Saturday, 12 November 2016

My original (?) idea as to why the optimum rate of interest is zero.

I argued in two recent posts on this blog that the optimum rate of interest is zero. See here and here. The first post argued that my idea was the same as the basic idea in a paper by Warren Mosler and Matthew Forstater (published in 2004) and entitled “The Natural Rate of Interest is Zero”.

My basic argument is that the state should issue enough money into the private sector or the economy generally to induce people to spend at a rate that brings full employment, but it should not issue so much that it then has to borrow some of that money back at interest with a view to constraining demand: that results in an artificial increase in the rate of interest. At least zero should be the rate of interest to aim for: that’s not to say, given the constant shocks that hit economies that zero will always be obtained.

However in a recent exchanged of comments with “JKH” on the Worthwhile Canadian Initiative blog, JKH claims that my above argument is not the same as Mosler and Forstater’s. Incidentally I’m not sure exactly who JKH is, but I seem to remember he taught at the Manchester Business School in the UK at one point.

Anyway, if JKH is right, that means my idea might be original. On the other hand Warren Mosler tells me my idea is the same as his. So I’m in a quandry at the moment – untill I have time to go thru Mosler and Forstater’s paper in detail again. And I don’t see myself having time – ever….:-)

Incidentally, the above is not to argue that the rate charged for mortgages etc should be zero: loans between private sector entities will always involve risk, so for that and other reasons, such loans will always be at a rate which is ABOVE zero.

P.S. (28th Nov. 2016).    Mosler sets out the idea that governments should borrow nothing because to do so distorts interest rates in the second last para of a Huffington article entitled “Proposals for the banking system.”

He says, “I would cease all issuance of Treasury securities. Instead any deficit spending would accumulate as excess reserve balances at the Fed. No public purpose is served by the issuance of Treasury securities with a non convertible currency and floating exchange rate policy. Issuing Treasury securities only serves to support the term structure of interest rates at higher levels than would be the case. And, as longer term rates are the realm of investment, higher term rates only serve to adversely distort the price structure of all goods and services.”
I agree that government borrowing artificially raises interest rates, but don’t see that the “term structure” is necessarily distorted. But maybe I’ve missed something.



  1. Can UK interest rates differ substantially from rates in the US and rest of world?
    Presumably you are also advocating strict capital controls. Could these be effective? What would the costs an benefits be for such controls. Would the City of London be castrated as a financial centre?

  2. I don't see why what I'm proposing would require capital controls with a view to having interest rates different in one country relative to another. My proposal is that demand is regulated by trying to pitch the amount of state issued money at a level that brings full employment. As to interest rates, they can be left to market forces.


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