Why Mankiw Is Wrong About Negative Interest Rates

Gregory Mankiw, professor of court economics at Harvard and economic advisor to President George W. Bush, proposed negative interest rates in a recent New York Times article. Mike Shedlock, a prominent financial commentator has appropriately weighed in 19 March with Time For Mankiw To Resign and again on 21 March with Economist Mankiw Defends Policy of Theft.

Ivy-League Court Economist

Interestingly Mankiw, a monetarist, appears to have the support of Paul Krugman, a Keynesian, who responded, “Greg Mankiw says yes. Since that was the answer I arrived at for Japan more than a decade ago, I have to say that it makes sense in principle.”

MR. MANKIW’S PROPOSAL

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent. … The idea of negative interest rates may strike some people as absurd, the concoction of some impractical theorist. Perhaps it is. But remember this: Early mathematicians thought that the idea of negative numbers was absurd. Today, these numbers are commonplace. Even children can be taught that some problems (such as 2x + 6 = 0) have no solution unless you are ready to invoke negative numbers. Maybe some economic problems require the same trick.

I will attack Mankiw’s insane proposal from several fronts, missed by most commentators, but nevertheless extremely important. While I do agree with revoking legal tender status for all Federal Reserve Notes (FRN), not just 10%, I differ with his proposed procedure and underlying moral reasoning.

LEGAL TENDER

Notice that Mankiw suggests that ‘the Fed were to announce that …. would no longer be legal tender.’ This talk about the Fed determining what is and is not legal tender baffles me. Perhaps Mr. Mankiw should open up a copy of the Constitution and read it.

Under Article 1 Section 8 Clause 5 Congress is given the power to ‘Coin Money, regulate the Value thereof’. Notice the Constitution does not say what money is only that it is something that is coined rather than printed. The Tenth Amendment states, “The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.” The Constitution operates on the principle that if a power is not specifically delegated then it is prohibited.

In this case the Federal Government is given no authority to make anything legal tender. The Federal Reserve Act was enacted by Congress creating the Federal Reserve. Because Congress does not have the power to declare anything legal tender and because the Federal Reserve was created by Congress therefore it follows that the Federal Reserve cannot declare anything legal tender. The individual States do retain the power to declare things legal tender but are restricted under Article 1 Section 10 Clause 1 from making any ‘Thing but gold and silver Coin a Tender in Payment of Debts’. The creature cannot exceed the creator.

NEGATIVE REAL RETURNS WILL FAIL

On 18 March 2009 I established the case for why the Federal Reserve’s quantitative easing will fail. On 1 February 2008 I marked the first snowfalls of the Kondratieff Winter, or Great Credit Contraction, because of investors' willingness to accept negative real returns.

Mankiw’s proposal will not work yet because although the US Treasury Bubble will burst and there are reasons how and why that will happen it has not happened yet. Most FRNs exist not as physical tickets but as digital illusions. Mankiw has gotten a little bit ahead of himself as capital will eventually move from digital illusions into physical FRN illusions because physical FRN tickets are safer and more liquid.

This has not happened yet although the US government has been placing restrictions to prevent it, such as the filing of Special Activity Reports, etc. Nevertheless, the attempt by Mankiw and Krugman is to force capital up the liquidity pyramid while the natural economic law is bringing it down. They may as well attempt to order the sun not to rise.

MORALITY

Since individuals are “endowed by their Creator with certain unalienable rights” and because individuals form governments to protect property, life, and liberty, it follows that individuals are superior to their creation of government. Individuals can grant to their creation at most only those rights they possess. No individual possesses the right to unjustifiably infringe on another individual’s autonomy, and because individuals create governments, no government can possibly be justified in the possession of such a right. Therefore, legitimate government must act within the constraints of the Non-Aggression Axiom (.mp3). Otherwise those actors are merely criminal gangs costumed in government regalia.

Government represents one of the most powerful forces on earth. Therefore, an individual’s political beliefs reveal with perfect clarity his or her moral character.

In this case, Mr. Mankiw would use the brutal violence of government to arbitrarily steal 10% of anyone’s savings and finds this repulsive behavior to be the philosopher’s stone as ’some economic problems require the same trick’. Can there be worse psycho-sociopathic tendencies?

