Narayana Kocherlakota is the President of the Federal Reserve Bank of Minneapolis. Here's what he said in a speech in Frankfurt the other day:
"Increasing the supply of assets available to investors would push downward on debt prices, and so upward on the long-run neutral real interest rate..."
First of all did Kochelakota ever look at a chart of the historic relationship between Federal debt and interest rates? Well, here it is below. By the way, I got this chart FROM THE FED.
Secondly, is he aware that it's the FED THAT SETS RATES? Even if the government expanded its debt, the Fed would have to at least signal higher rates before it could happen simply because the Fed would be buying all bonds, notes and bills at higher prices (lower rates) to defend its target. There'd be no sellers at lower prices (higher rates). NONE!
Third: higher levels of Federal debt entails more deficit spending, which is exactly what we need. Is that what he is advocating? If so, why doesn't he come out and say it?
What idiots. I really can't take it anymore.
1 comment:
Michael,
I think you are over-reacting, but kudos for monitoring such talks. It seemed to me tha the part you quoted made sense: an increase in Federal debt would mean more borrowing (= more assets on the market for investors to hold) and thus raise interest rates. So far that matches with what you said, so "why don't they just say so?" May be the key question. Okay, he was talking in Frankfurt, to monetary wonks, so maybe he has an excuse.
But I had trouble deciphering the sentence at the beginning of your quote. " I consider a permanent increase in the market value of the public debt, financed by an increase in taxes or a reduction in transfers." It seems to me that a borrowing increase would only be "financed by" such moves if they are thought of as a way to service the interest payments on such debt. It seems to me that ignoring the use of the initial borrowings is out-Barroing Barro, who, in his fantasy world of Ricardian Equivalence, would at least consider both ends of the borrowing process.
Still, I think he makes valid points about the problem of a zero-lower bound interest rate, an issue raised by the IMF's Olivier Blanchard just in time to put it on the key policy agendas.
Also, I think your graph is largely irrelevant since it tracks nominal, not real, interest rates.
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