Friday, June 10, 2016

Negative Interest Rates Can't Boost Growth

June 9, 2016
Negative interest rates by ECB, BOJ can’t boost growth, Allianz says

"The impact of monetary policy is actually counter intuitive and that shows that there's a lot of uncertainty that policy makers are facing," Heise said. "They can't even be sure how their instruments are going to affect the economy."

A historian, a physicist, and an economist are ready to play baseball.

The historian brought Babe Ruth's bat and claims that history shows it is the best tool for the job. The physicist brought a bat from his lab and claims that it is the best tool for the job that he's tested so far. In practice, hits the ball slightly further. The economist brought a badminton racket and claims that it is the best tool for the job. In theory, should prevent strikeouts!

For one, the chief economist at Allianz, which had 1.723 trillion euros ($1.95 trillion) under management as of the end of 2015, noted that low-to-negative rates aren't encouraging spending, which is what textbook economics would suggest.

If you are saving X dollars per month for your retirement and real interest rates fall, then you must save more than X dollars per month to compensate. Why is this concept difficult for economists to understand?

"It is quite remarkable that savings rates are not going down, although savings in terms of return is completely unattractive," he said.

It is not remarkable. As a retiree, the more interest rates fall the less I try to spend. If I spend more when I earn less then I will eventually run out of money. Duh!

I'm not proposing an economic theory here. I am proposing an economic practice, and I for one, am practicing it! It's ludicrous to think I will spend more money on things I don't really need when I am growing more concerned that my retirement savings will someday run dry.

Even a squirrel hoarding nuts for the winter can figure this out. If some of his nut collection has been stolen by other squirrels, then he must hoard more to compensate. Further, if he's low on nuts then he's not exactly going to waste any of the ones he does have.

Why is the squirrel saving more nuts when some are taken away? I know this must sound crazy to economists. He doesn't want to go frickin' hungry in the winter!

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