I wonder if Mr. Mankiw would recommend torture, invasion and genocide as good economic policies to get out of a looming recession because they would increase aggregate demand, stimulate the economy and increase GDP. Even Vladimir Putin revealed his understanding of these basic laws when he stated,

The only problem: your results were poor and this will always be the case because the work you do is unfair and immoral. In the long run immoral policies always lose.

Mr. Mankiw and Mr. Krugman are not engaged in the study or teaching of economics but political dogma. And so we see evidence of the true motive of these two influential court economists which is most likely: the sadistic desire to abuse the power of the State to engage in looting and killing.

CONCLUSION

The trick to get out of the current economic problems is really founded in morality. Decades ago Ludwig von Mises wrote in The Theory of Money and Credit,

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.

The solution to the current economic problems is to be found by picking up an extremely short document, the United States Constitution, and strictly applying its powers and disabilities in accordance with the Non-Aggression Axiom. Of course, doing so would drastically limit the ability of those who desire looting and killing.

If you look at every single problem we are facing today, almost all are the result of a lack of respect for the rule of law and the Constitution. The solution can only be applied if society changes its idea about what the role of government ought to be. If society thinks that the role of government is to take care of individuals from cradle to grave and police the world by spending hundreds of billions of dollars on a foreign policy that cannot be managed then the greater depression will only exacerbate. Thus, the true budget deficit and balance sheet deficiencies appear to be moral and not economic.

National currencies are like the common stock of nations. So long as the United States and its people continue violating these basic laws of morality and engaging in immoral policies, the FRN will continue to decline. The price of the monetary metals, gold and silver, will increase. But if you think the United States is a rogue elephant on the world stage now just wait until she is truly panicked.

Disclosure: Long physical gold and silver with no position in GLD, SLV, US Treasuries such as TLT, UDN or UUP.

Comments

[User 353732:]

The conceptual quality and practical relevance of an academic economist are inversely proportional to the amount of fawning attention he or she receives from the NYT.
The more jaded the Court, the more outrageously the Jester must gibber and prance.

Apr 23 06:53 AM

[dogster:]

right.org/bailout/cont...

Apr 23 10:31 AM

[joes:]

This seems to be a case of an individual assuming that what is most important to them must at the core of all moral belief, sometimes called "Western Elitist Syndrome".

The statement that all answers to the problems that we face can be found in a 200 year old document is absurd, it would be like hoping to fix a Prius by following a Model T manual.

The creature cannot exceed the creator concept in an attempt to discredit the federal reserve is a continuation of the tired old argument that they overstepped their bounds, which returns us to the 200+ year old document that has served us so well, but never as well as when it has been amended to meet the problems of current time.

We do agree that the problem can be found in morality, George Soros is an example of moral economic activism, and the need for a stronger ILO and IMF to prevent suffering in nations where they haven't had the moral leaders to even write that first piece of paper.

With Democracies on the rise and equality increasing in most places in the world I would say we have a problem, but the global society has seen worse and survived, even thrived. I expect more of the same.

Apr 23 12:14 PM

[kohalakid:]

Aren't a 2% negative interest rate and 2% inflation equally destructive of my US dollar holdings? I don't understand why the Fed feels its complying with its objective of price stability by letting 2%(or more) of my buying power evaporate each year.

Conclusion.......

Buy gold on dips!!

Apr 23 01:08 PM

[American in...:]

You folks are really confused. There is nothing in the Constitution that explicitly denies the Federal government that right to decide what is and is not legal tender.

Indeed, you are guilty of arguing for a minimalist view of the Constitution, which its founders would probably laugh at if they were alive today.

The Constituation is a framework, not the equivalent of the Ten Commandents (which are themselves a completely inadequate guide to morality).


On Apr 23 06:53 AM User 353732 wrote:

> The conceptual quality and practical relevance of an academic economist
> are inversely proportional to the amount of fawning attention he
> or she receives from the NYT.
> The more jaded the Court, the more outrageously the Jester must gibber
> and prance.

