Monday, 4 June 2018

The merits of a permanent zero interest rate.

Milton Friedman and Warren Mosler (founder of Modern Monetary Theory) advocated a system where government and central bank issue enough base money to keep the economy working at capacity but do not pay interest to those holding that money. I.e. they advocated a system where government does not borrow. And that amounts to a permanent zero interest rate policy.

Friedman did not produce very detailed reasons for that idea and I find Mosler’s reasons a bit convoluted and hard to follow. So I’ve written a paper setting out an argument for a permanent zero interest rate policy which is essentially very simple: it’s that none of the arguments for government borrowing stand inspection, thus there should be no such borrowing, and that (to repeat) equals a permanent zero interest rate set up.

Having said the argument is basically very simple, actually demolishing the large number of alleged reasons (or “lame excuses”) for government borrowing is not a simple matter: it requires a few thousand words.

The paper is 99% complete, and the draft as it stands at the moment is here. Comments are welcome. I’ll submit it to a journal – probably this week.


P.S. (9th June). Paper now submitted to a journal, though with significant changes to the version linked to above.


P.S.  – 27th June 2018.

The paper got turned down by the journal. I’ve done an improved version. See here.
The basic ideas in the (hopefully) improved version are the same. There are a two or three extra references and two or three extra minor points. In contrast to those minor points, there is a relatively important extra point namely that I’ve reconciled the ideas in the paper with full reserve banking (section 15).  More specifically, I’ve tried to show (very briefly) that the ideas in the paper are fully compatible with full reserve, or to put it more strongly, that the ideas in the paper and the ideas behind full reserve reinforce each other.


  1. I agree with you that the government should not normally borrow and/or pay interest on that. But there might be times, like a war, when the government needs most people to reduce their current consumption so that the government can inrease its own consumption of real resources. Maybe during certain national emergencies it is more reasonable for the government to solicit volunteers (bond buyers) to reduce their own current consumption with the promise of increased future consumption rather than to raise taxes on everyone? Some people might not be as able to cut their current consumption as easily as others and the tax code may not be able to distinguish that very easily. This potential reason for borrowing depends on the bond buyers actually reducing their current consumption though. I think MMT holds that government debt issuance does not usually reduce the potential of private sector consumption, for a variety of reasons.

    1. Great minds think alike: that's exactly what Milton Friedman said - i.e. that government borrowing made no sense, except possibly during a war.

  2. What Jerry Brown says. I was thinking you might need to outline what MMT says about current bond sales for a currency issuing nation like UK too. Using the example of total warfare does bring the question home. Government orders the planes and tanks - then invites middle class to buy bonds to 'pay' for war equipment. Keynes, 'issue war bonds of course'.What would happen to inflaflation without bonds and rationing if the whole upper middle class tried to buy the only two jars of jam left on the grocer's shelf?
    I always opt for this to discuss MMT with Daily Mail reader friends. I take from MMT, that in peace time, UK government issues bonds as the middle class prefers this method of inflation control to higher taxation.
    Still guv bonds can be set at 0%, even arguing the above, I assume?

    1. Good point. To put your point (as I understand it) another way. During all out war, government forcefully stops the output of luxuries, and forces luxury producers to turn to making armaments etc. Thus using bonds to fund the war is arguably a waste of time, since there is nothing much for the rich to buy. However, I suspect that government borrowing does help a bit in a war.

  3. I agree that rates should be zero, but not with your reasons.

    I question the idea that GDP growth should be a public policy priority. I also don't think maximum employment or nominal price stability should be the monetary policy objectives of the Fed.

    In my world the Fed would issue dollar-denominated, inflation-protected deposit accounts for individuals, and put a basic income in the accounts. You could also direct other income streams to the account to inflation-protect them.

    Public policies would encourage individual and ad hoc group innovation, without needing to involve firms or prices. Volunteerism and citizen science would be encouraged. Government should use its power to create money so we can choose to insulate ourselves from markets and their numerous failures.

    1. Thanks for your comment. I’ll take your points in turn. First I can’t see what’s wrong with economic growth (within environmental constraints). Everyone wants more leisure / increased income, don’t they? So what’s wrong with increasing output per person-hour?

      Re full employment not being a desirable object, I can’t see what’s wrong with trying to provide jobs for those who want jobs.

      Re inflation protected accounts, I’ve no big objection to that. That does not clash with my paper. Re basic income, I’ve no objection to that either. Again: no clash there.

      “Government should use its power to create money so we can choose to insulate ourselves from markets and their numerous failures.” Market forces are just INEVITABLE: they played a big role in the old USSR soviet economy, even though that economy was supposed to have been centrally planned – according to a book I read on the subject. Plus I go along with the conventional view held by economists, namely that markets do have specific and big defects, while at the same time they work very well in some areas. Thus the intelligent policy there is to let markets work where they work well.

    2. "Thus the intelligent policy there is to let markets work where they work well."


      "Market forces are just INEVITABLE"

      But animals don't have markets, and gift economies among humans don't need a medium of exchange, unit of account, or quid-pro-quo contracts.

      "what’s wrong with increasing output per person-hour?"

      I've seen logging and mining that is counted as increasing output. I see planned obsolescence and upgrade cycles that induce consumers to buy new phones, or computers, or cars, every few years. Salesmen try to sell me things I don't need, often lying, and if they succeed it counts as increasing output. If I quit my job and get healthy thus consuming less healthcare, I am a drag on output. But I'm healthier.

      > Everyone wants more leisure / increased income, don’t they?

      I think that is a normative assumption.

      I want to pursue ancient knowledge which teaches that the more you know, the less you need.

      The more we know, the less space and energy we need to compute something, for example.

      But if chips become more efficient, economics teaches us that in order to grow output you must sell more. So you hire a lot of salesmen, and deliberately make products that aren't upgradeable. Focusing on output as measured by NIPA with all their imputed data ignores the huge amounts of waste that accompanies GDP growth. Why can't Amazon collect and reuse boxes? Why is it cheaper to cut down new trees?

      Using GDP growth to measure well-being or progress is a mistake. In my view, we should ignore GDP when making public policy goals. I think you place far too much faith in imputed data that claims to measure GDP, anyway.

      To be intellectually honest, GDP measurements should report confidence intervals. The reason they don't is that their error terms multiply as they use surveys and regressions and re-use imputed statistics in calculations for other statistics. If they carried the "+ e" term along, I bet you their GDP measurements would be plus-or-minus 50%, or 100%, or more.

      Thus my public policy goals are knowledge advancement, not to maximize output and employment.

      Hayek advanced the idea that prices best measure the value of knowledge. I disagree. I think money is an inappropriate measure of knowledge because knowledge is not debited from the teacher when transferred to a student. By accounting convention, money is debited from one account when transferred to another.

      To make money act more like knowledge, I see finance as having evolved tools to expand balance sheets on both sides and design bets where each bettor acts as if they won the whole pot until the bet is decided in the future; then the loser pays from insurance. The insurance pays using money that is a bet it acts as if it already won, but won't be decided for a while. When that bet is decided, if the insurance company loses, it too can pay out of insurance. Thus the endless cycle of putting off final settlement for another day continues indefinitely, and finance skirts the conservation of money law underlying mainstream economics.


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