BIS Study Concludes Cutting Interest Rates to Zero May Not Be Necessary

-edited

A BIS study on the Effective Lower Bound of Interest rates suggests central banks can do other things than slash rates.

Have central banks gone too far in with rate cuts? I think so, and a BIS study No 804 (Un)conventional Policy and the Effective Lower Bound concludes the same thing.

The 47-page study is for geeks and it is mostly unintelligible gibberish that I will mock. A few small sections of the report are mostly understandable. Here are a couple such snips.

In response to the Financial and economic crisis of 2008-09, central banks have aggressively cut monetary policy rates, in many cases all the way to the effective lower bound (henceforth ELB), namely the rate below which it becomes profitable for Financial institutions to exchange central bank reserves for cash.

Our main result is that in reaction to a Financial shock which reduces banks' monitoring efficiency, credit policy may be a more efficient tool than policy interest rates.

Cutting policy rates to zero may be unnecessary after non-standard measures have been implemented.

The report was mostly 47 pages of nonsense that looked like the following:

BIS Study 804 Snip 1

BIS Study 804 Snip 2

BIS Study 804 Snip 3

The study had 20 references to the word "assume".

Note the preceding snip to "simply" the solution via a simple "approximation".

The study is rife with gibberish about things like "output gaps" that cannot be accurately calculated even if they exist at all.

In the first snip above, the study mentions "entrepreneurs would postpone consumption until the time of death."

This is another way of saying time preference cannot logically be negative.

Conclusion

Despite all the gibberish and mathematical nonsense, the final conclusion is at least somewhat understandable "Cutting policy rates to zero may be unnecessary after non-standard measures have been implemented".

I would revise and expand the sentence as follows.

Cutting rates to zero can never be correct. It is against laws of finance and time preference, which can never be negative. But there should not be a Fed in the first place either to cut rates or to implement "non-standard" measures.

Brick Wall

Central banks are the problem, not the solution.

They have hit a brick wall and cannot cram any more debt into the system.

There is no tolerance for paying interest.

The evidence is overwhelming.

  1. More Currency Wars: Swiss Central Bank Poised to Cut Interest Rate to -1.0%
  2. Inverted Negative Yields in Germany and Negative Rate Mortgages.
  3. Fed Trapped in a Rate-Cutting Box: It's the Debt Stupid

Mike "Mish" Shedlock

Comments (22)
No. 1-11
caradoc-again
caradoc-again

Does anyone expect CBs to back off now? Once through zero what event in the real world puts a hard limit on how negative they can go?

What will stop them?

Meanwhile Lagarde heads to ECB just as one of her darling children, Argentina, teeters on default again. She left some wreckage with poor interventions in Greece, siding with the Eurozone, and Argentina. She thinks neg rates are ok, along with Greenspan.

Beyond me to understand what on earth they think they are accomplishing outside of building upto an even bigger negative consequence.

caradoc-again
caradoc-again

It's the " May Not Be" that suggests even BIS (the authority) really has no clue too.

Sechel
Sechel

I don't believe Q.E. (other than the first round) had any economic impact other than reinflating asset prices and letting banks pretend they were solvent.

Maximus_Minimus
Maximus_Minimus

I can't get enough of those formulas that make economists look like scientists, something like eh...chemistry, which I studied. It made me feel good that, e.g. molecules behave predictably, and according some formulas. Thus, my conclusion is that the financial disaster in which we live can be attributed to lack of economic formulas. Make more complex formulas fellas, and raise those rates now.

thimk
thimk

the CBs of the world are wall papering over much needed structural changes in moribund economies. they are treating the symptoms with diminishing results .

Mish
Mish

Editor

I somehow missed this line in snip3 "where we also assumed"

RonJ
RonJ

ZH headline: "After Mark Carney Admits That Low Rates Lead To War, San Fran Fed Suddenly Changes Its Mind On NIRP"

avidremainer
avidremainer

And people wonder why Socialism is gaining traction. There is no such thing as Capitalism now. How can there be if the powers that be penalise savers? There is no Capitalism without savers. Pay $100 now to receive $89 back in 10 years. In what world is this sensible? "Socialism is evil" cries the Corporatist. " Well we've read your book " says the Socialist " and what you have produced is putrid, Forward brothers and sisters to the promised land! " I have done very well out of Capitalism. I am comfortable not rich, but a damned site better off than my forbears. For most of my life a Capitalist came along and said " Lend me some money I've got a great idea it will make us all richer." Sometimes the investment failed, but more often than not the idea made money. Now what have we got? Hey saver buy this and lose $11 over 10 years. Something wicked this way comes and I'm not sure that the Corporatists don't deserve all that is coming to them. Pity the rest of us have to suffer with them.

FromBrussels
FromBrussels

it is not a question of 'maybe' ; cutting rates IS unnecessary,, UNHEALTHY even ! CB's should know by know.....But they don t know, or don t want to kow rather , that much is obvious ... Criminal, secretive , bunch of counterfeiters disrupting the financial system for the benefit of the 0,0001 % !

RonJ
RonJ

"Central banks are the problem, not the solution."

The problem is that every cycle has an up phase and a down phase. There is no solution that prevents cycles. Inflation and deflation complete a cycle. Rise and fall of an empire complete a cycle. There is no preventing the fall of an empire.

The American middle class bloomed when the U.S. became producer to the world. That condition no longer exists, as world economies recovered from the WW2 era. Thus the U.S. middle class has been in decline since the post war peak.

Why is there no gold standard today? Cycles. The down phase of a cycle will break a currency peg to gold. Central banks are not a solution and neither is a gold standard. All solutions are temporary and simply work until the inverted phase of the next cycle dismantles them.

Salmo Trutta
Salmo Trutta

Negative interest rates are created by the Fed expanding Reserve Bank credit, as opposed to driving the commercial banks out of the savings business. That is all, it began in January 1957. It accelerated in 1966. It's offset, the demand for the residual transaction deposits, ended in 1981. It was accelerated by Greenspan dropping legal reserves by 40%. It was exacerbated by Bankrupt-u-Bernanke remunerating IBDDs. Unless savings are activated, a dampening economic impact is exerted and matastesizes (it's called Secular Strangulation).