The Religion Known as Economics

September 20, 2015
Could negative rates be next on the Fed's policy menu?

"Maybe we should have done three times as much QE, but nobody knows what three times QE would have done. By contrast, negative interest rates is right there in standard theory," Kimball said, which means that we can predict its effects by using basic economic models and beliefs.

Praise be! Believe it!!

Right now, when a $100 bill is deposited into an account, $100 is added to that account. However, a central bank could create a situation whereby that $100 deposit only led to a $98 increase in the account.

There won't be ANY unintended consequences from that, let me assure you! People will be filled with optimism and good cheer! Consumer spending will increase dramatically with this new "tax" on savings! Believe it!!

Or not.

March 2, 2015
Bill Gross sees negative rates turning investors into Oliver Twist

“Pension funds and insurance companies are perhaps the most important examples of financial sectors that are threatened by low to negative interest rates. Both sectors have always attempted to immunize their long term liabilities (retirement, health, morbidity) by investing at a similar duration with an attractive yield. Now that negative and in almost all cases low short term rates are expected to persist, long term bonds and similar duration assets do not offer the ability to pay claims 5, 10, 30 years into the future.”

It is a similar story for households, which struggle to save enough money at a high enough rate to pay for education, health care and retirement, he says. “Negative/zero-bound interest rates may exacerbate, instead of stimulate low growth rates in all of these instances, by raising savings and deferring consumption.”

I believe that rational people decrease spending when confronted with reduced earnings on savings. That's certainly what I did when real interest rates fell. I'd like to think that I'm somewhat rational anyway, when I adjust my spending to adapt to the new reality. As a long-term saver and retiree, I don't wish to outlive my nest egg. Go figure.

Know what? It's probably just the crazy talk of a standard economic theory heretic. Never mind. Pretend I didn't say a word. Embrace the future prosperity.