The Lie of 'Declining Neutral Rates'
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2018-12-08 07:00 by Karl Denninger
in Monetary , 194 references Ignore this thread
The Lie of 'Declining Neutral Rates'
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The latest line of garbage out of the central bank wonks is that the "neutral" rate of interest is "declining."

“The global decline in the neutral rate of interest over the past quarter century poses significant challenges to maintaining well-anchored inflation expectations in a standard inflation-targeting regime,” Mr. Williams said in the text of a speech to be delivered at a conference at his bank. In this environment, the problem central banks will need to solve “is the risk of inflation that is persistently too low, rather than too high.”

Mr. Williams should be indicted for this drivel as it is a knowing lie and a malicious one at that.

Last year's government deficit on a cash basis ("debt to the penny") was approximately 6.2%.  In other words if you simply held cash on a monetary basis you lost 6.2% because that's how much more money the federal government injected into the system by selling new (not-before issued rolled-over) Treasuries.

The "neutral" rate therefore was at least 6.2% plus any other unbacked credit emitted by anyone with a government backstop (student loans anyone?)

Second, as Tall Paul (Volcker) recently pointed out there is no legal justification for any inflation "target" above zero by the Fed, since the Federal Reserve's charter says stable prices.  It doesn't say "prices rising at 2% a year", it says stable.  Something is stable if it does not change, natch.

Who calls this out?  Nobody in the media, banking industry or politicians.

Gee, I wonder why?

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Bodhi
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Incept: 2008-02-23

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Trump won't mention it because it would destroy his narrative of 4%+ growth. The DemonRats won't mention it because then they couldn't play the same game. The banks won't mention it because they'd have to pay and charge more interest. The media won't mention it because they're pretty much all brainwashed by the Fed's mantra of 2% inflation = stable prices and growth. When it comes crashing down we'll hear ad nauseum, "Nobody could have seen it coming."
Striped-pad
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In a similar way, Mervyn King, previous governor of the Bank of England, claimed that the natural rate of interest is that which creates enough demand to sustain full employment. He's wrong.

The natural rate of interest is that which provides to the lender an income at least as large as the loan defaults and the lender's running costs. Anything lower, and the lender will eventually become insolvent. It just takes a trivial analysis of the lender's balance sheet to understand this.
Rickyd
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From your post...

"In other words if you simply held cash on a monetary basis you lost 6.2% because that's how much more money the federal government injected into the system by selling new (not-before issued rolled-over) Treasuries."

What governs the type and amount of new Treasuries being injected into the system?

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"That day is coming again, for the same reason -- willful and intentional blindness toward a grossly over-extended economic picture fueled by debt accumulation that cannot permanently continue as a simple function of arithmetic."

Karl Denninger
Onelegged
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With decades of stagnant wages and real inflation running in the range of 7% the fuse to the powder keg is lit.

They just keep telling us we just need to knuckle down and work harder. Go to college to ensure a higher lifetime income. Etc. Etc. All bull****.

You can work as hard as you can, but you can't outrun/outearn the politicians' pens.

It's all a scam. It's all bull****.

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The light at the end of this tunnel is a train and it's gathering speed.
Tickerguy
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@Rickyd:
Quote:
What governs the type and amount of new Treasuries being injected into the system?

Amount -- Congress. If you spend money you do not first tax you must issue debt to fund it.

Type -- Mnuchin; more-accurately, the Treasury department decides the tenor of debt (duration) to issue.

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Winding it down.
Nitrium
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So in a nutshell is near-ZIRP the "new normal" with NEW debt issuance (that they know is never going to be retired) effectively taking the place of interest rates to control inflation? I think Japan has been running this game for at least 25 years, i.e. if you want extra inflation you simply issue some more treasuries into the system which are immediately spent producing the desired inflation "target" papering over what is now basically a permanent recession. The various Governments running this scam, I'm pretty sure at this point, believe you can't technically default on money that is owed to their own respective Central Banks. MMT FTW smiley. I'm probably (hopefully) missing something.
Tickerguy
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The Japanese relied on an external carry trade; that's the only way it works, and it only works as long as that can be maintained -- which it can't be forever.

Now who's going to provide that with the US, given the magnitude required? smiley

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Winding it down.
Willy2
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- Nope. The monetary inflation was NOT 6.2%. It was zero. Because the US government BORROWS existing money, it doesn't create it out of thin air (contrary to what the Modern Money Theory nutcases think). The FED performed QT this year and that meant that there was actually deflation (on the part of the government). The money was created out of thin air by commercial banks. Those banks are responsible for the (monetary) inflation.
- The definition of inflation is an increase of money and/or credit. Deflation is the opposite.
- "Declining Neutral Rate" is FED-speak for "We expect that short term rates are going to drop, and the FED will follow that rate".
Tickerguy
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@Willy2 -- Nonsense. Who do you think "bought" the majority (nearly all, in fact) of that Treasury issuance? Commercial banks.

What's the reserve requirement on a US Treasury?

Zero.

Next question please.

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Winding it down.
Willy2
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- Did those banks buy those Treasuries with their cash reserves or with newly created money ? If they bought those T-bonds with their cash reserves then there was no monetary inflation.
Tickerguy
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Sigh.....

You don't remember what Bernanke did during the blowup with reserve requirements here, do you?

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Winding it down.
Quik49
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We've seen this movie...feels like an echo of 2008. How soon people forget.

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Long Vaseline....

Tickerguy
Posts: 155156
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Yep @Quik49.

The "Bailout" was indeed about $700 billion. But it was also about a one-sentence change in the law that Bernanke asked for and got, and of the people who commented on the process at the time I was one of very few who made any sort of noise about that specific component at all.

To this day that, and the refusal of Congress to ask A SINGLE QUESTION about Bernanke deliberately pulling over $60 billion out of the banking system into the maw of Lehman's collapse, which was documented on the NY Fed's own web site and which I was ALSO the only one to comment on, is a pair of events I will NEVER forgive -- or forget.

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Winding it down.
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