Low Interest Rates = Rape and Plunder

Via Mike Konczal, here is Carmen “Eight Centuries of Financial Folly” Reinhart indulging in a bit of folly of her own:

Reinhart is the toast of economic circles these days for speaking out about the newest way Western governments are using financial repression to liquidate their debts, particularly after a financial crisis. They’re doing this on the backs of savers, including pension funds… financial repression can lead to “the rape and plunder of pension funds,” Reinhart tells Institutional Investor. Financial repression consists of very low nominal interest rates combined with captive lending by large banks or pension funds to a government. The low, stable interest rate facilitates the servicing costs of large public debts. Sometimes modest inflation is added to the mix. This results in zero to negative real interest rates that reduce government debt. Hence, broadly defined, financial repression is a wealth transfer from savers to debtors using negative real interest rates — with the government as one of the key debtors. 

… Low interest rates are a fact of postcrash economic life, designed to kick-start greater borrowing. … “Financial repression is an expedient way of reducing debt,” she says. For banks as well as the government, debt overhang is a major economic problem. But every tax has costs, including distortionary effects. Because financial repression punishes savers, it’s unknown to what degree it inhibits savings.

Rape and plunder? Owners of financial wealth definitionally are savers? Low interest rates are a transfer to debtors? (Are high interest rates a transfer to creditors, then?) Financial asset-owners are morally entitled to low inflation and high interest rates? Not getting the risk-free, passive income you expected is “punishment”? RAPE and PLUNDER, seriously? This article is so exactly everything that I’m against that I’m kind of speechless. All I can do is point at it and say, But! Gha! But it’s! Bhehe!

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In possibly related news, over at Crooked Timber, Daniel Davies contemplates the possibility that in Europe today, there might be a conflict of interests between debtors and creditors. But no there isn’t, he decides, default would be equally bad for everyone:

The example that comes to my mind of a defaulting debtor that isn’t a commodity producer is Germany and their experiences with default have been absolutely awful. Graham Greene’s The Third Man is a story about the aftermath of debt default in a non-commodity economy.

Um yeah. Central Europe, 1946. Let’s see, what has just happened? What’s just happened in Germany (or Austria, as the case may be)? Oh yes: They’ve suspended payment on their bonds.

As through this world I’ve wandered, I’ve seen lots of funny men. Some of them seem to think that they are financial instruments. It gives them a funny point of view.

At Rortybomb: The Real Causes of Rising Debt

Last week I promised a discussion of my new paper with Arjun Jayadev on “Fisher dynamics” and the evolution of household debt. That discussion is now here, not here, but at Rortybomb, where Mike Konczal has graciously invited me to post a summary of the paper.

The summary of the summary is that the increase in household debt-to-income ratios over the past 30 years can be fully explained, in an accounting sense, y changes in growth, inflation, and interest rate. Except during the housing bubble period of 2000-2006, household spending relative to income has actually been lower in the post 1980 period than in preceding decades. If interest rates, inflation and growth had remained at their 1950-1980 average level, then the exact same household decisions about spending out of income would have left them with lower debt in 2010 than in 1980. And just as it wasn’t more borrowing that got us higher debt, less borrowing almost certainly won’t get us to lower debt. If household leverage is a problem, then the solution will have to be some mix of large-scale writedowns, higher inflation, and lower interest rates via financial repression.

But I encourage you to read the whole summary over at Rortybomb or, if you’re really interested, the paper itself. Comments very welcome, there or here.

UPDATE: Now also at New Deal 2.0.

UPDATE 2: Responses by Kevin DrumKarl Smith, Merijn Knibbe, Reihan Salam, and The New Arthurian. There’s some good discussion in comments at Mark Thoma’s place. And a very interesting long comment by Steve Randy Waldman in comments right here.

Does the Level of the Dollar Matter?

Mike Konczal has kindly reposted my back-of-the-envelope estimate of how much a dollar devaluation would boost US demand. (Spoiler: Not much.)

I am far from an expert on international trade and exchange rates. (Or on anything else.) Maybe some real economist will see the post and explain why it’s all wrong. But until then, I’m going to continue asking why Krugman and others who claim that exchange rates are an important cause of unemployment in this country, never provide any quantitative analysis to back that opinion up.

More abstractly, one might ask: Is the time it takes for demand to respond to changes in relative prices, minus the time it takes for exchange rate changes to move relative prices, greater than the time it takes for exchange rates changes to move relative costs (or to be reversed)? Just because freshwater economists say No for a bad reason (because relative costs adjust instantly) doesn’t mean the answer isn’t actually No for a good reason.