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The Natural Rate of Interest is "0"

JP Hochbaum

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"The overnight lending rate is the most important benchmark interest rate for many other important rates, including banks’ prime rates, mortgage rates, and consumer loan rates, and therefore
the fed funds rate serves as the ‘base rate’ of interest in the economy. In a state money system with flexible exchange rates running a budget deficit in other
words, under the ‘normal’ conditions or operations of the specified institutional context without government intervention either to pay interest on reserves to offer securities to drain excess reserves to actively support a nonzero, positive interest rate, the natural or normal rate of interest of such a system is zero."

http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf Page 10 near the bottom.

"We also know that budget deficits add to bank reserves and create system-wide reserve surpluses. The excess reserves then stimulate competition in the interbank market between banks who are seeking better returns than the support rate offered by the central bank. Up until recently this support rate in countries such as Japan and the USA was zero. In Australia it has been 25 basis points below the cash rate although there is no theoretical reason for that setting.

It makes much better sense not to offer a support rate at all. In that situation, net public spending will drive the overnight interest rate to zero because the interbank competition cannot eliminate the system-wide surplus (all their transactions net to zero – no net financial assets are destroyed)."

The natural rate of interest is zero! | Bill Mitchell – billy blog
 

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Loan me a million dollars interest free and let me pay you back whenever if that is the natural rate of interest.
 

JP Hochbaum

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Loan me a million dollars interest free and let me pay you back whenever if that is the natural rate of interest.
That is the market rate of interest, don't confuse the two.
 

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If this were the case, there would not exist an interest rate which would necessarily increase the demand for credit. While it certainly is true that a "natural rate" of interest can be zero (when there is high periods of unemployment and severe credit contraction), but this is not always the case.
 

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If this were the case, there would not exist an interest rate which would necessarily increase the demand for credit. While it certainly is true that a "natural rate" of interest can be zero (when there is high periods of unemployment and severe credit contraction), but this is not always the case.
Yeah, some times I think MMTers are just as dumb as Marxist. :lol:
 

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I'm sure that you are referring to some sort of technical economics term or concept that is beyond my knowledge level, but I would think that the "natural" rate of return on savings, would be historically negative.

When 100,000 years ago Ug tried to save his kill by burring it in the ground or by hiding it in a tree, as every day passed, the value of his "savings" deteriorates. Even just 100 years ago when the farmer tried to save his grain by putting it into a silo or a barn, as every day passed, he lost a little grain due to spoilage or vermin.

Other than with land improvements (and even those eventually deteriorate), historically we have never really been able to save long term. Savings in the form of metals may be the only exception as they are fairly stable and tend not to deteriorate with time. The whole "inflation/borrowing/interest is evil" meme, that many conservatives like to rant about, is a waste of time even discussing. Of course even with todays fiat money, anyone who wants to save in the form of metals can easily do so by purchasing metals.

I really have no clue why so many people think that they should be able to put money into a savings account or piggy bank and expect that their savings should grow in value with no effort put forth on their part. Wealth isn't created by saving, it is created by production. While it is possible to invest ones savings into a productive investment, thats not exactly the same as "saving", and it is subject to multiple risks.
 

austrianecon

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I really have no clue why so many people think that they should be able to put money into a savings account or piggy bank and expect that their savings should grow in value with no effort put forth on their part. Wealth isn't created by saving, it is created by production. While it is possible to invest ones savings into a productive investment, thats not exactly the same as "saving", and it is subject to multiple risks.
You can't created more production without capital. That capital comes from somewhere. So Wealth is created by only one process. Savings used to Loan. This to increase the buying of products. It's like the circle of life. You can produce all you want but if you sell nothing of what you produced you created no wealth.

But because money that is put into a savings account (note not a piggy bank cause that is idle) is used as loanable funds it allows products to be bought. Now that money you put into the bank is yours, not the banks. So the bank is using YOUR ASSETS to make a profit. The Bank is a middle man in the equation of saving/lending. If there were no banks, I would lending money and collecting all the interest but since we allow banks to do this for us, they get a cut and we get a cut because it's our money.
 
