Ie. No monetary policy. No monetary policy tools. Would the world fall apart?
No
Because we have fiscal policy
So how about no monetary policy, no QE, no interest rate targeting, no inflation targeting, no money printing. Just allow it to be a given, leave at current levels and allow everyone to adjust to that. And then adjust other things. Seems like a sensible proposition to me. Makes the world less complicated.
Oh, and walk away from responsibility?
No thanks
Only a non-economist could think that a sensible proposition. If we did it we would see maniac economic swings that would dwarf the 2000-2008 boom-bust. The whole reason nation states came up with monetary and fiscal policy as a way of managing their economies, is because of the destructive maniac swings that existed before such policies.
Moreover, given the economic fragility that specialization, long supply chains, and complexity engenders into economies, I very much doubt any economy could survive for very long as a modern technologically advanced civilization if they followed your suggestion. The fragile web linking everyone and everything together would be smashed to pieces by the continual economic swings that would occur.
I quite fully agree.
Would just like to add that Marx predicted a tendency towards a falling rate of profit in developed capitalism – seems to me this is playing out now.
Is there any need for a central bank any longer?
Combine fiscal and monetary within the treasury and make sure transparency is a priority.
It would take away the excuses for their failure to maintain sufficient aggregate demand in the economy to fully employ available real resources.
A blog on this will follow…
I’ve been asking the same for a while, why is the world riding on central banks, it’s just daft. Looking forward to your input on this.
Given the implication and revelation of that Financial Times chart that you posted the other day, it might be construed that the current role of central banks is to provide financial markets with the liquidity that they need to stay afloat.
Or it seems like that’s the way its turned out.
Only problem there is that politicians then have direct access to the printing press. Personally I like the way Positive Money, Richard Werner and the NEF solve that problem (see p.10-12 link below), which is to have the CB decide on the AMOUNT of new money to be created while politicians decide on HOW TO ALLOCATE the money. But that’s not to say I agree with all Positive Money’s ideas: I certainly don’t.
http://b.3cdn.net/nefoundation/3a4f0c195967cb202b_p2m6beqpy.pdf
The only problem with that is it shows no understanding of how money works
Money is debt
Not a neat pile of notes
I set the amount of my 8 year olds pocket money, he gets to allocate it…Is my household democratic? no it isn’t and neither is Positive Moneys ‘Money Creation Committee’.
In fact looking at CB’s track records on predications (BoE tightening in July 2008 for example)I just don’t see where the confidence comes from that they would be any better.
I admit I do not share the idea of a money creation committee
In fact, I have never understood what it is about. Technically I think it misses the point, entirely and somehow assumes there is a stock of money somewhere
There isn’t
Monetary Policy = corporate welfare in the form of Bond Interest.
Hence my argument for an alternative
“Third, this means that fiscal policy is now the only tool in town. Call it People’s Quantitative Easing if you like.”
Hang on. Traditional fiscal stimulus consists of extra spending when needed on a WIDE RANGE of public sector stuff (and/or tax cuts). In contrast PQE consists of extra spending just on infrastructure (despite the fact — hilarious this — that relevant skills aren’t available).
I agree that if interest rate adjustments are no longer an option, then something else will have to take its place. But the above “call it PQE” point needs a bit of re-thinking.
Sorry if it appeared I dismissed the rest
I did not mean to do so
Remember that you have devised is a monetary/fiscal hybrid (for want of a better term). Its best not to confuse us too much in that regard – or leave yourself open to those who would quote you misleadingly.
And where is this ‘hilarious’ skills shortage, Sanjay? In your suburb, the UK, the EU generally? Given the level of skilled unemployment – and the limits of Richard’s proposal, I’d be inclined to think that your suggestion is anecdotal, questionable and anything but hilarious.
Carney (and all CB heads) remind me of the priests in Galileo’s day, describing ever-more-complicated formulas that prove the Earth is at the center of the universe. The falsifications are almost too numerous to count. “Changes in the world economy…have pushed down interest rates”, well, no, hyper-aggressive CB interventionism has. We all acknowledge that price fixing is a terrible idea, yet we stand by while the most important price of all, the price of money itself, is manipulated by monetary Politboros full of Ph.Ds whose forecasts have been uniformly and laughably incorrect. Worse, we persist in believing the fiction that such policies are driven by what’s happening in the “real” economy. Reagan’s former budget director savages this fiction with unassailable facts that no central banker can refute and even a moron can understand:
http://davidstockmanscontracorner.com/the-central-bankers-malodorous-war-on-savers/
So now we get GFC Mark 2 and the currency wars, where CBs somehow try to make their nations richer by making their people poorer. You just cannot make this stuff up.
As Lenin said “what then shall be done”? Well we could start by separating money and credit, so every (taxpayer bailed-out) banking crisis is not automatically also a monetary crisis. A world of peace and prosperity is possible but only if we depose the charlatan monetary priesthood.