As another part of my quest to convince people that monetarist theories of inflation and interest rates are dead, let me present you with the following chart that shows the net supply of safe assets in developed countries and the real interest rate in these countries.
Maybe the problem isn't with the theory of supply and demand, but that the additional supply just being bought out from the markets via QE and that is what pushing interest rates down (which is kind of the point of QE AFAIK). What do you think?
That is one Ort of the story. The other part is that at 0% interest rates banks reduce their lending activity I to the real economy and thus the additional debt that isn’t bought by QE doesn’t create additional assets in the real economy either.
If a government issues debt and a branch of the government purchases that debt, makes the interest payments back to the government, and ultimately retires or rolls over the old debt with new debt, is there any debt created? Aren't we just playing a new version of monopoly? Has the elusive perpetual motion machine finally been invented?
Well, if you mean the central bank as the other branch of government it is better than a perpetual motion machine because central banks can create the money with which to buy the debt out of thin air.
With a dislocation like the one you plot, is it not right to conclude that the only way out of the funk is to allow a crash in speculative assets or grossly devalue the currency? Investors absorbed the mid-2010s expansion without inflation on the expectation that some variation of the former would eventually prevail; the policy response to COVID (at least in the US) led many people to consider that they had insignificantly hedged against the possibility of massive inflation. If the above narrative is true....where do we go from here?
Maybe the problem isn't with the theory of supply and demand, but that the additional supply just being bought out from the markets via QE and that is what pushing interest rates down (which is kind of the point of QE AFAIK). What do you think?
That is one Ort of the story. The other part is that at 0% interest rates banks reduce their lending activity I to the real economy and thus the additional debt that isn’t bought by QE doesn’t create additional assets in the real economy either.
On the other hand, the lending activity rises in the low interest rates environment as more people and companies want cheap capital.
The problem is not demand, it is supply. See here: https://klementoninvesting.substack.com/p/banking-in-a-negative-rate-environment
If a government issues debt and a branch of the government purchases that debt, makes the interest payments back to the government, and ultimately retires or rolls over the old debt with new debt, is there any debt created? Aren't we just playing a new version of monopoly? Has the elusive perpetual motion machine finally been invented?
Well, if you mean the central bank as the other branch of government it is better than a perpetual motion machine because central banks can create the money with which to buy the debt out of thin air.
With a dislocation like the one you plot, is it not right to conclude that the only way out of the funk is to allow a crash in speculative assets or grossly devalue the currency? Investors absorbed the mid-2010s expansion without inflation on the expectation that some variation of the former would eventually prevail; the policy response to COVID (at least in the US) led many people to consider that they had insignificantly hedged against the possibility of massive inflation. If the above narrative is true....where do we go from here?