[ExI] More economist failures

BillK pharos at gmail.com
Tue Aug 9 12:00:02 UTC 2016

Economists Mystified that Negative Interest Rates Aren’t Leading
Consumers to Run Out and Spend
August 9, 2016


Not only has it been remarkable to witness the casual way in which
central banks have plunged into negative interest rate terrain, based
on questionable models. Now that this experiment isn’t working out so
well, the response comes troubling close to, “Well, they work in
theory, so we just need to do more or wait longer to see them

Policy makers in Europe and Japan have turned to negative rates for
the same reason—to stimulate their lackluster economies. Yet the
results have left some economists scratching their heads. Instead of
opening their wallets, many consumers and businesses are squirreling
away more money.

When Ms. Hofmann heard the ECB was knocking rates below zero in June
2014, she considered it “madness” and promptly cut her spending, set
aside more money and bought gold. “I now need to save more than before
to have enough to retire,” says Ms. Hofmann, 54 years old.

Recent economic data show consumers are saving more in Germany and
Japan, and in Denmark, Switzerland and Sweden, three non-eurozone
countries with negative rates, savings are at their highest since

People save for emergencies and retirement. Economists, who are great
proponents of using central bank interest rate manipulation to create
a wealth effect, fail to understand that super low rates diminish the
wealth of ordinary savers. Few will react the way speculators do and
go into risky assets to chase yield. They will stay put, lower their
spending to try to compensate for their reduced interest income. Those
who are still working will also try to increase their savings
balances, since they know their assets will generate very little in
the way of income in a zero/negative interest rate environment.

It is apparently difficult for most economists to grasp that negative
interest rates reduce the value of those savings to savers by lowering
the income on them. Savers are loss averse and thus are very reluctant
to spend principal to compensate for reduced income. Given that
central banks have driven policy interest rates into negative real
interest rate terrain, this isn’t an illogical reading of their

The second effect is that of inflation signaling. Again, consumers are
reacting correctly to the message central banks are sending. Negative
interest rates signal deflationary tendencies and that central banks
think deflation is a real risk. And what is the rational way to behave
in deflation? Hang on to your cash, because goods and services will be
cheaper later.

As I suspected might happen. I wonder if central banks will continue
with low and negative interest rates when it starts driving pension
schemes bankrupt?


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