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posted by cmn32480 on Tuesday September 06 2016, @01:19PM   Printer-friendly
from the everything-electronic dept.

Bloomberg reports:

If you believe that government meddling in financial markets was responsible for the last recession and the lackluster recovery, you might be right. But probably not in the way you think.

Imagine what would happen in a free market if everyone suddenly decided that future economic growth would be very slow. The price of safe assets such as U.S. government bonds -- assets that pay off even in a low-growth environment -- would rise sharply. As a result, the real (inflation-adjusted) interest rate, which always moves opposite to the price of safe assets, would fall. In principle, if the demand for safe assets was strong enough, the real interest rate could go deep into negative territory.

Yet two government mechanisms prevent real interest rates from getting too negative. The first is cash: As long as people can hold currency, which loses its value only at the rate of inflation, they won't buy safe assets that yield even less. The second is the central bank's promise to keep the inflation rate low and stable -- at about 2 percent in most developed nations. As a result, people have little reason to hold any asset that yields less than negative 2 percent (perhaps negative 3 percent, considering that cash is bulky and hard to store).

In other words, governments -- by issuing cash and managing inflation -- put a floor on how low interest rates can go and how high asset prices can rise. That's hardly a free market.

[...] The right answer is to abolish currency and move completely to electronic cash, an idea suggested at various times by Marvin Goodfriend of Carnegie-Mellon University, Miles Kimball of the University of Colorado and Andrew Haldane of the Bank of England. Because electronic cash can have any yield, interest rates would be able go as far into negative territory as the market required.

[...] If cash were abolished, I would support the adoption of two complementary measures. First, instead of targeting a positive inflation rate, central banks could target true price stability by aiming to keep the level of prices constant over time. (To be clear, this would be disastrous unless cash were eliminated first.)

Second, currency does provide a service beyond being a store of value and a medium of exchange: It's anonymous and thus ensures the privacy of transactions. In its absence, governments would have to allow the private sector to offer alternatives with the same attractive features.

We've endured a deep recession and a miserable recovery because the government, through its provision of currency, interferes with the proper functioning of financial markets. Why not ensure that doesn't happen again?

Narayana Kocherlakota is a Bloomberg View columnist. He is a professor of economics at the University of Rochester and was president of the Federal Reserve Bank of Minneapolis from 2009 to 2015.


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  • (Score: 2, Insightful) by Anonymous Coward on Tuesday September 06 2016, @03:56PM

    by Anonymous Coward on Tuesday September 06 2016, @03:56PM (#398159)

    The article is pure propaganda. Loose monetary policy only reaults in centralization of wealth by banks through debt. It wont result in inflation if banks dont literally give the money away, which they are not.

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  • (Score: 1) by Francis on Tuesday September 06 2016, @05:47PM

    by Francis (5544) on Tuesday September 06 2016, @05:47PM (#398211)

    Inflation is mostly an issue of currency supply. The biggest driver of wealth inequality in the US is inflation. Stocks tend to adjust fit inflation because everything they do is inflation adjusted.

    But if you're unfortunate enough not to be able to afford to have money tied up in investments for a decade or longer, you're stuck with bonds and bank deposits which mostly fail to keep up with inflation. There's little point in saving in those accounts as it's costing the depositor to save money.

    Unfortunately the idiots at the central bank purposefully create inflation and hold the interbank lending rates below inflation ensuring that depositors never come out ahead.

    A healthy economy will have periods of minor inflation and deflation so that people don't have expectations about currency being worth much more or less than it is presently. An economy that's always inflationary is barely better than one that's usually deflationary. There's a huge incentive to borrow and spend rather than save. And the more mature the economy the less that makes sense.

    • (Score: 5, Interesting) by Thexalon on Tuesday September 06 2016, @08:31PM

      by Thexalon (636) on Tuesday September 06 2016, @08:31PM (#398277)

      The biggest driver of wealth inequality in the US is inflation.

      No it isn't, not even close. The biggest driver of wealth inequality in the US is best shown in this graph:
      http://cdn.theatlantic.com/assets/media/img/posts/2015/02/labor_gap/04e656c70.png [theatlantic.com]

      Basically, what happened was that wage growth stopped back in the 1970's, while productivity continued to rise. There are a whole bunch of reasons for this, including international trade and union-busting, but that gap is absolutely critical to understanding why the rich are ending up with vastly more wealth than the rest of us.

      Another way of looking at it: If a worker manages to save $1000 over the course of a year, that is an indication, to the capitalists of the world, that the worker was paid $1000 too much that year, and something should be done to make sure that that isn't repeated.

      --
      The only thing that stops a bad guy with a compiler is a good guy with a compiler.
      • (Score: 3, Interesting) by TheGratefulNet on Tuesday September 06 2016, @08:57PM

        by TheGratefulNet (659) on Tuesday September 06 2016, @08:57PM (#398284)

        I agree - the elites are trying their best to ensure we are all slaves and have no bargain power in ANYTHING.

        the hatred of those 'haves' from the 'have nots' is really running deep, right now, and I feel that, myself (been out of work since march and still no job prospects. if I can't find something soon, I'm going to be in serious shit. and the elites LOVE THAT since it gives them power over me and I have little say in the matter).

        look rich fucks: once I hit bottom, I would care less what happens. make me a terrorist - go ahead. make us all like that. you'll then find out why its so important to throw a bone to the middle class (ie, the new poor class) so that they don't rise up with a 'got nothing to lose, fuck it all!' attitude.

        never before in my life have I felt this way. and I fully understand being pushed to the limit where you just say 'fuck it'.

