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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Zero rate!

Posted by WARREN MOSLER on October 29th, 2008


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Yes, but, of course, for the wrong reasons!

They all still act and forecast as if lower rates are expansionary.

This still has no support in theory or practice.

Outstanding government debt means the private (non-government) sectors are net savers.

Households remain net savers.

Lower rates directly cuts personal income.

And lowers costs for businesses including costs of investments that reduce costs.

I do favor a permanent zero interest rate policy.

That would mean the same amount of government spending needs less in taxes to support it (larger deficit).

Ex-Fed Gov. Meyer Makes a Case for a Zero Fed-Funds Rate

By Brian Blackstone

With the U.S. unemployment rate now expected to climb well above 7%, former Federal Reserve governor Laurence Meyer projects that Fed policymakers may have to lower the target federal-funds rate all the way to zero next year.

“However, the expected rise in the unemployment rate, paired with the rising threat of deflation, presents a risk that the FOMC will have to ease even further, perhaps all the way to a zero federal funds rate,” Meyer and Sack wrote in a research note.

Meyer and Sack said they think the jobless rate will rise to as high as 7.5% from 6.1% now. They also expect a significant gross domestic product contraction of 2.8%, at an annual rate, in the fourth quarter, after a projected 0.7% decline in the third. They also expect GDP to fall in the first quarter of next year.

Meyer and Sack expect the Fed’s preferred inflation rate gauge — the price index for personal consumption expenditures excluding food and energy — to moderate to just 1% growth, at an annual rate, by the end of 2010.

“Plugging our interim forecast into our backward-looking policy rule suggests that the federal funds rate should be cut to zero by the middle of next year,” Meyer and Sack wrote.

“Our forward-looking policy rule…gives similar results if we plug in our updated forecast, as it calls for a funds rate of about zero by early 2010,” they wrote.


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2 Responses to “Zero rate!”

  1. RSG Says:

    “That would mean the same amount of government spending needs less in taxes to support it (larger deficit).”

    Not sure what you mean here. Government spending isn’t revenue constrained.

    Reply

  2. warren mosler Says:

    right,

    but ‘too much’ deficit spending will, at the margin, result in only nominal gains (inflation) and not real growth.

    What i was trying to get at is that ‘all else equal’ higher savings desires mean the same amount of govt spending requires fewer tax liabilities.

    Agreed it wasn’t stated all that well!

    Reply

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