tag:blogger.com,1999:blog-5908830827135060852.post7319099436385655962..comments2024-03-29T02:54:56.523-04:00Comments on Bond Economics: Implications Of Negative Interest RatesBrian Romanchukhttp://www.blogger.com/profile/02699198289421951151noreply@blogger.comBlogger13125tag:blogger.com,1999:blog-5908830827135060852.post-66041757561455721962016-05-19T06:36:50.904-04:002016-05-19T06:36:50.904-04:00Even with an existing stock of debt with positive ...Even with an existing stock of debt with positive coupons, the amount of interest paid is limited. As new negative coupon debt is added, it will eventually turn the net payment negative. <br /><br />The idea that negative rates suggest deflation is the biggest challenge to my argument. It is related to the "neo-Fisherian" argument that real rates are constant, and hence negative rates imply deep deflation. However, it seems unlikely that an economy could have much deflation if the government is running a primary deficit of 3%-5% of GDP per year.<br /><br />I probably needed to write a longer article on that topic...Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-22330007053646263152016-05-19T00:19:41.447-04:002016-05-19T00:19:41.447-04:00"If the nominal interest rate is negative, th..."If the nominal interest rate is negative, the greater the amount of debt, the greater the "revenue" negative yields create."<br /><br />Not necessarily. This might apply to new debt but not old debt necessarily.<br /><br />Presumably debt already on the books is at positive rates so interest is being paid not received. (You are talking about high debt ratios, so high debt already exists.)<br /><br />Negative interest rates suggests deflation in which case the real value of existing debt is increasing.<br /><br />Neither of these are good for the debtor.<br /><br /><br />Henry.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-52921524783310252092016-05-16T08:26:24.158-04:002016-05-16T08:26:24.158-04:00Wish people said this more. Most of us already rec...Wish people said this more. Most of us already receive negative rates on our transaction balances, and have for many years. It's not some dramatic new development.JW Masonhttps://www.blogger.com/profile/10664452827447313845noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-23608512328514338152016-05-12T23:07:52.804-04:002016-05-12T23:07:52.804-04:00Brian,
SoberLook had a great comment on understan...Brian,<br /><br />SoberLook had a great comment on understanding negative interest rates:<br /><br />http://soberlook.com/2016/04/understanding-negative-interest-rates.html<br /><br />Too many people don't understand negative rates and what they really mean. <br /><br />I even had one pension fund manager tell me they will never buy bonds with negative rates but they might not have much of a choice! Leo Kolivakishttps://www.blogger.com/profile/09223434531795543335noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-75482879563681097772016-05-12T22:04:21.248-04:002016-05-12T22:04:21.248-04:00Negative interest rates are like bank fees or gove...Negative interest rates are like bank fees or government taxes.Joe Leotehttps://www.blogger.com/profile/01292763300917387201noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-27670561893666736422016-05-12T19:49:32.450-04:002016-05-12T19:49:32.450-04:00It's not a major topic of interest, agreed. Bu...It's not a major topic of interest, agreed. But it suggests a policy of locking in negative rates, and laughing at debt sustainability analysis.<br /><br />Since the negative interest acts as a tax, growth cannot get out of control. Hence, the external situation will also stabilize.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-47940562988956203582016-05-12T15:43:16.973-04:002016-05-12T15:43:16.973-04:00" To get this in a SFC model, all you need to..." To get this in a SFC model, all you need to do is track the long-term debt separately, and have the initial stock of debt with an interest rate below that of the eventual growth rate of nominal GDP."<br /><br />Disagree on two levels. <br /><br />In the open economy case, if output grows too fast (relative to exports), debt/gdp rises. The interest rate part is a minor thing. <br /><br />You can see this in Godley/Lavoie's open economy models. <br /><br />About inflation and debt/gdp, my point was that it's not obvious that debt/gdp will not rise as a model in G/L's book shows. That real budget balance has correction terms because of inflation isn't a reason to presuppose that debt/gdp will improve. <br /><br />Few economies have negative interest rates on government bonds. That's fine: a lot of them are creditor nations. Second nobody ever thinks that if growth resumes, bond yields of some nations' government bonds will remain negative. So I don't understand the importance of negative interest rates in debt sustainability issues. It's a minor thing. Ramananhttp://www.concertedaction.comnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-57515764539240577022016-05-12T11:16:15.436-04:002016-05-12T11:16:15.436-04:00My comments were very brief, and conditional upon ...My comments were very brief, and conditional upon negative interest rates. Under that assumption, since the interest cost is negative, I will stand by statement that debt sustainability would not be an issue.<br /><br />The question is whether negative interest rates could be sustained if inflation is rising, or the currency is falling. If fiscal policy was coherent with a low inflation objective, I see no reason why not. And fiscal policy is generally coherent in this manner; the only real risks are posed by indexation in government contracts. <br /><br />You are supposing a large fiscal expansion, which easily could be done in a fashion that is not coherent with a low inflation objective. (I lump the external value of the currency in with "low inflation objective".) i believe that a floating currency sovereign can achieve most reasonable objectives for fiscal policy and meet the low inflation objective, so long as the real resource constraints are respected. A lot of the "hydraulic Keynesianism" policies ignored those real constraints, and ran into problems.<br /><br />Would private sector desires to increase wealth pose a difficulty? Under the assumption that they are forced to allocate a greater portion of their wealth towards foreign currency/private sector assets as a result of the negative interest rate on government liabilities, the flows could work out.