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.
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.
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.
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.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.
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.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.
We are saying the exact same thing here.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).
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.
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.
We are saying the exact same thing here.
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?
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?
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.
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 thereThe 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
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.
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
It's entirely possible for the fed to create an ample supply of money for banks to loan without any savings existing at all.
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