Harry Long

The Dogma of Low Interest Rates Is Wrong

1. You argued that a devaluing currency improves exports and helps the balance of trade. I brought up the example of Japanese car companies, because it contradicts your point.

They outsell us, because they make better cars, more cheaply, even with a strengthening Yen, not because of interest rate manipulation. A weakening dollar does not change that dynamic in the real economy where you have to make real goods. You yourself concede the point.

2. You say, " Deflation is not asset prices." Asset prices do reflect inflation or deflation. Apparently, this fact is inconvenient for you. Again, to the evidence, Japan has had interest rates at zero and deflation. The U.S. has had interest rates at zero and has experienced deflation in the housting market. Dropping assets are deflation. When asset prices such as gold increase, they signal an increase in the money supply, but no increased demand for real goods and services. Remember the inflation equation? It has two components: money supply and the velocity of money. I think this basic relationship is at the center of your confusion about asset prices the quantity of goods demanded in the physical economy.

The government can affect the money supply by lowering interest rates. The government does not affect the quantity of goods demanded long term (even if they try to directly with cash for clunkers).

3. You quote my third point, but again do not argue against my Tide aggregate demand/budget constraint argument. You just wave your hands around other issues.

4. The basis is clear, interest rates are down and the stock market is up (asset prices). Quantity of goods demanded is down (cars, etc). My evidence is right in front of you. Record low interest rates have not created record demand for cars.

5. You did suggest it was a contradiction. To quote you, "Also note that Japanese bond yields remained very low throughout this time, despite massive government debt. If "liquidity had been sucked out of the country" then WHAT WAS ALL THIS MONEY DOING IN JAPANESE GOVERNMENT BONDS?".

Again, I invite you to enter into a real debate by responding to my specific point about aggregate demand/budget constraints.

The Dogma of Low Interest Rates Is Wrong

Again, I agree that changes in interest rates affect prices. They do not stimulate the real economy.


On Oct 07 11:57 AM thiazole wrote:

> Here is the simple answer for why lowering interest rates doesn't
> cause deflation (a picture is worth a thousand words):
>
> research.stlouisfed.or...

The Dogma of Low Interest Rates Is Wrong

Exactly, Chap08 contradicts himself multiple times.


On Oct 07 11:20 AM JeffDB wrote:

> On Oct 07 08:15 AM chap08 wrote:

The Dogma of Low Interest Rates Is Wrong

Thiazole, the medical analogy does not hold here, because we do not have a closed economic system.

Our economy is part of a larger, linked system. In this system, money goes where it is treated best.

If you understand the structure of incentives (risk/return), then you can understand money flows.


On Oct 07 11:21 AM thiazole wrote:

> Good response. Saying that Japan's monitary policy caused their deflation
> is equivalent to saying cancer drugs cause cancer, or dieting makes
> people fat. Just because people who have cancer take cancer drugs
> or people who are fat often diet doesn't mean the treatment caused
> the disease.

The Dogma of Low Interest Rates Is Wrong

Bearfund, that was very articulate, great points, I wish I had made them myself.


On Oct 07 11:17 AM bearfund wrote:

> chap08, the money that went into JGBs was something of a remnant.
> I don't think the author meant to suggest that ALL the borrowed cheap
> money leaves the country, only that most of it does and that most
> of what remains does little or nothing to generate real growth. The
> Treasury and JGB markets feature tremendous leverage. The value of
> the currency - relative to other currencies, to gold, or in purchasing
> power terms - does not affect the directional outcome of a highly
> leveraged government bond position. Since there is also no credit
> risk, the only variable that affects the directional outcome is the
> change in interest rates over time. If you own JGBs purchased with
> free short-term yen, the only way you can lose money is if overnight
> yen interest rates rise above your yield on cost. The same is true
> of Treasuries purchased with the flood of cheap dollars.
>
> That is why we have lately been seeing Treasuries, US stocks, and
> commodities moving together in dollar terms. Normally we would expect
> Treasuries to fall in value during a real recovery as investors looked
> for better returns elsewhere. The reality is that there are no returns
> of any kind anywhere; there is no yield. It is all speculation fueled
> by free dollars and leverage. Under those circumstances, it doesn't
> much matter what you buy; anything is better than holding those declining
> dollars. Many will indeed look to higher-yielding currencies and
> foreign assets. Others seek value in commodities. And some - those
> whose privileged position allows them to do so - will gear up big
> time and purchase Treasuries. These trades are all likely to be winners
> as long as overnight rates never rise. Which happens to be exactly
> what the Fed keeps telling everyone each time the FOMC issues a statement.
>
>
> The behaviour of these markets right now is an extreme danger signal
> for the FOMC. There is no possible way that any unleveraged participant
> can increase or even maintain his purchasing power over the lifetime
> of a 30-year Treasury bond he purchases at a yield of 4%. Not when
> the dollar is losing several percent of its value each month. That
> fact that anyone is willing to pay so much for that bond is a clear
> signal about the kind of participant that does so, and therefore
> about the amount of dollar liquidity in the system. And when you
> see that coupled with universally-rising dollar asset prices, you
> should be terrified. This is not a recovery trade, it's a dollar
> debasement trade. When you price these assets in anything else you
> see the truth. No one who sees these charts should feel anything
> but cold, naked fear.

