
The Natural Rate of Interest Is Zero (2004) [pdf] - jganetsk
http://www.cfeps.org/pubs/wp-pdf/WP37-MoslerForstater.pdf
======
bubbleRefuge
Takeaways: -the federal government is self funding. (my opinion: we should
take advantage of this by lowering taxes or spending more)

\- taxes create demand for money but don't fund government.

\- 'money' doesn't exist till the federal gov spends it into existence

\- interest rates are determined exogenously by the fed.

\- large deficits tend to drive down , not up, interest rates because of the
excess reserves created.

~~~
api
I wish people understood that public debt is not really debt as ordinarily
understood. It's really just an accounting artifact and tends to reflect and
mirror net private savings.

That is unless your country does not issue it's own sovereign currency. Then
it is debt.

~~~
barrkel
Public debt is a promise to fund future obligations and things like pensions
would be significantly devalued if it isn't honoured, so in political practice
it is debt.

That debts and savings are two sides of the same coin is tautological and
doesn't require a state or fiat currency. Your current account with the bank
is a debt the bank owes you. All savings are debts.

~~~
bubbleRefuge
Right, but public debt is someone's asset as well. To parapharse Stephanie
Kelton. The federal deficit is the public's surplus.

------
jnordwick
(2004) and talking about the risk free overnight rate.

"Deficit spending will result in net central bank reserve credits in the
aggregate banking system, which will drive the short-term overnight inter-bank
lending rate to zero."

Also, we now pay interest on reserve balances which goes against one of the
paper's assumptions.

~~~
jganetsk
The paper mentions that:

"While government security sales may be used to drain the excess reserves to
maintain some positive overnight rate, or the central bank may pay interest on
reserve balances, absent such government intervention the base rate of
interest is zero. In other words, the natural rate of interest is zero."

~~~
jnordwick
That's what I'm saying. The paper was written in a time before interest
payments on reserve balances, and it explicitly says that is one of the
requirements for the paper to hold. We now pay interest on reserves, but I'm
not sure what that entire policy is or how it works.

~~~
jganetsk
The paper still holds. It is saying that the natural rate of interest, i.e.
the "base case", is zero. It mentions interest on reserves and bond issuance
to drain reserves both as ways to "move away from the base case". It claims
that, regardless of mechanism, we should justify our actions to move away from
the base case. It also claims that the base case is a good policy for a
variety of reasons.

------
mhuffman
It is also the natural amount of profit in perfect competition!

~~~
taneq
When you put it that way, I really don't want to live in a perfectly efficient
market.

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mcnamaratw
So are the authors lending or just talking?

~~~
matte_black
I too would be interested in this as I'd like to take out a mortgage.

~~~
phlo
In Switzerland, the current target interest rate (set by the Swiss National
Bank) is -1.25 to -0.25 percent, with current rates around -0.75%.

This means banks need to pay the SNB on their funds deposited there. Many of
them pass that on to their customers: Deposits don't earn any interest to
speak of, and for large sums (starting from 1M or so), banks commonly _charge_
interest. At some points, the yield on Swiss Gov't bonds was even negative.

If you can offer a safe (and bank-accepted) way to store that money, you stand
to make a killing.

On the other hand, even in that environment, mortgages aren't free. Rates
range from 0.5 to more than 2%. Part of that is the banks' margin, part of it
comes from fixing the interest rate for some (2-10) years.

[1]
[https://www.snb.ch/en/iabout/stat/statpub/zidea/id/current_i...](https://www.snb.ch/en/iabout/stat/statpub/zidea/id/current_interest_exchange_rates)

~~~
Dylan16807
I'm surprised the rate would get that negative. Especially when they have a
1000 Franc note (worth around 1000 dollars). At that level you can fit
trillions of dollars in a single vault. A respected bank could build a new
vault, staff it with multiple guards, charge 0.2% or 0.1% for storage, and
make their investment back in under a year. Even with smaller notes. Obviously
I'm missing something here, but what? Is it not safe enough?

~~~
ThrustVectoring
A that sort of scale, you need government permission to turn the banknotes
back into legally recognized bank account balances. So if there's a 1% chance
Switzerland says "no, you can't actually just store cash in a vault instead",
you're losing money on a risk-adjusted basis.

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stretchwithme
Being able to use money has value. To get people to forgo the use of their own
money, you have to pay them something.

If there were risk free investments (I don't think there are), wouldn't people
invest in those directly instead of letting you do it with their money?

Of course, there is always arbitrage.

~~~
volgo
There is. It's U.S. Treasury bonds. It's guaranteed profit and risk free

~~~
daxorid
Sovereign debt is only risk-free relative to the issuing government's
continued existence.

The historical average duration of empires, republics, dynasties, and
monarchies is 349 years. The assumptions we make about financial markets in
the developed world seem to completely ignore political factors, as if issuing
governments or unions that exist today will always exist - as if history has
somehow ended.

When you buy a 30y US Treasury bond at auction, you are getting paid 3.13% to
assume that between years 231 and 261, representing 8.6% of the average
lifespan of empires, no existentially threatening political upheaval will
occur in the United States.

Seeing the political division of the populace in the 2016 election, I wonder
if this is a prudent assumption.

