Tom Brown sent me to an Austrian critique of monetary stimulus (in this case negative interest on reserves):

Negative deposit rates” means that the banks will charge the customer for saving money and placing it in the bank. According to Keynesian theory (if there really is such a thing) government needs to spur “aggregate demand” in order to stimulate the economy to increased production. Keynes had no respect for savings…only spending. He called the consequences of savings to be a “paradox of thrift” in that if we all save instead of spend, then the economy will go into a death spiral. He was completely ignorant of capital theory, which explains that REAL capital, not paper money capital, comes from deferring spending ON CONSUMER GOODS in order to increase spending ON CAPITAL GOODS. The money that we save is not destroyed. It goes into the lendable funds market to finance long term capital investment that will pay future dividends, both literally and figuratively, ensuring MORE goods in the future.

He’s right about 2 things. The paradox of thrift is a silly concept. And it is usually the case that monetary stimulus will discourage saving and hurt the economy. This is because monetary stimulus cannot push growth past the natural rate, based on population growth, technology, government institutions, etc. But it can raise the rate of nominal GDP growth. This raises the nominal returns to capital without raising the real returns. Even worse, nominal returns are taxed, so the real tax rate on capital rises with faster NGDP growth and this discourages capital formation, slowing economic growth.

Things are very different, however, when the monetary stimulus is making up for recent monetary tightness, which drove real output below potential. In that case, monetary stimulus can boost real output because nominal wages are sticky, or slow to adjust. And here’s what is surprising, this sort of growth will lead to more saving, not less. The easiest way to see this is with a closed economy model, or a model of the global economy where all the major central banks are doing stimulus.

Recall that, by definition, saving equals investment. Also recall that the share of GDP spent on investment goods is procyclical. That means investment spending rises faster than consumption during booms and falls faster than consumption during recessions. During a recession monetary stimulus raises real economic growth, which causes investment to rise faster than consumption. Since saving equals investment, saving also rises faster than consumption. Monetary stimulus actually causes people to save a larger share of their income.

Keynesians try to explain this result by distinguishing between planned and actual saving, but that explanation is not satisfactory. If the public is rational they will fully understand what is going on. The monetary stimulus will cause them to plan to save more, and to actually save more. There are two better explanations:

1. The monetary stimulus leads to faster expected growth in income, and the marginal propensity to save out of an extra dollar is greater than the average propensity to save.

2. The monetary stimulus may increase the expected real rate of return from saving. This will show up in higher long term expected yields from stock and bond purchases. This odd result (an upward sloping IS curve) does seem to occur on occasion, but is hard to predict.

One final point. Real interest rates on long term Treasuries have been falling for more than 30 years, from over 7% to near zero. The causes are poorly understood. Here are some possibilities:

1. Increasingly easy money.

2. Increasingly tight money.

3. Demographics and technological change.

4. Piketty is wrong about everything (just kidding.)

The first explanation is very doubtful; NGDP growth and inflation have been slowing for more than 30 years. There’s no model that predicts increasingly easy money would produce that result.

The second explanation is slightly more plausible, but only for the period since 2008. Tight money in 2008 caused a deep recession, which lowered real returns on capital. But this doesn’t explain the 30 year downtrend.

The third explanation is the most plausible. Because quantities of saving and investment (as a share of GDP) haven’t changed dramatically, it seems the global supply of saving must have shifted right, while global investment demand shifted left. Thus rates fell sharply with little change in the actual quantity of global saving and investment as a share of GDP. Possible explanations:

1. Higher saving rates due to demographics, particularly in Asia. Slowing population growth.

2. The investments of the 21st century (such as Facebook) require less capital than typical 20th century projects, such as interstate highway system and automobile factories.

3. An increasing gap between the risk-free rate and the average return on capital.

4. ?????

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