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JP Hochbaum

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If this were the case, there would not exist an interest rate which would necessarily increase the demand for credit. While it certainly is true that a "natural rate" of interest can be zero (when there is high periods of unemployment and severe credit contraction), but this is not always the case.
The natural rate of interest when the feds introduce new money into the economy, via bank lending, is always going to be "0". Anything higher than that is the feds interfering with interest rates.
 

JP Hochbaum

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You can't created more production without capital. That capital comes from somewhere. So Wealth is created by only one process. Savings used to Loan.
Our economy doesn't use savings to loan, it uses reserves. And it is not reserve constrained, a bank can obtain reserves at any time.
 

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Our economy doesn't use savings to loan, it uses reserves. And it is not reserve constrained, a bank can obtain reserves at any time.
Are you serious? No wonder you MMTers are always wrong, you don't know how banking works. Let's start simply here.

Banks are required to hold X% against various liabilities which is dependent on the liabilities. Borrowing from the Federal Reserve (or another Bank) to obtain a reserve quota at the end of the day is a liability as that money has to be paid back. Those types of borrowing are overnight loans which are settled at the start of the next day (think discount window). So it's literally just rolling over the same money over and over again between the Fed and the Bank. It can't be lent as it's a Reserve. What is lent is deposits (savings, checking and such).

If you read Regulation D (Reserve Requirements for Depository Institutions) of the FRB you'll find Savings Accounts are considered Saving Deposits. Banks have no reserve requirement for Saving Deposits. So they can lend 100% of whatever is in your savings account. They don't need reserves. So money in savings accounts are ALWAYS loaned first.

You can clearly understand how banking works if you look at the difference between Investment Banking and Commercial Banking. Investment Banks have huge reserve requirements compared to Commercial Banks. Goldman Sachs, Lehman Brothers and Bear Sterns were Investment Banks. They had to roll over overnight borrowing every day or do lots of repos. Lehman and Bear had problems doing that and that's why they failed. BofA, Citi, JP Morgan had an investment bank side to them but they were also commercial which means they took deposits every day. They didn't have massive roll over problems because they had savings account at which they could lend with 0% reserve requirement.

That's why Savings Accounts are primary lending tools in commercial banking.
 
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JP Hochbaum

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Are you serious? No wonder you MMTers are always wrong, you don't know how banking works. Let's start simply here.

Banks are required to hold X% against various liabilities which is dependent on the liabilities. Borrowing from the Federal Reserve (or another Bank) to obtain a reserve quota at the end of the day is a liability as that money has to be paid back. Those types of borrowing are overnight loans which are settled at the start of the next day (think discount window). So it's literally just rolling over the same money over and over again between the Fed and the Bank. It can't be lent as it's a Reserve. What is lent is deposits (savings, checking and such).
We are saying the exact same thing here.

"Reserve requirements place not such limit on lending for reasons I have explained often. Commercial banks hold reserve accounts at the central bank for the sole purpose of facilitating the payments system (clearing house). Many countries have no reserve requirements other than the accounts must not be in the red on a sustained basis. The US is currently considering eliminating the positive requirements.

Reserve requirements are an artefact of the old gold standard and are irrelevant in the current monetary system. They do not reduce bank risk nor do they comprise a buffer that can be drawn on when there is a run on a bank.

To understand why reserve requirements do no constrain lending you have to understand how a bank operates. Banks seek to attract credit-worthy customers to which they can loan funds to and thereby make profit. What constitutes credit-worthiness varies over the business cycle and so lending standards become more lax at boom times as banks chase market share (this is one of Minsky’s drivers).

These loans are made independent of the banks’ reserve positions. Depending on the way the central bank accounts for commercial bank reserves, the latter will then seek funds to ensure they have the required reserves in the relevant accounting period. They can borrow from each other in the interbank market but if the system overall is short of reserves these horizontal transactions will not add the required reserves."