        I'm educated, skilled, experienced. and jobless for months. this is a failure of the western system, no doubt about it. if a guy like me can't stay employed and pay bills we have FAILED as a country and civ.

        not kidding. I can see myself being pennyless and wanting to strike back at anyone who is not like me.

        I dread that situation. but its there in the distance, visible to me. not happy about this 'new economy'. not at all.

        --
        "It is now safe to switch off your computer."
        • (Score: 2) by art guerrilla on Wednesday September 07 2016, @11:10AM

          by art guerrilla (3082) on Wednesday September 07 2016, @11:10AM (#398643)

          why, son, have you ever considered the Army as a career move ? ? ?
          THAT is yet another reason why the economy is KEPT SHITTY for us 99%: stupid morlocks have to be herded to go and fight the wars of Empire...
          95%+ of the people in the armed forces aren't there because they want to spread peace and democracy to Lower Pipelinestan, no, it is because THEY CAN'T GET A FUCKING JOB...
          which is EXACTLY why Empire likes to keep us unemployed and desperate: you will do ANYTHING for Empire, including murdering brown people half the world away who ain't done shit to us...

        • (Score: 2) by Webweasel on Wednesday September 07 2016, @02:49PM

          by Webweasel (567) on Wednesday September 07 2016, @02:49PM (#398713) Homepage Journal

          I get the feeling when my kids hit uni, I'm gonna buy a sniper rifle and start hunting money cunts.

          George Soros is first on my list.

          --
          Priyom.org Number stations, Russian Military radio. "You are a bad, bad man. Do you have any other virtues?"-Runaway1956
      • (Score: 3, Insightful) by jmorris on Tuesday September 06 2016, @10:59PM

        by jmorris (4844) on Tuesday September 06 2016, @10:59PM (#398342)

        that is an indication, to the capitalists of the world, that the worker was paid $1000 too much that year

        Yes and no. The problem is the supply of labor almost always exceeds the demand, leading to the situation you describe. For example we always discuss the unemployment rate, the labor participation rate, etc. where the assumption is that there are more workers than jobs and we are measuring how many unneeded workers there are in the current reporting period. Of course an employer would be a fool to pay more than needed in that situation. Now stop looking at the macro picture and zoom in on specific cases where the demand for labor can't be met (at least easily) by the available supply. You get similarly extreme cases in the other direction where workers make outrageous demands and get them. Anyone remember the .com era of Aeron chairs for everybody, in house 5star chefs, etc? Supply and demand at work, perfectly natural and good.

        Our challenge is to get an economy firing hard enough to create enough demand for labor that the price rises above the minimum required to support the worker's continued life processes. Of course one way to start doing that would be to stop importing third world labor to compete with the natives, from illegals at the low end to H1Bs in higher wage/skilled markets. Moderate tariffs to remove some of the incentive to outsource everything and just import the product of third world labor from the third world would also help. Balance between too low to be effective and so high it does more harm than good would be required of course.

        • (Score: 2) by Thexalon on Wednesday September 07 2016, @05:44PM

          by Thexalon (636) on Wednesday September 07 2016, @05:44PM (#398796)

          Now stop looking at the macro picture and zoom in on specific cases where the demand for labor can't be met (at least easily) by the available supply. You get similarly extreme cases in the other direction where workers make outrageous demands and get them. Anyone remember the .com era of Aeron chairs for everybody, in house 5star chefs, etc? Supply and demand at work, perfectly natural and good.

          Notice what happens in these cases, though. All of a sudden we get barrages of news stories about the drastic shortages of X kind of workers, and how universities need to train more of them and and we need to expand H-1B to import more of them, and so forth. And since the employers have the clout to drive public policy, while workers on average don't, the employers typically get what they want and eventually drive the price down. If they succeed, they will report this to their shareholders as improving the efficiency of their business.

          This even affects relatively high-status and high-education professions like doctors, lawyers, and scientists. Why do you think there's such a push to educate more in STEM fields?

          --
          The only thing that stops a bad guy with a compiler is a good guy with a compiler.
      • (Score: 1) by khallow on Tuesday September 06 2016, @11:09PM

        by khallow (3766) Subscriber Badge on Tuesday September 06 2016, @11:09PM (#398351) Journal

        Another way of looking at it: If a worker manages to save $1000 over the course of a year, that is an indication, to the capitalists of the world, that the worker was paid $1000 too much that year, and something should be done to make sure that that isn't repeated.

        So I guess you're a "capitalist" then? Because you're the one looking at it that way. Personally, I think it's a very stupid way to look at the situation because a standard mantra here is "There's no such thing as a free lunch".

        • (Score: 2) by Thexalon on Wednesday September 07 2016, @01:54PM

          by Thexalon (636) on Wednesday September 07 2016, @01:54PM (#398691)

          I am in fact, in part, a capitalist, because I pulled in several grand last year from investments.

          But this way of thinking is all over stockholder reports and statements from union-busting managers. I'm quite certain I'm not making this up.

          --
          The only thing that stops a bad guy with a compiler is a good guy with a compiler.
      • (Score: 1) by Francis on Wednesday September 07 2016, @11:48PM

        by Francis (5544) on Wednesday September 07 2016, @11:48PM (#398922)

        Not really. In that scenario, you could get second job in your free time to dig yourself out. But due to inflation, not only aren't you making as much as you were, but the value of the available stores of wealth decreases over time, so that $1000 is worth less and less every year.

        Not being appropriately compensated is an issue, but it's not the issue.