tag:blogger.com,1999:blog-7314520695799326639.post7633367467779554004..comments2023-09-22T12:18:35.125+01:00Comments on Your Neighbourhood Economist: Interest Rates – low but not low enoughYour Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-7314520695799326639.post-63848756748860285152015-06-26T13:14:38.169+01:002015-06-26T13:14:38.169+01:00Thanks again for your comments.
I studied economi...Thanks again for your comments.<br /><br />I studied economics at university after finding it useful to understand the world around me. So you will have to excuse me if I remain somewhat wedded to the ideas that I learnt and wanting to use the bits of economic theory that I still find useful. <br /><br />The ideas for this blog posting do not rely on the IS/LM model but more basic ideas on the role of interest rates in the economy. Economic theory struggles to explain why you would have surplus saving and little investment so the blog posting was an attempt to find an explanation.<br /><br />I agree with your comments on the inability of "financial tweaks" to fix the economy. In this blog, I have argued for more expansionary fiscal policy and monetary policy which puts cash in the hands of consumers rather than banks.<br /><br />I also agree with your comments on where bank lending comes from. Banks have the ability to create cash from nothing but that does not mean that quantitative easing has not provided extra liquidity for the banking sector at a time of heightened concerns about cash reserves.<br /><br />However, as you may imagine, I do not share your skepticism about the usefulness of economics. It is true that much of economic theory has proven to not only to be irrelevant but also misleading. But I still hope that lessons can be learnt and something can be salvaged. Ideas like a "self-healing" economy and an economy moving to "equilibrium" may seem antiquated but still have some relevance. Capitalism would not have made it this far if economics did not provide policymakers with some useful insights.<br /><br />This has just been a general reply but please let me know if there is anything in particular that you think might require further explanation.Your Neighbourhood Economisthttps://www.blogger.com/profile/00096015895608337029noreply@blogger.comtag:blogger.com,1999:blog-7314520695799326639.post-7308377313290037892015-06-25T17:16:46.067+01:002015-06-25T17:16:46.067+01:00You seem to subscribe to the Krugmann IS/LM nonsen...You seem to subscribe to the Krugmann IS/LM nonsense. Even the creators of that idea have admitted it was never meant to represent reality. Krugmann with his massive ego will never admit his model is wrong. He just finds an excuse such as the strange, "liquidity trap" idea, which even he said, renders his model unusable in that situation.<br /><br />The "self-healing" of an economy is another piece of idiocy which igmores real life and the action of capitalists, policy makers, central bankers and global competition all acting in different directions.<br /><br />I cannot see that there is any one "equilibrium" that an economy moves towards. It is one humongous mulitvariable system with myriads of random events. <br /><br />What is amiss is that the economic theories bandied about are simply not up to the job.<br /><br />Your statement, "Quantitative easing adds to this by giving banks more money to lend" is way way way off the mark, and displays the current ignorance amongst economists and politicians of how the banking system functions. Banks DO NOT lend out of reserves and banks DO NOT lend out depositors' cash. They are NOT intermediaries between depositors and borrowers.<br /><br />Banks simply create out of nothing the debts and simultaneously the deposit to fund the debt.<br /><br />Without this basic and fundamental precept of how the money creation works in the finance system, and integrating it into economic models, all economic models are doomed to failure. Which they are anyway, because we are dealing with fickle humans, who have a herd mentality, and governed by a bunch of decision makers with their own interests constantly in mind.<br /><br />A recent article in the Telegraph stating that the UK hardly works at all, it is difficult to see why they should receive any salary increase until they put in a full day's work. Fully 10% of UK workers state that they work 30 minutes each day!<br /><br />http://www.telegraph.co.uk/finance/jobs/11691728/Employees-waste-759-hours-each-year-due-to-workplace-distractions.html<br /><br />And pop this paper into your theory about interest rates and prices.<br /><br />http://phe.rockefeller.edu/docs/Nature_Rebounds.pdf<br /><br />Huge productivity increases in food production, and moves towards stopping the incredible waste of food we decadent Westerners chuck away every day.<br /><br />And check out how many gadgets are being shrunk into one smart phone. Instead of ten different bits of stuff, it is all integrated into one device.<br /><br />Pissing about with IS/LM and interest rates is just a totally blinkered approach. Might be nice for the stupid politicians, "Oh, we only have to tweak the interest rate and all will be hunky dory".<br /><br />But it won't work.<br /><br />What might improve things is more focus on differential interest rates across the economy and government policies to determine where the banks should be lending money. Currently most lending is going into pumping up house prices, a non-productive asset, and the main reason why people have little discretionary spending. It is all going on rent or mortgage repayments.RPhttps://www.blogger.com/profile/17695303458973909485noreply@blogger.com