Lending is capital- not reserve-constrained | Bill Mitchell – billy blog
 

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You can't created more production without capital. That capital comes from somewhere. So Wealth is created by only one process. Savings used to Loan.
It's entirely possible for the fed to create an ample supply of money for banks to loan without any savings existing at all.

This to increase the buying of products. It's like the circle of life. You can produce all you want but if you sell nothing of what you produced you created no wealth.
Agreed. Demand is the key to wealth creation.
 

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Our economy doesn't use savings to loan, it uses reserves. And it is not reserve constrained, a bank can obtain reserves at any time.
The money that banks lend comes from someplace. It can come from savings, or investors, or the fed. Borrowers could care less where the money comes from, as long as it is available.

When it comes from any source other than the fed, lending is reducing the money supply of that other source, thus there is no creation of new money.

I know that none of that was your point, or contrary to your point, but I just don't want those things to be ignored.
 

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We are saying the exact same thing here.
Yes, but this is DP, so even when people agree, they seem to feel this need to pretend like they are disagreeing, and then they say the exact same thing, but using different worlds.

Ha! It makes us feel like we are actually debating.
 

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The natural rate of interest when the feds introduce new money into the economy, via bank lending, is always going to be "0". Anything higher than that is the feds interfering with interest rates.
WTF are you even talking about?
 

JP Hochbaum

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WTF are you even talking about?
Many economists will argue that the fed lowering or raising interest rates will distort the natural rate of interest. They argue as the fed lowers the rates to "0" it distorts it.

But that is not true, any fed interest rate distortion comes about from raising it above "0".
 

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Many economists will argue that the fed lowering or raising interest rates will distort the natural rate of interest. They argue as the fed lowers the rates to "0" it distorts it.

But that is not true, any fed interest rate distortion comes about from raising it above "0".
The Fed has limited control of the natural rate of interest: this can be observed by recent spikes in all interest rates (which is a sign the natural rate has increased). The promise of a dollar tomorrow is worth less than a dollar today: true or false?
 

JP Hochbaum

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The Fed has limited control of the natural rate of interest: this can be observed by recent spikes in all interest rates (which is a sign the natural rate has increased). The promise of a dollar tomorrow is worth less than a dollar today: true or false?
They have total control of the natural rate of interest, unless you are referring to market rates for certain products like securities, mortgages, etc.. Those interest rates are effected by supply and demand and economic conditions.

I am referring to the original rate of interest of which commercial banks obtain currency from the Feds (Fed Funds Rate), that natural rate of interest is "0". As monopoly issuer of currency there is no risk at issuing loans at "0" interest.

"The overnight lending rate is the most important benchmark interest rate for many
other important rates, including banks’ prime rates, mortgage rates, and consumer loan
rates, and therefore the Fed funds rate serves as the “base rate” of interest in the econ
-
omy. In a state money system with flexible exchange rates running a budget deficit—in
other words, under the “normal” conditions or operations of the specified institutional
context—without government intervention either to pay interest on reserves or to offer
securities to drain excess reserves to actively support a nonzero, positive interest rate, the
natural or normal rate of interest of such a system is zero"

http://moslereconomics.com/wp-content/graphs/2009/07/natural-rate-is-zero.PDF

Start at page 4 of the above link to try to understand better what I am getting across here :)
 

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They have total control of the natural rate of interest, unless you are referring to market rates for certain products like securities, mortgages, etc.. Those interest rates are effected by supply and demand and economic conditions.
The Mosler paper describing his take on the natural rate of interest is rather ho-hum.

I am referring to the original rate of interest of which commercial banks obtain currency from the Feds (Fed Funds Rate), that natural rate of interest is "0". As monopoly issuer of currency there is no risk at issuing loans at "0" interest.
That is not the natural rate of interest. The natural rate of interest is the rate is equivalent to the risk-free rate. I thought that Finance 101 covers the time value of money....
 

JP Hochbaum

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The Mosler paper describing his take on the natural rate of interest is rather ho-hum.