The Dogma of Low Interest Rates Is Wrong

Jeff, you're exactly right. Thanks for the reality check.


On Oct 07 11:14 AM JeffDB wrote:

> On Oct 07 08:15 AM chap08 wrote:

The Dogma of Low Interest Rates Is Wrong

Fat Panda, I agree with you, it encourages excessive risk. Great point.

Challenging the Low Interest Rate Religion

Palmer, thank you for the reality check. More people need to hear it.

Sometimes, it feels like I am out in the wilderness with the theorists who refuse to wed their thoughts to inconvenient things like facts and evidence.


On Oct 07 10:36 AM a. palmer jr. wrote:

> I'm one who agrees that interest rates shouldn't be so low in the
> U.S. As far as stimulation; If one is starting a business or expanding,
> shouldn't one expect to pay at least a modicum of interest on their
> loan? 40 years or so ago when I was buying a house the interest rates
> were around 7% but it didn't stop me from buying. The economy didn't
> seem to hurt back then and the stock market wasn't nearly as volatile
> as it is today. It seems that higher interest rates for loans and
> savings adds a little stability to the market. Oh, by the way, I
> didn't default on the loan, I paid it off.

The Dogma of Low Interest Rates Is Wrong

I think I am also tapping into emotional discomfort you have with logical criticisms of economic orthodoxy.

By definition, new theories of how the world works--in any discipline--contradict old theories.

Your challenge, if you dislike my theories, is to debate them using logic and evidence.

On Oct 07 10:23 AM chap08 wrote:

> Harry, try to be less emotional and as you say "look at the facts".
>
>
> There was growth in Japan post 2001. It's there in your figures.
> Compare that growth with what they achieved in the previous decade.
> Note also that they stopped QE in 2006 when they thought they had
> beaten deflation.
>
> Also note that Japanese bond yields remained very low throughout
> this time, despite massive government debt. If "liquidity had been
> sucked out of the country" then WHAT WAS ALL THIS MONEY DOING IN
> JAPANESE GOVERNMENT BONDS?
>
> As for a weak currency helping the trade deficit and unemployment
> - yes it does! Of course there's standard economic theory to back
> this up, but I see that you don't care for standard economic theory.
> So let's look at another example - China. China have a policy of
> deliberately holding their currency down exactly for this reason.
> You know what, it works!
>
> I could go on, but when you start saying things like "low interest
> rates do not stimulate the real economy" then your thinking gets
> so far away from the "facts" and "evidence" that it is, to be frank,
> laughable.
>
> On Oct 07 09:12 AM Harry Long wrote:

The Dogma of Low Interest Rates Is Wrong

Again, going back to facts, you are not responding to specific examples I have given multiple times. I would appreciate it if you would respond to my arguments point by point.

Again, the Yen has appreciated against the dollar for years, yet they still have a large trade surplus with the U.S. and their car companies have gained market share, putting out cheaper, higher quality cars. You have not contradicted this point.

Jim Rogers has made the same argument repeatedley.

Second, you keep mentioning deflation. I agree that interest rates affect asset prices. I have argued that consistently.

If you disagree when I say that interest rates do not affect the real economy, it should be easy for you to contradict my aggregate demand/budget constraint argument and tide example, but you don't.

If my arguments are laughable, it should be easy for you to contradict them, point by point, starting with the tide example.

In a fair debate, silence is consent, so I encourage you to refute my examples, rather than just saying that I am wrong without contradicting my arguments. I have and will continue to do you the courtesy of responding to your arguments point-by-point.