<br /><br />Finally, although the debt-to-GDP ratio could rise when inflation accelerates, the empirical evidence is that faster nominal GDP growth reduces the ratio. To get this in a SFC model, all you need to do is track the long-term debt separately, and have the initial stock of debt with an interest rate below that of the eventual growth rate of nominal GDP. Compounding the denominator faster than the numerator will reduce the ratio under any reasonable level of the deficit. Given the way that tax brackets are fixed, and most government spending is not indexed at a high frequency, inflation acts to tighten the fiscal deficit in the current environment.<br /><br /> Fans of rational expectations would say that you could not announce such a policy (as bonds would reprice), but the empirical reality is that the bond market has not perfectly forecast future growth rates.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-50340960956225187832016-05-12T10:50:42.532-04:002016-05-12T10:50:42.532-04:00I have a small section on the effect of the policy...I have a small section on the effect of the policy rate on the currency in my upcoming report (unless it is savaged by the proofreader, should be ready within two weeks). I think the section appeared as a first draft on this site; I discuss how the policy rate differential affected the Canadian dollar. But for a fuller explanation of my view, it will be available shortly at the nominal cost of $3.99 (🙂).<br /><br />But the shorter version is as follows. The fundamental driver are portfolio flows. I think the reason policy rates appear to be a driver is a signalling mechanism -- central banks are assumed to have a decent handle on domestic economic conditions, so rate hikes signal that the economy is growing. Things might be different in an inflationary environment like the 1970s.<br /><br />As for who is doing the trading, the vast majority of the volume is the result of foreign exchange traders doing hyperactive trading. Since they work with forwards, they create huge notional positions which bloat their importance. That said, they do not have the balance sheet capacity of the equity/bond portfolios, and so all their activity is aimed at getting in ahead of the fundamental flows. The implication is that forex specialists can swing the currency around on a day-to-day basis, but they have to respect the underlying flows. For example, if international investors decide that Canadian equities are a great investment, no matter what forex traders think about CAD, it is eventually going to go up.<br /><br />Finally, you also need to take into account corporate activity, like buyouts. During the tech boom of the 1990s, the USD was supported by foreigners being suckered into buying US tech firms.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-59312629870896466472016-05-12T09:34:43.970-04:002016-05-12T09:34:43.970-04:00Fiscal sustainability is closely tied to current a...Fiscal sustainability is closely tied to current account sustainability as the two balances are connected by an identity. <br /><br />Fiscal sustainability by itself means less: fiscal balance is more a reflection of the current account balance on an average, since the private sector balance is a small positive on an average. <br /><br />So it's more a question of debt sustainability to foreigners which one cannot claim to be sustainable at all times. <br /><br />About your point on inflation, it isn't true that inflation isn't a problem in debt sustainability. The following situation is a bit academic but still illustrative of issues: <br /><br />Suppose there's a large fiscal expansion and prices rise. Since households have a wealth target, they will try to attempt to compensate the real wealth loss due to high inflation by saving more. But fiscal balance depends on households' saving behaviour. <br /><br />It seems contradictory to the intuition of large expenditure in a period of rapid inflation but can be checked with a stock flow consistent model. In Godley/Lavoie's book, there's an example of how debt/gdp can blow due to large inflation. Ramananhttp://www.concertedaction.comnoreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-7229240342327043772016-05-12T09:14:35.139-04:002016-05-12T09:14:35.139-04:00Very helpful post.
I was curious about the short ...Very helpful post.<br /><br />I was curious about the short section on central bank policy. I would have thought that the exchange rate effects were just one motivation among others for negative policy rates, not the main one. But you may be right, I don't have a strong view here. What I am wondering about is this:<br /><br />Given the lack of connection between the policy rate and other yields (longer risk-free rates, risky rates, returns on equity, etc.) why does the policy rate have such a strong effect on exchange rates? We should be open to the possibility that it actually doesn't, but certainly it seems to. y working hypothesis would be that the main or at least the marginal participants in foreign exchange markets are not asset owners in general, who are adjusting the mix of currencies in their portfolios, but foreign-exchnage specialists who don't hold other assets. Does that seem right?<br />JW Masonhttps://www.blogger.com/profile/14979669866721105903noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-54560256209578038002016-05-11T21:04:23.252-04:002016-05-11T21:04:23.252-04:00Sure, the ratio is not relevant, but that did not ...Sure, the ratio is not relevant, but that did not stop Reinhart and Rogoff. Obviously, different fiscal conservatives have their own theories, but worries about the debt-to-GDP ratio does appear to be a common denominator. I am just attempting here to respond to the general argument, and not any one person's views in particular.Brian Romanchukhttps://www.blogger.com/profile/02699198289421951151noreply@blogger.comtag:blogger.com,1999:blog-5908830827135060852.post-91117739764494057442016-05-11T20:50:23.670-04:002016-05-11T20:50:23.670-04:00Brian,
I am not sure debt-to-GDP ratio is relevan...Brian,<br /><br />I am not sure debt-to-GDP ratio is relevant. As even right-wing ideologue like Tyler Cowen knows quite well that what what matters is debt-to-national wealth. Defict spending increases private wealth if there is no leakage. For country like Japan, there is virtually no limit to government debt given its annual large current account sulplus.Anonymousnoreply@blogger.com