That is not the natural rate of interest. The natural rate of interest is the rate is equivalent to the risk-free rate. I thought that Finance 101 covers the time value of money....
And if the feds raise it above "0" it becomes a risk for commercial banks to borrow, thus "0" is the natural rate of interest because it contains no risk. You just proved it there :)
 

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And if the feds raise it above "0" it becomes a risk for commercial banks to borrow, thus "0" is the natural rate of interest because it contains no risk. You just proved it there :)
I have no idea what you are talking about.

First of all, banks are paid 25 basis points on excess reserves, where as their official target rate is a range (0-25 basis points). However the effective rate, along with the daily highs and lows is actually quite volatile.

With this in mind, Moslers entire paper is a non-statement. Yes, the overnight rate becomes zero IFF the Fed pumps enormous amounts of liquidity into the system. A general rule of thumb is, $40 billion worth of Fed purchases lowers the effective rate by 10 basis points. However, if the Fed were to do nothing, and allow assets to mature off of their balance sheet, interest rates would eventually increase.

Having one dollar today is worth more than the promise of one dollar tomorrow.
 

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Mosler/Forstater's 'natural rate' argument has nothing to do with the Fed 'pumping enormous amounts of liquidity' anywhere.

It's based on the fact that Treasury spending adds reserves to the system, and that without the 'intervention' of bond issuance to drain said reserves, the rate would be driven to zero, 'naturally,' as their supply continually increases with no sterilization to offset the effect.

You are only considering QE/bond purchases, but ignoring the effects on reserve balances of Treasury spending & bond issuance/sterilization.
 

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Mosler/Forstater's 'natural rate' argument has nothing to do with the Fed 'pumping enormous amounts of liquidity' anywhere.

It's based on the fact that Treasury spending adds reserves to the system, and that without the 'intervention' of bond issuance to drain said reserves, the rate would be driven to zero, 'naturally,' as their supply continually increases with no sterilization to offset the effect.

You are only considering QE/bond purchases, but ignoring the effects on reserve balances of Treasury spending & bond issuance/sterilization.
This thread, and the paper it references is a bunch of talk about.... nothing. I am not sure why this concept is so difficult: a dollar today is worth more than a dollar tomorrow.
 

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We are saying the exact same thing here.

"Reserve requirements place not such limit on lending for reasons I have explained often. Commercial banks hold reserve accounts at the central bank for the sole purpose of facilitating the payments system (clearing house). Many countries have no reserve requirements other than the accounts must not be in the red on a sustained basis. The US is currently considering eliminating the positive requirements.

Reserve requirements are an artefact of the old gold standard and are irrelevant in the current monetary system. They do not reduce bank risk nor do they comprise a buffer that can be drawn on when there is a run on a bank.

To understand why reserve requirements do no constrain lending you have to understand how a bank operates. Banks seek to attract credit-worthy customers to which they can loan funds to and thereby make profit. What constitutes credit-worthiness varies over the business cycle and so lending standards become more lax at boom times as banks chase market share (this is one of Minsky’s drivers).

These loans are made independent of the banks’ reserve positions. Depending on the way the central bank accounts for commercial bank reserves, the latter will then seek funds to ensure they have the required reserves in the relevant accounting period. They can borrow from each other in the interbank market but if the system overall is short of reserves these horizontal transactions will not add the required reserves."

Lending is capital- not reserve-constrained | Bill Mitchell – billy blog
No, we don't agree.

Bill Mitchell has no clue what he is talking about. Reserve Requirements are there against liabilities because those liabilities are the ones which are drawn on first. Banks need 10% for all Checking Accounts because Checking Accounts are used everyday at any time. Savings accounts are not used that often and the consumer is limited to a certain amount of withdraws from it per month.
 

austrianecon

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It's entirely possible for the fed to create an ample supply of money for banks to loan without any savings existing at all.
No, it can't as every other liability a bank has requires reserve requirement. If your and JP's argument were true.. then why were Banks pumped with tons of liquidity over the last 5 years and lending has decreased?

You can take your time in answering that. :)
 
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