Beyond the Zero

With apologies to Pynchon

After hovering just in positive territory for a long while, the equilibrium Fed Funds rate slipped beyond the zero yesterday in our model. This event, marked only by a handful of us with a solemn salute, solidified the systemic absence of monetary demand. Noah-esque liquidity is flooding a demand absent economy.

To us, the constant discussion of QE, LSAP and Taper miss the far more important evaluation of policy calibration. If the equilibrium (neutral) rate is negative nominal, then asset purchases are extremely necessary. However, the situation also highlights the impotence of monetary policy in igniting the credit cycle alone. Take your pick, Liquidity or Structural, the economy is Trapped. Capacity will have to be curtailed in some fashion or the deluge will continue to overwhelm future expectations of scarcity. "Forward Guidance" is the caulk plugging the gap and covering up the mistake. Policy makers of both fiscal and monetary stripe must shift focus to the demand side.

Until then, we have slipped, like Tyrone Slothrop (GIK), beyond the zero. Asymptotic extinction of a conditioned response to stimulus. In the words of Werner von Braun, "Nature does not know extinction, all it knows is transformation." The time has come for policy to change.


3 thoughts on “Beyond the Zero

  1. RichL

    Do you not believe that QE causes the effects you bemoan?

    To paraphrase Richard Koo from Nomura, if you stack 100, 10,000 or a million apples on an apple cart, and don’t change the price, how will any of those increases in supply of apples raise the demand for them? The same applies to dollars.

    Removing net interest income from the investment community -via bond buying- doesn’t increase income from investments- it reduces it. Reducing income from investments is deflationary.

    Fining major banks and imposing G-SIFI rules on the expansion of bank balance sheets when, god forbid, there should ever be an increase in loan demand is highly likely to prevent an expansion in bank loans. Thank our prosecutors who aspire to be politicians for the first piece of errant economic policy, and Mr. Tarullo of the Fed and Mr. Hoenig of the FDIC for the latter particular piece of brilliant economic policymaking.

  2. mike

    I’m old enough to remember when policy discussions centered on “a consumer driven economy”, and private sector efficiency vs. public sector inefficiency. It seems to me when public sector employees are paid more than their counterparts in the private sector, tax hikes are in vogue rather than tax cuts, and US corporations are still focused on paying fines to regulators/class action law firms and getting their share of corporate welfare that “policy must change” is a long shot.

    Capitalism is really messy, but it works. I think we may have become too soft and stupid to go back to what works.


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