Apr 23 02:14 PM

[rosey99:]

The time to be Austrian was about two or three years ago, it seems to me that now it is time to be a Keynesian. While I am as fond of the Constitution as the next guy, to say that it is not a dynamic, evolving thing is a complete fallacy. Slavery is a good example.

A dogmatic fundamentalist system of belief is part of how we got here. The Austrian school has a lot of interesting things to say, but to take it as "the one true religion" is probably a mistake. I have trouble with the idea that a dogmatic, ultra-libertarian approach will be the best solution, and that there is some great conspiracy at work here. I do agree that morality, or more precisely, lack of ethics played a huge role in how we got here. A blind man can see that corruption is a huge problem, but it seems to have little to do with party affiliation or (stated) political philosophy. I also agree that things could get really interesting if "the elephant panics," especially if it is the result of perceived credit risk in US public debt, aka higher interest rates/lack of willing lenders.

Interesting ideas, just a bit too narrow and extreme for my taste. Simplistic even. I enjoy hearing the thoughts of others, and getting a sense of the diversity of ideas that characterizes an open society. . .So thanks for the post.

Apr 23 04:56 PM

[Edward Ulys...:]

You hit a sore spot with this one. I had to buy my son the $135 Macroeconomic by Mankiw for one semester of economics. Garbage. It proves that professors who really don't understand reality are paid BIG bucks to make sure the students get it wrong. I didn't argue the case during the semester so my son would get a good grade in the course, but after his B+, I set him straight with my $6 copy of a book published in 1938 titled "The Promises That Men Live By." With Harvard degrees becoming more like scarlet letters by the day, plus being appointed by Bush, Jr., I doubt Mankiw's reputation survives much longer. By the way, the word GOLD is in the index, with ONE page number, and used in ONE sentence in passing. With the claim of over one million sold, that sure leaves a lot of students learning the hard way, and not getting what they paid for. Aldous Huxley was right in 1962 with his Ultimate Revolution speech.

Apr 23 05:04 PM

[Leftfield:]

Great article! It certainly gives me pause when I reflect on the simple principle that "an individual's political beliefs reflect with perfect clarity his or her moral character." All kinds of nice and high-sounding reasons have been invoked to justify infringing on other's rights through the power of government and all kinds of nasty reactions occur when proponents of such are confronted with simple principle.

Now we're in a time of payback, where all the little compromises are adding up to an overwhelming debacle. All freedom and prosperity are threatened. Really, by what principle does Wall St. not have a right to trillions if they have the power to grab it in our fascist welfare adventurist state?

Apr 23 07:08 PM

[DougM:]

While I agree with you and with Shedlock completely, you've both missed something in Mankiw's proposal: he leads with the Fed setting the interest rate on all the "digital" money to a negative rate. I believe he gives the example of returning 97 cents for a dollar invested, or something along those lines. Anticipating that this would simply lead to people hoarding banknotes, he backstops his plan with forced evapouration of currency from the hands of evil savers.

Apr 23 07:40 PM

[lastboyscout:]

Gee, are you guys nuts!!!! There is so much to address. Quote G. Washington (1796) "Towards the preservation of your government...it is requisite...that you resist with care the spirit of innovation upon its principles, however specious the pretexts. One method of assault may be to effect, in the forms of the Consitiution, alterations which will impair the energy of the system, and thus to undermine what cannot be directly overthrown."

Do you understand. The constitution IS the "rules" we must go back to, a strict reading of this document. It means what it says, a simple, short document of thoughts and ideals that created this great country. We the people have fell into this idea that this document, and the ideas that it records no longer is relivent to our current time, is far from the truth. This is the very situation GW warned about in the above quote. The Bible " an inadequate guide to morality"?? are you nuts!! Even an athiest or muslim will recognize that Gods rules are the basis for a civilized society. If everyone lived according to Gods rules, there would be peace on earth. "George Soros is an example of moral economic activism"?? George is the ultimate of greed and corruption, who is morally bankrupt. George uses, pillages and rapes to get what he wants, furthering corruption everywhere he goes. This man is not a person you want emmulate.

Apr 23 07:46 PM