Will the Real Financial Reality Please Stand Up
Since the 2008 crisis the world has been under the largest monetary policy experiment in history.
Some say more is needed like removing the majority of cash around the world from circulation and cutting rates to negative. Others are pointing out that the ultra low rates have already brought the global financial system problems that will never be solved with more debt, negative interest rates, and moving toward a cashless global system.
Which is it? Consider these comments from books recently released by two individuals who have worked at the central banking level.
“The policy world is hugely uneasy about the difficulties central banks have had in lifting rates off the zero bound once is was reached….
Perhaps the most sobering thought is the realization that at some point (perhaps before the ink on this book is dry), another recession will inevitably occur. Then, in the normal course of things central banks will want to cut rates to stabilize the economy and cushion the rise in unemployment. ….there just isn’t going to be a lot of room for interest rate cuts unless a way is found to make negative rate policy more effective.
Yes, they can go back to some of the same tricks they tried in 2008 – quantitative easing and forward guidance…But most central bankers are rightly skeptical that these alternative approaches are anywhere near as potent as interest rate cuts.” [The Curse of Cash (2016) Kenneth Rogoff, pgs 131 -132, Rogoff served as the Chief Economist for the International Monetary Fund. Today he is a professor of economics and public policy at Harvard.]
"The journey could be anywhere, but let’s start in Erie, Pennsylvania, and area of the
country that was struggling even before 2008. …The zero bound [monetary policy of the Fed between Dec ’08 and Dec ’15] has dealt the region a devastating blow. Now, in an Erie elementary school a student is given stapled copies of “Everyday Mathematics” instead of an actual textbook. After a snowstorm, twenty-one buckets were deployed to catch leaks because there was no money to catch the leaks. In the last five years, the Erie school district has laid off one fifth of its employees and closed three schools to cut costs. School officials are being forced to divert budgets earmarked for kids and facilities to cover the shortfall in a zero-interest-rate environment where bonds return only 1 or 2 percent.
This is not limited to Erie. By mid-2016, long-term returns for U.S. public pensions have dropped to the lowest levels ever recorded – a $1.25 trillion funding gap…..” [Fed Up: An Insider’s Take on Why the Federal Reserve is Bad for America (2017), Danielle DiMartino Booth, pgs 3-4. Booth began her career with Credit Suisse in New York and served nine years as monetary adviser to Dallas Fed President Richard Fisher until his retirement in 2015. She is currently President of Money Strong LLC]
In my opinion, the biggest challenge to the world of finance is between the theoretical and the operational. The theoretical world is fighting a battle with real world consequences as shown in Rogoff's and DiMarinto Booth's comments.
If a zero interest rate has had negative impacts on savers, pension fund managers and insurance companies for years, will negative interest rates help correct this problem? What repetitive patterns can be found that show operational strain from needing a "perfect stock market"?
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