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As every economist knows, lowering interest rates stimulates business, and raising rates inhibits business. The reason is that high rates make borrowing more expensive, so businesses are reluctant to borrow for expansion. That’s why stock prices go down when the Fed raises rates.

That is what you have been told; it is a giant steaming pile of bull dung.

Stock prices do not reflect actual business growth, or actual sales, or actual profits or actual anything.

Stock prices reflect the crowd’s anticipation of future stock prices.

We’ve written about this before, in many posts, among which are:

The dumb and dumber of negative interest rates
Low interest rates: The sneak tax on you.
The low interest rate/GDP growth fallacy

Having covered the subject in some depth, I only was moved to have another go at it when I saw the following article

Economists Mystified that Negative Interest Rates Aren’t Leading Consumers to Run Out and Spend
Posted on August 9, 2016 by Yves Smith

Not only has it been remarkable to witness the casual way in which central banks have plunged into negative interest rate terrain, based on questionable models.

Now that this experiment isn’t working out so well, the response comes troubling close to, “Well, they work in theory, so we just need to do more or wait longer to see them succeed.”

The particularly distressing part, as a new Wall Street Journal article makes clear, is that the purveyors of this snake oil talked themselves into the insane belief that negative interest rates would induce consumers to run out and spend. From the story:

Two years ago, the European Central Bank cut interest rates below zero to encourage people such as Heike Hofmann, who sells fruits and vegetables in this small city, to spend more.

Policy makers in Europe and Japan have turned to negative rates for the same reason—to stimulate their lackluster economies. Yet the results have left some economists scratching their heads. Instead of opening their wallets, many consumers and businesses are squirreling away more money.

When Ms. Hofmann heard the ECB was knocking rates below zero in June 2014, she considered it “madness” and promptly cut her spending, set aside more money and bought gold.

“I now need to save more than before to have enough to retire,” says Ms. Hofmann, 54 years old.

Recent economic data show consumers are saving more in Germany and Japan, and in Denmark, Switzerland and Sweden, three non-eurozone countries with negative rates, savings are at their highest since 1995, the year the Organization for Economic Cooperation and Development started collecting data on those countries.

Companies in Europe, the Middle East, Africa and Japan also are holding on to more cash.

And there is the key: “I now need to save more than before to have enough to retire,” says Ms. Hofmann.

“Well, duh,” as the kids liked to say.  If you have saved, for instance, $1 million for your retirement, and you were earning a modest 3% on those savings, that was an additional  $30,000 per year, which plus Social Security, will help your savings last longer.

But if your savings yield $0, you’re going to need to spend less, so you can make your capital last longer.

And if you, and millions of others spend less, what happens to the economy?

Right. The economy suffers.

Gross Domestic Product (GDP) is a measure of the economy, and it also is a measure of spending — private and public — plus exports. So when spending declines, GDP growth declines.

And as we have seen, time and again, when deficit spending growth declines, we have recessions and depressions.

The article then discusses that these consumers all went on a saving binge..because demographics! because central banks did a bad job of PR! Only then does it turn to the idea that the higher savings rates were caused by negative interest rates.

The higher savings rates were caused by the lower spending rates. There are only two things you can do with any given amount of money: Save/invest or spend. All else remaining equal, when one goes down, the other goes up.

Sadly, “all else” doesn’t even remain equal, for negative interest rates cause money supply growth to fall.

How could they have believed otherwise? Do these economists all have such fat pensions that they have no idea what savings are for, or alternatively, they have their wives handle money?

People save for emergencies and retirement. Economists, who are great proponents of using central bank interest rate manipulation to create a wealth effect, fail to understand that super low rates diminish the wealth of ordinary savers.

Consider what happens to investors in T-securities. When interest rates decline, the federal government pumps fewer interest dollars into the economy, which is recessionary.

It is apparently difficult for most economists to grasp that negative interest rates reduce the value of those savings to savers by lowering the income on them.

Value = Demand/Supply.  It is one of the most basic formulas in economics. One only can wonder how it is possible for economists not to understand it. When the Demand for money is reduced, the Value of money is reduced. Could it be more obvious?

Savers are loss averse and thus are very reluctant to spend principal to compensate for reduced income. Given that central banks have driven policy interest rates into negative real interest rate terrain, this isn’t an illogical reading of their situation.

Ed Kane has estimated that low interest rates were a $300 billion per year subsidy taken from consumers and given to financial firms in the form of reduced interest income.

Since interest rates on the long end of the yield curve have fallen even further, Kane’s estimate is now probably too low.

The second effect is that of inflation signaling.

Again, consumers are reacting correctly to the message central banks are sending. Negative interest rates signal deflationary tendencies and that central banks think deflation is a real risk. And what is the rational way to behave in deflation? Hang on to your cash, because goods and services will be cheaper later.

