Monday, October 17, 2011

Karl Marx and Communist Manifesto - Has A Familiar Ring to it, doesn't it? (MacroBusiness via Naked Capitalism

"Centralisation of credit in the hands of the State, by means of a national bank with State capital and an exclusive monopoly."

Posted: 17 Oct 2011 12:08 AM PDT
By Zarathustra, who is the founder of Hong Kong blog Also sprach Analyst. He was educated at the London School of Economics and the Chinese University of Hong Kong and was once a Hong Kong-based equity research analyst focusing on Hong Kong real estate (which he did not really like), with a secondary coverage on China real estate sector (which he actually hated). Cross posted from MacroBusiness

Zero interest rate policy and quantitative easing is not working to stimulate the real economy. No country has succeeded. The pioneer of quantitative easing, the Bank of Japan, failed (and Japanese yen is uber-strong). The Federal Reserve has failed, and the Bank of England has failed.

Before going to quantitative easing, let’s consider whether zero interest rate policy (ZIRP) works. Michael Pettis offered some interesting observations recently in his newsletter. He says that even though theory reckons that lowering interest rates should make people less likely to save, and to consume more, empirical data suggest the otherwise. In fact, people save more when rates are low, not less:
In China, for example, deposit rates are seriously negative and have been negative for many years, and yet the household savings rate is nonetheless very high. In fact it seems that, as a rule, countries with repressed interest rates have higher, not lower savings rates.
What’s more, I have seen US historical data that suggests that when interest-rate declines have coincided with falling, not rising, stock and real estate markets (as they have recently), the savings rate usually rises rather than declines. In other words households care mainly about their wealth, not about the reward for postponing consumption.
So in an environment where the asset side of household’s balance sheet is falling in value (as in recent years in the US), it makes sense for households to save more, regardless of the interest rates. That’s debt deleveraging or balance sheet recession as we know it.


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