Saturday, September 24, 2011

The Zero Bound may not be the zero bound

Right-wingers are always saying that Krugman's only solution is to "print money". That disregards Krugman's very own research. Keynesian economics only says to print money when you're not already at the 0% interest boundary. Beyond that, printing money doesn't do anything except make mattresses plump. Krugman's own published research and writings say the same thing: once you hit the zero bounds, the only thing that works is fiscal policy -- turning the government into consumer of last resort to put people back to work. Printing money may be part of that process if you can't sell enough bonds, but only incidental to turning government into consumer of last resort. This is consistent with the history of GDP growth during FDR's term of office, where GDP growth was highly correlated to government spending -- more spending was more growth, less spending was less growth.

But Paul Krugman brought up an interesting point yesterday: The zero bound may not actually be zero. That is, we may have slight inflation and interest rates slightly above zero, and still be in the Keynesian zero-bounds liquidity trap territory. The deal there is that if I buy a 10 year Treasury, that's it -- I'm locked in for the next ten years. I don't have that money for my own purposes anymore. The only way I'll do that is if I'm compensated for that fact. And if long-term rates are fairly low, on the order of 1%, at the same time that inflation is around 1%, then I am effectively receiving negative interest on my money because of the loss of use of that money I have for the next ten years.

And that's the point we enter Keynesian liquidity trap territory, my friends... when you have real negative interest, you're out of monetarist money-printing territory, and into Keynesian fiscal spending territory.

So anyhow, in the linked article above Krugman doesn't put any numbers to this notion. I'm sure he's playing with numbers as we speak, but he doesn't do a lot of that on the NYT site, alas, we'll have to see if he publishes an academic paper about the subject. But if it turns out he's right, we are truly, truly f*cked, because the notion of the GOP in Congress allowing fiscal policy to be implemented is somewhere between "no" and "fuck no".

-- Badtux the Economics Penguin

1 comment:

  1. My wife and I are a walking embodiments of liquidity trap thinking. Our "zero bound" is the amount of trust we have in the current economic and political systems.

    We have a bit of excess money. We could invest it in something productive, if we had any confidence that "investments" on paper wouldn't be speculated away or stolen through some "legal" chicanery enforced by the corporate fascist court system. We're not innovative or young enough to come up with some world-beating smart idea like your inventive self, Tux.

    So we sit on our money. Or rather, we convert it to hard, shiny things -- screw ounces, we're dealing in kilograms now -- and make it into the equivalent of mattress money. In fact, we're not even leaving it in mattresses controlled by the financial system, where it at least might count toward banks' capital reserves.

    We've heard horror stories from American expats about people who have been harrassed for tens of thousands of dollars by the IRS for having overseas banks accounts that they did not declare under the provisions of a stealth law that's been around since the mid-2000s, but that few people knew about. We're considering making multiple trips across an ocean (not sayin' which one) to mule back lumps of valuable stuff. We'll probably hide this, maybe literally bury it in the ground in some country (not sayin' which one.)

    This is the thinking of a paranoid peasant in the late Roman Empire. It does nothing to further the growth of the economy. But in a time when lawlessness comes from the authorities who are supposed to enforce the law, what else is one to do? I'm not going to stand firm and keep participating in a system that would run me down with as little thought as an 18-wheeler trucker has for the frogs he runs over as they cross the highway during a mass migration.

    Ironic that we're doing the same thing as the multi-national corporations we despise. But the logic is the same at our small level as it is at their large one. If there's nothing productive you can do with your money, and whatever steps you take are likely to be whip-sawed away by speculators who make profits on churn, not productivity, you sit on your pile. It's worse than the Great Depression liquidity trap, because then (in the U.S. at least) the problem was lack of demand. Now, the G.D. I demand problem is magnified by the problem of official criminality, like in some Third World hellhole.

    The current pattern of civilzation is going to implode, Tux. We're making friends with people who have farmland. We're upgrading our skills in living simple, especially in wrapping our mindsets around the likelihood of a Great Lurch Backwards. Life might not be worth living then, but for myself, I'm going to keep on doing it, just to spite the bastards at the top who'd like to see us little people FOAD.


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