St. Louis Fed Promotes the Mathematically Impossible

It's bad enough when economic writers are clueless about how markets work. It's worse when Fed economists are clueless.

Check out this Tweet by @StLoiusFed.

170 people liked this Tweet.

Understanding the Math

  • Negative interest rates cannot push people into more stimulating investments.
  • No matter how negative the rate, someone has to hold every treasury bond and someone has to hold every dollar in circulation.
  • In the equity markets, for every buyer of stocks, there is a seller, thus the sideline cash argument fails as well.

It's bad enough when analysts fail to understand basic economics, but even Fed economists are clueless about how markets work.

Negative rates cannot possibly do what the Fed suggests, but they can foster an artificial wealth effect when people borrow or spend more than they should.

Any economic gain spurred on by reckless borrowing will all be taken back and then some, in the next recession.

Zombie Corporations

Negative real rates also foster zombie corporations. The BIS defines zombie firms as those with a ratio of earnings before interest and taxes to interest expenses below one, with the firm aged 10 years or more.

As it sits, 10% of corporations are zombies, unable to make interest payments from profits.They need cheap money to survive.

If the St. Louis Fed economists see a sustainable benefit from spurring zombie corporations, they are wrong about that too.

Mike "Mish" Shedlock...

Comments (14)
No. 1-14
El_Tedo
El_Tedo

"No matter how negative the rate, someone has to hold every treasury bond and someone has to hold every dollar in circulation." I'm not sure if this is correct in the case of the FED being the buyer of the negative interest bond.

JonSellers
JonSellers

Sitting on cash is cheaper than buying negative interest rate bonds and is no more stimulating. It you want to increase investments that stimulate the economy, then raise taxes on investments that don't stimulate the economy like stock trading, asset stripping, Uber, Tesla, etc...

AWC
AWC

"Any economic gain spurred on by reckless borrowing will all be taken back and then some, in the next recession."

AWC
AWC

Nah, it will be taken onto the Feds balance sheet. New paradigm here in moral hazard town.

KidHorn
KidHorn

So 0% isn't enough of a disincentive. You have to actually charge people to hold their money in order for them not to give it to you. It sounds crazy, but it appears to be true.