# Another "modest proposal" after Jonathan Swift.



## Fsharpmajor (Dec 14, 2008)

I know my last modest proposal thread ended up being locked, but it wasn't really my fault. Anyway, this thread will make it up by solving all the world's financial problems.

*What we need is negative interest rates.* The way it will work is, you pay interest on your savings rather than receiving interest, but if you take out a loan you will receive interest on it rather than paying interest.

This will result in a big increase in consumer spending, which is just what we need to boost the economy right now.

Isn't it?


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## science (Oct 14, 2010)

Good thinking!

High inflation is roughly the same thing, and arguably we've been needing some inflation to motivate people (especially banks and large firms) to move money out of savings and into investments. I'm not sure that's correct, but it's arguable, and it's more-or-less the principle behind the low Fed rates. I think it may be the idea behind quantitative easing as well, but I haven't tried to understand that policy, so I'm not sure.


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## Ralfy (Jul 19, 2010)

Consumer spending will go up but production may drop due to lack of credit.


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## Fsharpmajor (Dec 14, 2008)

science said:


> Good thinking!
> 
> High inflation is roughly the same thing, and arguably we've been needing some inflation to motivate people (especially banks and large firms) to move money out of savings and into investments. I'm not sure that's correct, but it's arguable, and it's more-or-less the principle behind the low Fed rates. I think it may be the idea behind quantitative easing as well, but I haven't tried to understand that policy, so I'm not sure.


That was my thought. High inflation is the equivalent to interest being paid out of your savings, and quantitative easing is--maybe--equivalent to interest being paid onto loans.


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## Kopachris (May 31, 2010)

I'm a little confused. Why exactly would banks give a person a loan if they have to periodically give the person more money which won't be paid back? And why exactly would people put money in a savings account if they have to periodically give the bank more money proportional to the amount they put in? Is that the point? To make people stop saving so much and to stop banks from lending so much?


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## Fsharpmajor (Dec 14, 2008)

Kopachris said:


> Is that the point? To make people stop saving so much and to stop banks from lending so much?


I suppose it could be. Modest proposals are meant to be puzzled over. Is emptying the pockets of the savers to fund the spendthrifts a good idea?


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## science (Oct 14, 2010)

If the economy's problem is that there isn't enough money in circulation, leading people (including banks) to want to hold their money rather than spend it (or lend it to people who would spend/invest it), leading to less spending, leading to people being unable to sell things, leading to business failures and unemployment - then the solution is to get more money in circulation, sending the cycle in reverse. If the central bank lowers its interest rate, hopefully the banks will borrow more from it, lending more to others, who in turn spend that, creating jobs, and as the money filters into the economy people in general become more willing to spend and prosperity returns. In other words, higher inflation was needed.

Other times the problem could be that there is too much money in circulation, making people want to spend money but not sell things. This is the opposite problem, and the solution (in theory) is to raise the interest rate, hopefully creating lower inflation.

It works pretty well most of the time. The big hitch tends to be government spending, which operates in a way similar to monetary policy, but governments (largely because it is counter-intuitive to voters and politicians) often don't act correctly. They borrow and spend when there's too much money (when they should run a surplus, decreasing the money supply) and then scrimp and save during a bad economy (when they should run a deficit, increasing the money supply). In the face of bad fiscal policy, monetary policy can only do so much.

Think of the last couple of weeks. The idea has been that the US is so much in debt that we're not going to pay it off. If lenders believed that, they would be less willing to lend, to the US, and the government would have to pay a higher interest on its bonds. Anyway, even though the lenders are eager to lend to the US, the people believe the government is in too much debt. That's fine, of course - the government of We the People ought to do what we want. However, investors realize that cutting government spending when there's already not enough money in circulation is going to lead to an even bigger money shortage, and an even bigger recession. So the response to the debt deal was: to sell stocks because companies won't be making much money during the recession, and loan the money from those sales to the US government, even though they won't get much money in return for those loans. (Edit: Don't take my word for it, here is Krugman's blog about the market crash yesterday: http://krugman.blogs.nytimes.com/2011/08/19/awesome-wrongness-2/).

Of course there are half a dozen other perspectives on all of this, but this is the money supply theory of it all - and it has been doing a good job of explaining events for the past couple of years.


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## TxllxT (Mar 2, 2011)

What we need is a bacteria that eats gold or something that makes gold rust.


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## starthrower (Dec 11, 2010)

We need higher wages so the means of the working class can catch up to the cost of living. Taxes on the wealthy need to be increased dramatically. If they are not going to invest a good portion of their enormous profits in to jobs, R&D, and the overall economy, then the government should collect more taxes and invest the money in job creating projects around the country.