Furthermore, you contradict you own points. You point out the QE took place in Japan, then you seem to suggest that it is a contradiction that interest rates remained low. Low interest rates are consistent with QE.


On Oct 07 10:23 AM chap08 wrote:

> Harry, try to be less emotional and as you say "look at the facts".
>
>
> There was growth in Japan post 2001. It's there in your figures.
> Compare that growth with what they achieved in the previous decade.
> Note also that they stopped QE in 2006 when they thought they had
> beaten deflation.
>
> Also note that Japanese bond yields remained very low throughout
> this time, despite massive government debt. If "liquidity had been
> sucked out of the country" then WHAT WAS ALL THIS MONEY DOING IN
> JAPANESE GOVERNMENT BONDS?
>
> As for a weak currency helping the trade deficit and unemployment
> - yes it does! Of course there's standard economic theory to back
> this up, but I see that you don't care for standard economic theory.
> So let's look at another example - China. China have a policy of
> deliberately holding their currency down exactly for this reason.
> You know what, it works!
>
> I could go on, but when you start saying things like "low interest
> rates do not stimulate the real economy" then your thinking gets
> so far away from the "facts" and "evidence" that it is, to be frank,
> laughable.
>
> On Oct 07 09:12 AM Harry Long wrote:

The Dogma of Low Interest Rates Is Wrong

Tony, I apologize if I have offended. I don't mean to snipe. I always enjoy the give and take of a good debate.

The Dogma of Low Interest Rates Is Wrong

Alphameister, the facts speak for themselves. The Yen has appreciated for years against the USD and Japanese car manufacturers still put out a more competitive product at a more competitive price.

A deep understanding of the issues is evidenced by facts, not feelings.

Challenging the Low Interest Rate Religion

You whole assumption the low interest rates stimulate the real economy (as opposed to increasing prices) is common. However, this seeming "logic" is as widespread as it is wrong.

For example:

A main condition for stable and profitable growth is low inflation.

Inflation kills demand in terms of the aggregate quantity of goods citizens can afford. It doesn't spur it.

For instance, for families with fixed budged constraints (a fancy term for incomes), if the price of Tide goes up by 20%, the family either buys 20% less quantity of Tide, or less of something else in order to still afford it. But their income is unchanged. They can afford less of everything. The economy is hurt, not helped. When citizens can afford less goods, businesses lay off even more workers. Less quantity of goods can be afforded, businesses earn less or go broke, more workers are laid off. It' a simple and vicious cycle.

But, the socialists will proclaim, incomes will rise as well, negating this effect. Go to your boss and ask for a raise. See what happens. Inflation kills economies.

As Milton Friedman recollected of du Pont's famous adage "we do not have to be gracious at all to inconsistent logic or absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally." No society has ever prospered from inflation.


On Oct 07 06:37 AM chap08 wrote:

> Wrong on several counts.
>
> Australia is not a test of your theory. Australia is a strong economy
> that is directly exposed to growth in emerging Asia. They feed China
> et al with natural resources. This will keep Australia's economy
> and stock market strong. They can afford to raise rates.
>
> Quoting from the RBA statement:
>
> "Growth in China has been very strong, which is having a significant
> impact on other economies in the region and on commodity markets"
>
> "Economic conditions in Australia have been stronger than expected"
>
> "Unemployment has not risen as far as had been expected"
> "Housing credit growth has been solid and dwelling prices have risen
> appreciably over the past six months"
>
> Does this sound like the US today? Does it sound like Japan over
> the last 20 years? Japan was no proof of your theory. They had no
> effective monetary policy until 2001, and even then they weren't
> strong enough. Liquidity was not sucked out of the country. The problem
> was that there were no good investment opportunities internally due
> to a declining economy and ineffective action by the government and
> BOJ.
>
> If you want to see the effect of raising rates on a weak economy,
> look at the US in the early 30s. It was a disastrous policy. The
> same would be true for weak economies, such as the US, today.

The Dogma of Low Interest Rates Is Wrong

A main condition for stable and profitable growth is low inflation.

The effect of inflation is to penalize the virtue of savers, who are caught in the double-whammy of the debasement of the currency and ridiculously low interest rates, thereby earning highly negative returns on their savings. This is not just China. These savers are ordinary Americans who do not over leverage and did all the right things. They are often the elderly on fixed incomes. This inflation is a taking (theft) from savers and a gift to all those who have borrowed money. Their debts are fixed, but the money they must repay in becomes steadily less valuable. It is yet another form of wealth transfer (theft) from those with virtue to those with vice.