Despite what my good friends of the Modern Monetary Theory (MMT) persuasion say, low rates encourage inflation by reducing the Demand for dollars, while high rates discourage inflation by increasing the Demand for dollars.

(MMT says high rates cause inflation by increasing costs, a hypothesis that is at odds with historical fact.) The Fed successfully has fought inflation by increasing interest rates.

Inflation is a loss in the Value of money compared to the Value of goods and services.

Value = Demand/Supply
Demand = Reward/Risk
Reward = Interest

To fight inflation, increase the Demand for money, which is accomplished by increasing the Reward for owning money, and that is done by increasing Interest.

Here we have what passes for the policy logic:

Low interest rates should encourage consumers and businesses to spend by depressing returns on savings and safe assets such as government bonds. Such spending should create demand for goods, help lift sagging inflation and boost economic growth.

Earth to economists: savings and spending may look fungible to you because they are alternative uses for income but they serve very different functions.

Once people have put enough away that they have a good reserve for emergencies and enough to have a comfortable retirement, then saving and spending can be regarded as close substitutes.

But in the US, with safe income on investments running below inflation levels, and Medicare being actively crapified, a retirement-aged couple would need over $3 million in liquid assets to allow for 20-30 years of living expenses and possible medical costs. How many are in that boat?

One of the greatest, if not the greatest, fears of retirement is outliving your money.

Now perhaps this rationalization was simply central bank patter for wanting to depress the value of their currency and spur growth through more exports.

Thus, the idea that consumers might spend more was just a convenient cover for their real aim that some economists who were not clued in took seriously.

But whatever the cause, the central bank hallelujah chorus regularly claimed that negative interest rates will lead consumers to run out on a shopping spree.

The one bit of good news in this article is that the Bank of England is not persuaded, and even though the Fed has admitted it might take up the negative interest rate experiment, it remains keen to raise rates.

Mind you, it’s not clear that this skepticism is due to greater intellectual rigor. Banks have lost safe sources of earnings with zero and negative interest rates, and are increasingly pressuring central banks to increase interest rates, even though they’ll take hits during the adjustment period.

In summary, the imposition of negative interest rate is among the least intelligent of economics ideas in a litany of unintelligent ideas that beset the “science” of economics.

It is yet another example of: “If it doesn’t work, never has worked, and can’t possibly work, do it again, only more.”

(Other examples bad economics ideas are: “Reduce deficits to grow the economy,” “Cut the federal debt to make it sustainable,” “Cut Social Security to make it last longer,” “Punish the poor to make them work harder,” “Increase interest rates to slow economic growth,” and “Reward the rich for being the ‘makers.‘”)

All have been designed and promulgated by the rich to widen the Gap between the rich and the rest.

Rodger Malcolm Mitchell
Monetary Sovereignty

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THE RECESSION CLOCK

Vertical gray bars mark recessions.

Recessions begin an average of 2 years after the blue line (Federal Debt Held By The Public As A Percentage Of GDP) first dips below zero.

(A common phenomenon is for the line briefly to dip below zero, then rise above zero, before falling dramatically below zero.)

There was a brief dip below zero in 2015, followed by another dip – a familiar pre-recession pattern.

Recessions are cured by a rising red line.

As the federal deficit growth lines drop, we approach recession, which will be cured only when the growth lines rise.

Increasing federal deficit growth (aka “stimulus”) is necessary for long-term economic growth.

MONETARY SOVEREIGNTY

Twitter: @rodgermitchell; Search #monetarysovereignty
Facebook: Rodger Malcolm Mitchell

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We were entertained by Trump-hats reading, “Make America Great Again.”

Then incredibly creative minds came up with:

Major Gun Rights Bill Headed for Republican Congress
Posted On 09 Jan 2017

Conservative voters are counting on Donald Trump and a Republican Congress to protect the Second Amendment, but a new bill from North Carolina Rep. Richard Hudson could indicate a much more aggressive agenda for the 115th Congress.

Hudson has introduced a national reciprocity bill that would force every U.S. state to recognize concealed-carry licenses issued in other states – a law that gun-rights groups have wanted for years.

The right-wing always is hyper-concerned about states’ rights, unless the states actually use those rights. Then, as we have discovered, shooting rights are far more important than any other rights.

“Your driver’s license works in every state, so why doesn’t your concealed-carry permit?” Hudson asked in a fact sheet accompanying the bill.

Uh, well . . . could it be that the citizens of some states don’t want a bunch of lunatics carrying guns everywhere?

The purpose of the bill isn’t necessarily to change local and state laws by federal decree, but rather to prevent situations where gun owners are arrested for unintentionally violating another state’s laws.

