The Flinchum File

Thoughtful Economic Analysis and Existential Opinions
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Shoveling Truce

There is a lot of conversation these days about negative interest rates, something that Europe and Japan are experimenting with.  So, should the Fed take our interest rates down, like Europe and Japan, rather than up?

NO!  This reminds me of a situation where you are digging a hole deeper and deeper, while your partner stands on the surface and starts shoveling the dirt back down on you.

Interest rates are a powerful double-edged sword.  Lower interest rates reward borrowers and punish savers.  We have had exceptionally low rates for eight years, and it has barely stimulated the economy.  While it was a good tool at first, we have kept them too low for too long.  (Pension funds are becoming increasingly under-funded, because they cannot earn anything on their bond portfolio.  The same is true for insurance companies.)

It is not true that – if a little is good, then more is better.  Eight years of historically low interest rates have barely stimulated the economy.  Why do we think lower or negative interest rates will do much more?  The economy is not weak because interest rates are too high.  That is especially true in Europe and Japan.  Already, we are seeing the demand for cash – that is, actual currency – increase dramatically worldwide.  It is better to hide a wad of $100 bills in your closet than pay the bank to hold your money for you.  How crazy is that?

Central banks like the Fed are in the hole, still digging to save the world, and legislators are standing on the surface, shoveling the dirt back into the hole.  Central bankers have been doing the hard work for too long . . . how much longer can they be expected to save the world alone??