But you may say, "sure these savers lose out, but we can increase employment with some inflationary increases in the money supply." This seeming "logic" is as widespread as it is wrong. Inflation kills demand in terms of the aggregate quantity of goods citizens can afford. It doesn't spur it.

For instance, for families with fixed budged constraints (a fancy term for incomes), if the price of Tide goes up by 20%, the family either buys 20% less quantity of Tide, or less of something else in order to still afford it. But their income is unchanged. They can afford less of everything. The economy is hurt, not helped. When citizens can afford less goods, businesses lay off even more workers. Less quantity of goods can be afforded, businesses earn less or go broke, more workers are laid off. It' a simple and vicious cycle.

But, the socialists will proclaim, incomes will rise as well, negating this effect. Go to your boss and ask for a raise. See what happens. Inflation kills economies. As Milton Friedman recollected of du Pont's famous adage "we do not have to be gracious at all to inconsistent logic or absurd reasoning. Bad logicians have committed more involuntary crimes than bad men have done intentionally." No society has ever prospered from inflation.

I agree that China has great potential, and have argued that in previous articles, such as "It's Not Just the Carry Trade."

However, I would encourage you to examine emerging market returns during U.S. interest rate tightening cycles.


On Oct 07 09:21 AM Tony Petroski wrote:

> I think Chap08 has it right and the author has it wrong.
>
> Money flows to emerging markets and China because (the author knows
> this but didn't put it quite right) the potential returns are much
> larger even given larger risks. It may be that financing such outflows
> with extremely low interest rates may pave the way for continuing
> the outflows, but you don't stop the outflow by raising interest
> rates. You stop the outflow by creating conditions for stable and
> profitable growth.

The Dogma of Low Interest Rates Is Wrong

Where do I begin?

No investment opportunities in Japan? Oh, I forgot, Toyota and Honda aren't real companies like GM, Ford, or Chrysler.

Ineffective action by the gov and BOJ? It was very effective, if keeping zombie banks alive and not forcing them to write down loans is the goal (hence, my point).

To your point about the 30's, low interest rates do not stimulate the real economy, they affect prices. Half of the U.S. monetary base was wiped out when banks failed. You blame the weak economy on interest rates against that backdrop? Wow. It's time to embrace evidence-based thinking.

On Oct 07 08:15 AM chap08 wrote:

> "If we do not wish to share such an experience, why are we repeating
> the same policies which led to such results? "
>
> We're not repeating the same policies. Japan tacitly accepted deflation
> for over a decade. It wasn't until 2001 that they started a policy
> of QE. From that point, they had their longest post war period of
> economic growth. Our monetary, rather than fiscal, response has been
> much earlier and much more aggressive. Don't expect the same results
> as Japan.
>
> As for the carry trade, Japan did not suffer from a lack of funds
> for investment. What they suffered from was a lack of good investment
> opportunities at home - the world outside always offered more. The
> same is currently true for us.
>
> You say that: "extremely low interest rates suck investment funds
> and liquidity out of nations. You heard it here first, and the evidence
> is clear. Money has flowed out of U.S Equity ETFs and into Global
> ETFs." That's not because of low interest rates. That's because a)
> there are better investments overseas, and b) we have a dollar declining
> on the back of a declining economy. This will continue, not as long
> as we have low interest rates, but as long as we have a poor economy
> and poor investment opportunities at home.
>
> You say that a falling currency is "procyclical". No it isn't. A
> falling currency will help to reverse our trade deficit, unemployment
> and deflation. It is countercyclical. That's what floating exchange
> rates do.
>
> People say that we have had interest rates too low for a decade.
> Has this starved us of funds for investment? When you look at the
> last decade of the housing market, do you look at a market starved
> of funds for investment?? In fact, the reverse is true. We have had
> over the last decade, and continue to have, too much money chasing
> too few good investments. That just results in mal-investment, like
> housing. Low interest rates do not starve you of investment funds.
>
>
> What we need are better investment opportunities thru an improved
> economy. Low interest rates and a lower dollar are part of what's
> necessary to achieve that. High interest rates would do the reverse.
> This author suggests elsewhere that Australia sets a good example
> to us by raising rates. This is nonsense. Australia is a totally
> different economy with much stronger exports, employment and housing.
> If you want to see the effect of raising rates on a weak economy,
> look at the US in the early 30s. It was a disastrous policy. The
> same would be true for all weak economies, such as the US, today.