September 3, 2016


The price of money has tumbled. Here's why the world should be worried (Yanis Varoufakis, 25 August 2016, World Economic Forum)

Objects of desire come at a cost. [...]

Once the price of money (interest rates) hit zero, central banks tried buying mountains of public and private debt from commercial banks to give them an incentive to lend freely. The ECB went so far as to pay banks to lend to business while, at the same time, punishing them for not lending (via negative interest rates for excess reserves).

But bankers and businesses, viewing these measures as desperate responses to self-fulfilling deflationary expectations, went on an investment strike, while using the central-bank money to inflate the prices of their own assets (stocks, art, real estate, and so forth). This did nothing to defeat the Great Deflation; it only made the rich richer, an outcome that somehow reinforced central bankers' belief in central bank independence.

Not all central bankers, thankfully, are incapable of responding creatively to the Great Deflation. Andy Haldane, Chief Economist at the Bank of England, has courageously suggested that all money should become digital, which would permit real-time negative interest rates to be imposed on all of us, thus forcing everyone to spend at once. John Williams, President and CEO of the Federal Reserve Bank of San Francisco,recently argued that the Great Deflation could be beaten only by targeting the price level and nominal national income simultaneously - a New Deal-like approach featuring joint action by the Fed and the government.

What separates these central bankers from the herd is their readiness to jettison the myth of independent monetary policy, to accept that money is the most political of commodities, to challenge the sanctity of cash, and to concede that defeating the Great Deflation requires a progressive policy agenda.

Simone Weil once said, "If you want to know what a man is really like, take notice of how he acts when he loses money." Likewise, if we want to know what our societies are really like, we must take notice of how they react to negative interest rates.

Given that deflation means that the money we hold is gaining value, rather than losing it, Ms Weil, at least, would have expected negative rates, though she would have noticed how odd it is for us to accept that banks are fighting the increasing value of our money. 

Posted by at September 3, 2016 7:03 PM