The weird way people talk about zero interest rates
There's something about zero interest rates that makes people go a little crazy. Something about it that just seems, well, unnatural. Maybe it's not dogs and cats living together , but it's still pretty close to mass hysteria.
Well, at least that's what Wall Street thinks. Gillian Tett , who's one of the best at getting the masters of the universe to tell us what they think in between their flights from Davos to Aspen, says that "ultra-low interest rates have a nasty habit of distorting markets in all manner of unexpected ways, all over the world." You can see that, supposedly, in the all the money that's pouring into "U.S. activist funds, angel investments, laying down wine or jumping into the art market." In other words, we should worry that billionaires are paying so much for Picassos and pinot noirs as part of the hyperinflation in the Hamptons .
Now it's true that lower interest rates make asset prices go up, but "distorts" is a funny way of putting that. After all, we don't say that higher interest rates "distort" asset prices down. No, if it means anything, it means that rates are inappropriately low. But if that's the case, where's the inflation? It's not like central banks can keep rates lower than they should without prices going higher. Well, that Godot still hasn't shown up. Overall inflation isjust 0.2 percent and core inflation is a still-below target 1.3 percent , which, after six years, tells us that the Fed's unconventional policies haven't gone too far. The opposite, actually.
It's the economy, not interest rates, that are distorted. People want to save more than they want to invest, and that is why rates are so low. Sure, the Fed has lowered short-term rates as much as it can, and lowered long-term rates by buying up bonds so there's less supply , but if it weren't for the fact that rates can't fall below zerowell, at least not that far then they would have fallen a lot more on their own. The Fed's bond-buying is just trying to make up for this. Or, if you prefer to talk about distortions, it's trying to get around the distortion of the zero lower bound to stop the economy from being distorted.
The mistake that Wall Street, and even some famous economists , make is getting this causality backwards. They think that lower rates are what's messing up the economy, rather than reflecting the fact that it's already messed up, and that raising rates will make thisbetter. That's why they think the real risk, as Tett puts it, is that "low rates become ingrained into the consumer and corporate psyche" and "become increasingly hard for policymakers to remove." Now expectations do matter, but it's expectations of low inflation that justifies low rates, not low rates themselves, that we should worry about. Just look at the countries that have tried, and failed, to keep rates up after they've hit zero: Japan, Europe, and Sweden. Each of them told themselves a story about why they needed to hike ratesthey thought they'd recovered, or inflation was coming to get them, or maybe a bubbleand they each did so, despite what was at the time too-low inflation. Well, it turns out that raising rates when your economy is still kind of weak isn't a good idea. All of them ended up having to cut rates back down to zero, and then start buying bonds with newly-printed money. The way to get stuck at zero, in other words, is to look for any excuse to leave it, instead of waiting until you should. And yes, whining about startup valuations, wine prices, and high-end art auctions is the definition of looking for any excuse.
It's not clear why the Fed should care if angel investors lose money on whatever social media/bitcoin/Uber-but-for-zero-interest-rates tech company that they invested in. It's not the Fed's job to worry about the Billionaire Price Index. It'd be ... unnatural if it did.
The weird way people talk about zero interest rates , b y Matt O'Brien , Wonkblog
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I kinda wonder if there isn't another, psychological factor at work: a lot of the Very Serious People who run the world are in their 60s. They were kids and then ados during the high-inflation 1970s.
I know that I, for my part, had the idea that 13% inflation was "normal". It was what existed at the time when I became aware of "prices" as a thing. I soon learned that that was not true, but in some part of my brain, a return to 13% always seems to be in the natural order of things...
I wonder if the VSPs are not suffering from the same imprinting.