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This is deflationary in that expected government payout to banks over the next years will be lower, but only slightly so as the interest is very low and the banks are not very good at spending their money into the rest of the economy.

Technically correct, but will be more than offset by having the reference interest rate at longer maturities drop to zero, which will mean that investments which were unprofitable on yesterday's interest rate will become profitable tomorrow.

And expanding the domestic capital plant is (shock, horror) inflationary (though only very slightly in the present state of demand).

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Fri Jan 11th, 2013 at 11:07:38 AM EST
[ Parent ]
It would certainly be a boon to a project to construct windmills along the front range of the Rockies and a transmission infrastructure to tie them into both the Eastern and Western US grids. Texas also if they agree.

Undertaking any 'self liquidating' project that promoted the general welfare would be like printing money. Oh, wait....

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Jan 12th, 2013 at 10:58:43 AM EST
[ Parent ]
So when up against the zero bound, the central bank needs to borrow directly to the state in order to further lower real interest rates?

Wean the banks of their government subsidies and force them to find private projects to finance!

(Then of course there is the option of having stimulus spending through the treasury.)

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sun Jan 13th, 2013 at 02:53:39 PM EST
[ Parent ]
Long version:
So when up against the zero bound, the central bank needs to borrow directly to the state in order to further lower real interest rates?

If you insist on using open market operations in government bonds to conduct your interest rate policy, yes. Then the CB will have to buy tsys until the interest rate on tsys drops to where the CB wants it to be. This is what QE does for you.

But the CB doesn't have to do this by buying and selling tsys (though if the CB actively refuses to treat tsys at least as well as private bonds, or to lend directly to the state on the same terms it offers private banks for rediscounting tsys, you will most likely have a constitutional crisis on your hands).

The CB can simply offer private banks the option to borrow at longer maturities against suitable collateral. This is what LTRO would do for you if it had not been a one-off event. And the CB can offer banks longer maturity deposit facilities. This is already routine in the Eurosystem.

What happens today is that the bank grants you a mortgage, and then it posts the mortgage as collateral with the CB for an overnight loan (neglecting the interbank market, which can be done without loss of generality under an interest rate targeting CB). Instead of this, the CB can offer to let the bank post the mortgage as collateral for a loan with the same maturity as the mortgage. Basically, the CB can offer the bank a fixed-rate loan, as opposed to the variable-rate loan it gets today.

- Jake

If you only spend 20 minutes of the rest of your life on economics, go spend them here.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Jan 13th, 2013 at 03:18:09 PM EST
[ Parent ]

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