Actually, the purpose of the bill IS to change local and state laws by federal decree. That’s the whole idea.

It has the support of the NRA, which released a statement approving of Hudson’s legislation.

What a surprise.  The NRA favors guns over states rights. The NRA favors guns over all rights.

“Law-abiding citizens should be able to exercise their fundamental right to self-defense while traveling across state lines,” said the organization’s Chris Cox. “This is an extremely important issue to our members and we thank Congressman Hudson for leading the fight to protect our rights.”

Yes, what could possibly go wrong with gun-runners . . . uh, people carrying guns across state lines — even into airplanes, for instance? Of course, that never would happen.

The bill should have no trouble passing the House, but it could run into problems in the Senate where Republicans have a much slimmer majority. Passing legislation requires 60 votes, and the GOP only has 52 seats under their control.

There are a few Democrats who could potentially be persuaded to support a bill like this, but we’ll see. The party is in fight mode right now, so it may be obstruction as far as the eye can see.

What?? A political party devoted solely to obstruction?  Whoever heard of such a thing?

Democrats would actually do themselves a big favor by supporting this bill, though. It’s a harmless law and it’s common sense.

The party could find a way to support it without dropping their gun control messaging, and it would be an olive branch to gun owners after the disastrous Obama years.

Yes, just a harmless little law. Hardly even worth discussion.

And the states still could have gun control, except they couldn’t control guns any more than the most gun-crazy of all 50 states.

Yep, other than that, the states would have complete control.

But wait, why limit it to state law.  How about a law to force every U.S. city to recognize concealed-carry licenses issued in other cities. 

So, if Flaming Nape, TX, passes a law requiring every citizen to carry a gun, all American cities would be bound by that law.

After all, your driver’s license works in all cities.  We don’t want gun owners arrested for unintentionally violating another city’s laws, do we?

Unfortunately, there’s no indication that Democrats are interested in pulling themselves out of the far-left bubble they’ve built for themselves, so don’t hold your breath.

Oh, that terrible “far-left bubble” — you know. It’s the “bubble” that brought America the disastrous Social Security, Medicare, Medicaid, civil rights bills, anti-poverty bills, equal education, the Voting Rights Act, aids to the arts, urban renewal, rural development, etc. — all that “far-left bubble” stuff the right-wing did its best to protect America from.

But those rights don’t compare in importance with the one BIGGEST right — the right to shoot at someone who pisses you off, kill a few innocent bystanders, and claim self-defense afterward.

That’s what the founders meant when they wrote “well-regulated militia.”

Question: What problem is this law intended to solve? Not enough guns in America? Not enough shootings in the most gun-crazy nation on earth? Not enough deaths and woundings from bullets?

Have millions more guns really protected us as the NRA promised? Have millions more people carrying guns made us safer? Does the idea even work?

So, O.K., let’s just do it.  Begin with allowing “law-abiding” people to carry a gun into Congress.

Then, if that seems to work without problems, then later we can expand it to allowing “law-abiding” defendants to carry guns into trials. (Why not? They haven’t yet been convicted of anything.)

Follow it up with allowing “law-abiding” people to carry guns into statehouses and into governors’ mansions, and “law-abiding” visitors to take guns into jails, and “law-abiding” kids to carry guns to kindergarten.

Baby steps, first — as long as they’re “law-abiding.”

Let’s keep America gory.

Rodger Malcolm Mitchell
Monetary Sovereignty

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THE LAWS

•Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.

•Any monetarily NON-sovereign government — be it city, county, state or nation — that runs an ongoing trade deficit, eventually will run out of money.

•The more federal budgets are cut and taxes increased, the weaker an economy becomes..

•No nation can tax itself into prosperity, nor grow without money growth.

•Cutting federal deficits to grow the economy is like applying leeches to cure anemia.

•A growing economy requires a growing supply of money (GDP = Federal Spending + Non-federal Spending + Net Exports)

•Deficit spending grows the supply of money

•The limit to federal deficit spending is an inflation that cannot be cured with interest rate control. The limit to non-federal deficit spending is the ability to borrow.

•Until the 99% understand the need for federal deficits, the upper 1% will rule.

•Progressives think the purpose of government is to protect the poor and powerless from the rich and powerful. Conservatives think the purpose of government is to protect the rich and powerful from the poor and powerless.

•The single most important problem in economics is the Gap between the rich and the rest.

•Austerity is the government’s method for widening the Gap between the rich and the rest.

•Until the 99% understand the need for federal deficits, the upper 1% will rule.

•Everything in economics devolves to motive, and the motive is the Gap between the rich and the rest..

MONETARY SOVEREIGNTY