The trickle down theory has never worked, and never will work. More and more wealth concentrated in the hands of a few is not doing anybody any good. The last time the top one percent took home more than 23 percent of the nation's income was in 1928. Everyone knows what happened in 1929.


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## Polednice (Sep 13, 2009)

I don't get all this moaning about the economy nonsense - I've been printing money in my garage for the last ten years and it's always worked out fine for me.


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## TxllxT (Mar 2, 2011)

Polednice said:


> I don't get all this moaning about the economy nonsense - I've been printing money in my garage for the last ten years and it's always worked out fine for me.


I bet you drive the same car like mr. Bean


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## Chi_townPhilly (Apr 21, 2007)

Fsharpmajor said:


> *What we need is negative interest rates.* The way it will work is, you pay interest on your savings rather than receiving interest, but if you take out a loan you will receive interest on it rather than paying interest.
> 
> This will result in a big increase in consumer spending, which is just what we need to boost the economy right now.





science said:


> Good thinking!


Say *what?*

Although (in honesty) the idea of insitutions charging money for the safe-keeping of cash is not unprecedented (really, it's the 'safe-deposit-box' principle applied to money), it can't work in a free society.

Borrowers NEED lenders... preferably *willing* ones. If you subsidize borrowing and de-fund lending, ever'body's gonna wanna be a borrower, and no-buddy's gonna wanna be a lender.

To take my personal example, I have a couple months earnings in liquid savings- for life's emergencies-- just the way many personal finance gurus say you should. Now, if I have to _pay out money_ for the safe-keeping of that emergency reserve, then I can always withdraw it and put it under the mattress (or, to be more specific to my own situation, The Safe). In short, my capital goes on strike for higher pay.

If ya think the Banking Crisis of 2008 was a spooky thing, just wait'll you see what happens to the banking system if it becomes denuded of private capital...


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## Andy Loochazee (Aug 2, 2007)

As a way of boosting consumer spending, the suggestion in the OP is completely impractical because the supply of funds to lending institutions would dry up and the demand for them would go through the roof. 

The idea that consumer spending needs to be boosted is highly questionable. If it is done by the normal procedure of tax cuts, this could further unbalance government budgets and lead to an increase in interest rates as the government needs to go the financial markets to borrow more, thus crowding out the initial tax boost via negative effects on private investment. As noted above, the suggestion that consumer demand could be boosted by fiddling around with lending and borrowing rates in the manner suggested is completely wrong.

The best way to achieve a sustained economic recovery is for governments to reduce their debt positions in order to restore investor confidence. In this regard the UK has done quite well so far, following the last change of government, but the USA has not done enough and the markets have run scared. It's hardly surprising that the USA is in a mess given the crazy mix of different hands on the economic levers, each pursuing different and often conflicting political agenda.


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## science (Oct 14, 2010)

Chi_townPhilly said:


> Say *what?*
> 
> Although (in honesty) the idea of insitutions charging money for the safe-keeping of cash is not unprecedented (really, it's the 'safe-deposit-box' principle applied to money), it can't work in a free society.
> 
> ...


Did you actually read my post?

For the record, just in sticking case you decide to read more than the first line of _this_ post, I did not endorse the details of his proposal, just the style of his thought. That is a distinction that should have been obvious to any reader paying a modicum of attention to the rest of the post, which you conspicuously and intentionally chose not to quote or respond to.

Look, I can see you're itching to get personal with me, so come out and do it.


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## science (Oct 14, 2010)

Andy Loochazee said:


> As a way of boosting consumer spending, the suggestion in the OP is completely impractical because the supply of funds to lending institutions would dry up and the demand for them would go through the roof.
> 
> The idea that consumer spending needs to be boosted is highly questionable. If it is done by the normal procedure of tax cuts, this could further unbalance government budgets and lead to an increase in interest rates as the government needs to go the financial markets to borrow more, thus crowding out the initial tax boost via negative effects on private investment. As noted above, the suggestion that consumer demand could be boosted by fiddling around with lending and borrowing rates in the manner suggested is completely wrong.
> 
> The best way to achieve a sustained economic recovery is for governments to reduce their debt positions in order to restore investor confidence. In this regard the UK has done quite well so far, following the last change of government, but the USA has not done enough and the markets have run scared. It's hardly surprising that the USA is in a mess given the crazy mix of different hands on the economic levers, each pursuing different and often conflicting political agenda.


It is surprising that the stock market runs in fear of unsustainable US debt but the bond market continues to fund the debt at some of the lowest rates since WWII.

In other words, it is surprising that so many investors scared of US debt would choose to sell stocks and buy US debt with the money.


