Sunday, 18 October 2015
Permanent zero rates would not be a disaster.
This Financial Times article claims that if zero rates still prevailed come the next recession, that would be a disaster because central banks would not be able to cut rates with a view to imparting stimulus. Actually various economists, including Milton Friedman, have advocated permanent zero rates.
My response to the FT article in the comments after the article was as follows.
The above article claims that “At that point, the world economy would be on the precipice of disaster….”. Oh la la: what are we going to do, children?
This is a problem which most advocates of Modern Monetary Theory find about as difficult as making a cup of instant coffee. For those not acquainted with MMT thinking (which isn't much different from Keynes’s thinking), here is what I’m 95% sure is the standard MMT answer to the problem. (I’ve had conversations with other MMTers almost every day for the last five years, so I’ve a pretty good idea what they think.)
1. Government / the state owns a device called the “printing press”: it can print and spend any amount of money it wants anytime, as Robert Mugabe demonstrated. (Curiously numerous so called “professional” economists seem to be unaware of the fact that the state owns a printing press, but then ignorance is common among economists.)
2. Instead of increased spending, the state can always increase its “net spending” by cutting taxes rather than by increasing public spending. Obviously that’s the option that right of centre governments tend to implement.
3. Going as far as Mugabe is clearly undesirable, however printing and spending enough to bring full employment is clearly desirable.
4. The state can if it wishes print and spend so much that the resulting excess demand has to be reined in via artificially increased interest rates. To implement excess demand, and then cancel some of it via increased interest rates is arguably a strange thing to do, however there may be arguments for doing that. Personally I don’t think there are, i.e. in common with one of the leading MMTers, Warren Mosler, I favor permanent zero rates. Milton Friedman in 1948 also advocated a permanent zero rate (i.e. no government borrowing).
5. The main obstacle to bringing about full employment is a collection of economic illiterates known as “politicians” who seem to be under the illusion that the state needs to borrow before it can spend. (Back-street counterfeiters would split their sides at the idea that someone in possession of a printing press needs to borrow money.)
6. So in the event of interest rates still being at zero come another recession, far from that being a “disaster” as the above article suggests, there is no problem in principle whatever: all we do is use the printing press to increase public spending net of tax.