interest Rates stimulate hoarding
behaviour and weaken aggregate demand.
Interest rate suppression consequently is counterproductive as a
The lower the opportunity
cost of foregone yield, the more people (and
banks) hoard cash reserves and the more money velocity declines. The
charts of the Federal Reserve below illustrate the correlation and
coincidence of money velocity and the interest rate level.
1: Velocity of MZM Money 1962-2013
2: One Year Treasury Yield 1962-2013
3: Ten Year Treasury Yield 1962-2013
Reserve of St
inspired by False Keynesian Assumptions.
Keynesian theory holds that
levels and business cycles are steered by waves of optimism and
fuelled by highly irrational emotions of fear and greed. Keynes’
spirits” assumption continues to inspire monetary policy worldwide.
Still fifty years of monetary data provide the evidence that the
Keynesian assumption is false. Individual emotions of fear and greed
aleatory to provoke collective mood changes. Monetary data do indeed
demonstrate that, rather than by Keynesian
emotions, hoarding behaviour is
steered by the interest rate level.
the opportunity cost of foregone yield, the more people (and
banks) hoard cash reserves and the more money velocity declines.
levels prove indeed highly correlated with the yield level.
The correlation between
money stock inflation and the decline of the
money velocity is remarkably strong (correlation: R²=0.64; elasticity =
0.75). As a consequence and contrary to monetarist belief, inflating
stock does not automatically translate in effective spending and output
as the monetary expansion is neutralised almost entirely by the
decline of the money velocity. Most of the cash injected in the economy
neither spent nor lent but hoarded.
Correlation Money Velocity and
10-Year treasury Yield 1962-2012
The crucial issue is that
interest rate suppression proves counterproductive with devastating
deflationary effects as a result:
- Low yields obviously
tend to stimulate hoarding depressing aggregate demand even more.
- Manipulating the
“price of credit” unbalances supply and demand for loans. Low
interest rates have besides the intended effect of boosting
demand for credit also the effect of depressing the supply. The
lenders’ eagerness grant loans declines along with declining rates and
margins. The lower interest rates, the higher the likelihood of
subsequent rate hikes and the lower the banker’s eagerness to engage in
(long term) lending .
- Rate suppression
provokes a systemic mismatch between durations of the loans needed and
the loans on offer. The lenders’ inclination to shorten credit
durations during rate cuts is not matched by a corresponding shift of
investment projects in the real economy. Confronted with the scarcity
of appropriate long-term credit, long-term investors face a dilemma.
Either they freeze their planned investments or they compromise their
financial stability by agreeing to loan durations that are incompatible
with the long term nature of their project. On the macro-level, the
likely outcome is a devastating mix of both. The housing debacle was a
typical example of the last.
- Artificially low
interest rates tend to over-stimulate long-term investments to the
detriment of short-term projects. The resulting misallocation of
resources is incompatible with people’s time preference and the actual
needs of the real economy. The distortion leads to misadventures and
massive loss of resources and utility.
- The borrower’s gain
merely is the lender’s loss. Besides the intended reduction of
the borrower’s loan burden, rate suppression also causes the lenders’
income to drop to the same extent, leaving no net gain for the economy
as a whole. Savers, insurance trusts, investment funds, retirees etc.
thereby see their spending power structurally impaired. The lower
yields, the more pension reserves need to be provisioned and the less
cash remains available for immediate spending.
The full report under the link below includes the empirical
methods, charts, references
as well as the comprehensive data-set. http://workforall.net/research/The-Monetary-Stimulus-Myth.pdf