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## Chi_townPhilly (Apr 21, 2007)

Andy Loochazee said:


> The best way to achieve a sustained economic recovery is for governments to reduce their debt positions in order to restore investor confidence. In this regard the UK has done quite well so far, following the last change of government, but the USA has not done enough and the markets have run scared. It's hardly surprising that the USA is in a mess given the crazy mix of different hands on the economic levers, each pursuing different and often conflicting political agenda.


Granted the US has a lot of cooks in our "economic kitchen," but I think the larger point is that the Head Chef has *ZERO* interest in reducing or even in refraining from increasing our current debt position.

Stay tuned the middle of next month, when yet _another_ 13-digit big-government spending initiative figures to issue forth from our current Executive Branch.


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## Fsharpmajor (Dec 14, 2008)

Andy Loochazee said:


> As a way of boosting consumer spending, the suggestion in the OP is completely impractical because the supply of funds to lending institutions would dry up and the demand for them would go through the roof.


This is where the quantitative easing comes in. The government prints loads of money and hands it to the banks, who then use it to pay interest to borrowers.


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## Almaviva (Aug 13, 2010)

Chi_townPhilly said:


> Granted the US has a lot of cooks in our "economic kitchen," but I think the larger point is that the Head Chef has *ZERO* interest in reducing or even in refraining from increasing our current debt position.




Actually in his latest initiative he is talking about cuts, and don't forget that his own plan was 2 billion in cuts above what was finally approved by Congress. Why did he put on the table a plan with huge cuts if he has zero interest in cuts?


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## Andy Loochazee (Aug 2, 2007)

Fsharpmajor said:


> This is where the quantitative easing comes in. The government prints loads of money and hands it to the banks, who then use it to pay interest to borrowers.


Sorry but "Quantitative Easing" doesn't work that way, if it works at all.

QE was introduced in the UK because the Bank of England couldn't drive down interest rates any lower by its usual "lender of last resort" method through the discount market, and the Bank considered that consumer and business lending needed a further boost to stave off recesion. This boost couldn't be achieved by fiscal policy because the Bank has no control over any fiscal tools, and there was no way that the Treasury would allow an increased fiscal deficit given that it was working in the opposite direction.

So the Bank resorted to the only other monetary weapon at its disposal (which had previously been unused) which was buy up financial assets like government and corporate bonds using newly created money. This expansion of the money supply increased the commercial banks' short term liquid asset base as cash was substituted for government and commercial paper, which then gave the banks an incentive to increase their lending. This extra lending was not, in any way, expected to be achieved by means of making borrowing rates negative, but instead partly by increasing the banks' desire to lend in order to restore their normal liquidity ratios, and partly by driving down longer term interest rates by increasing the demand for new commercial and government paper and thus to make it cheaper for businesses and consumers to borrow long term. There is no suggestion whatsover that nominal interest rates, whether short or long term, can be made to go negative.

The jury is still out on the effectiveness of all this QU so far. The danger is that QE, by expanding the money supply, will have no effects on real output but simply stoke up inflation.


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## Almaviva (Aug 13, 2010)

Andy Loochazee said:


> The jury is still out on the effectiveness of all this QU so far. The danger is that QE, by expanding the money supply, will have no effects on real output but simply stoke up inflation.


In principle I find QE very dangerous because it obviously creates inflation which then may cool off the economy again since higher consumer prices undermine consumer confidence and spending.

Maybe a rule should exist that when new money is printed for QE a couple of years later, after a jolt to the economy, a mechanism should kick in to withdraw that same amount of money from circulation again.


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## science (Oct 14, 2010)

I know that people whose formative years were in the late 70s and early 80s are really scared of inflation getting out of control, which would force the Fed to again adopt a really tight monetary policy leading to high unemployment. But right now it doesn't appear to be a near-term threat.


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## Almaviva (Aug 13, 2010)

science said:


> I know that people whose formative years were in the late 70s and early 80s are really scared of inflation getting out of control, which would force the Fed to again adopt a really tight monetary policy leading to high unemployment. But right now it doesn't appear to be a near-term threat.


 Unless there are other pressures on prices like world scarcity of food crops and dwindling oil reserves. Then, our weak economy that is already vulnerable and is on the brink of producing its own inflation (prices this quarter did go higher, interests set to zero are also a factor), will have to deal with foreign pressure on prices as well.


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## science (Oct 14, 2010)

We'll see. If it happens, then we'll have to tighten the money supply. But for the past couple of years, the fear of inflation that never happened (was one factor that) prevented us from dealing with the crisis that did.


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## Fsharpmajor (Dec 14, 2008)

Almaviva said:


> Maybe a rule should exist that when new money is printed for QE a couple of years later, after a jolt to the economy, a mechanism should kick in to withdraw that same amount of money from circulation again.


No problem! Under my "modest proposal" (recalling my original post for the thread), this money will be given to the savers to put in the bank. It's a win-win scenario.


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