~~~
xvedejas
I also wonder if this is a prudent assumption. Existential threat is really
hard to measure. If we want to know the average lifespan of a modern republic
that has existed for about 250 years already, we don't have many data points
to compare to. Here are ones that may count:

\- San Marino has been a republic for over 1000 years

\- The Netherlands was a republic from 1581 until 1806

\- Switzerland has been a republic since 1648

\- Paraguay, Chile, Argentina, and a dozen other Latin American countries have
been republics continuously for over 150 years. Not without their share of
upheaval, but even in the case of Venezuela I don't know that you can argue
that the country stopped existing in sudden crisis.

And that's all I can find, for "modern" republics >= 150 years old at present
or at cessation. The next closest is France, which is also still a republic.
We don't have too much data but I would listen to an argument that modern
republics seem to be unusually long-lived compared to more traditional
government types. With no better information available, you can choose either
to trust the examples we have, or to adopt the doomsday prepper mentality.
When trust is cheaper, it's not any surprise to me that people trust the
government to continue existing.

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jonny_eh
I suspected that low interest rates would be around for a while, if not
forever. So when I got my mortgage, I got the 7/1 ARM, instead of the standard
US 30-year fixed.

~~~
jganetsk
The paper is talking about the overnight, risk-free interest rate, not a long-
term mortgage, which is just one point on the yield curve. If we think of the
yield curve as a 3D graph, where one axis is interest rate, another axis is
term, and a third axis is risk, then the paper is claiming that there is a
point at (0, 0, 0). But central banks often change the interest rate to
something non-zero at (0, 0).

------
kazinator
Zero interest means zero economic motivation to lend anyone any money. This is
only possible in some ideal world in which there is very little demand loaned
money, and those few who borrow always give it back in a timely way, so there
is zero risk in lending. And lending is just between friends; you know, can
you give me a hundred bucks? I will pay you back in a few weeks (exactly a
hundred bucks). And they always do.

------
politician
(2004)

~~~
sctb
Updated. Thanks!

------
HIPisTheAnswer
USD is a promise to pay a dollar to the bearer of the receipt. A dollar is an
amount of gold, and so is a franc, a pound, a baht, and probably many others.
Conversion of a thing into itself is _not_ a conversion. There is no risk free
rate, and the behavior of capital constrained by worldwide tax hunt cannot
reasonably be called 'natural'. One more thing: banks can only have reserves
_after_ covering the totality of their demand deposits, which means that
virtually all public banks are insolvent... You say they can sell some assets
to cover? Fine! Let's see the selling, and see how many come out alive! I'm
waiting!

~~~
betenoire
Where do I trade in this piece of paper in my pocket for gold?

~~~
_red
Technically a FRN (Federal Reserve Note) is backed by a US Dollar. These are
distinctions which seem odd today, and describe the odd system that we now
have.

A "US Dollar" is defined constitutionally as being "gold or silver". However
you can no longer redeem a FRN for a USD....only for more FRN's.

It raises several interesting legal questions when pondered, for instance when
you pay taxes you are being taxed on USD earnings, although technically you've
never been paid this.

~~~
pmyteh
There's no constitutional definition of a dollar: gold, silver or otherwise.

The restrictions in article I section 10 bind the states, not the federal
government.

Since the suspension of convertibility into gold in the 70s, dollars are
essentially a pure fiat currency - whether in FRNs, dollar coins or otherwise.

~~~
_red
Yes it bound the states...and its obvious intention was to forbid the
promulgation of fiat throughout these "united states". Moreover, the First
National Bank of the US was forbidden from both buying US treasuries and
issuing debts beyond its capitalization. Clearly two limitations intended by
the framers of the constitution to prevent the issuance of a fiat currency.

The dollar was a unit of measure prior to the existence of the United States.
Saying the dollar was not defined is like saying an ounce is not defined. A
"dollar" was 550 grains in weight.

~~~
pmyteh
Its obvious intention was to centralise currency by preventing the states from
making their own scrip. The Framers were perfectly capable of writing
limitations on the federal government reflecting those on the states if they
wanted to - look at the restrictions on bills of attainder and titles of
nobility.

And the first Bank was not set up by the Constitution - it was set up in 1791
by Act of Congress after a political fight between Hamilton and his critics.

The Spanish dollar existed at the time of the US's founding, as did various
other countries' (differently weighted) dollars; the US dollar wasn't defined
until 1792 (when it was, indeed, defined as given weights of either gold or
silver - the Spanish dollar was silver only). But the US dollar was defined by
Congress and can be redefined by the same. And they have.

