Mosler Endorses ZIRP. Forever.

By Stephanie Kelton

Warren Mosler, writing for US News & World Reports, makes the case that the Fed should not “normalize” rates or go back to trying to fine tune the economy by raising and lowering the overnight interest rate but, instead, just leave rates where they are.  Let’s see if Warren’s argument will top the list of reader favorites. Read the full article here.

23 responses to “Mosler Endorses ZIRP. Forever.

  1. Pingback: Mosler Endorses ZIRP. Forever. | The Money Chr...

  2. I agree with the theory behind Warren’s suggestion. But there’s one problem he didn’t address, as follows.

    If interest rate adjustments are ruled out, that means AD is adjusted purely via fiscal measures. But at the moment, fiscal adjustment is in the hands of a bunch of economically illiterate morons known as “politicians”. So decisions on the size of the deficit has to be taken out of the hands of politicians, and they’ll fight that.

    However, there is no need for purely POLITICAL decisions to be taken away from the electorate or politicians: that’s decisions like what proportion of GDP is allocated to public spending, and how that is split between education, roads, the military, etc. It’s just determining the size of the deficit that needs to taken away from politicians and put into the hands of some sort of committee of independent economists.

    Moreover, the final decision on the size of stimulus is ALREADY out of the hands of politicians since any excess deficit they implement can be countered by the central bank in most countries.

    Simon Wren-Lewis (economics prof. at Oxford in the UK) dealt with this point in a recent blog post. See:

    Also, the sort of institutional changes needed to effect Warren’s idea have been well thought out in this work by Positive Money and others (see pp. 10-11):

    And for Positive Money’s latest publication, see:

  3. What seems to be continually ignored is the ever increasing amount of interest bearing loans created by the private banks, and not forgetting the ubiquitous credit card. The zero interest rate of the Fed has no effective impact on these loans other than to improve the profitability of the private banks.
    The quantity of “money” created by the private banks must be enormous compared to the “money” spent by the Government. The problem arises when that money is created and simply directed to gambling and not productive endeavours, then the economy will stagnate for everyone but the “rich” gamblers.
    It doesn’t seem logical to place so much reliance on the Government spending/borrowing/taxes while ignoring the effect of the private banks. Far too many people are so immersed in debt that their “savings capacity” is nil, and more often, less than nil. So, while Warren’s theoretical argument that Government deficits represent “monetary savings” in the private sector might be correct, it certainly doesn’t wash with a lot of people who pay high interest rates on the money they have to borrow in order to live.

    • And, one could add, where does the interest to pay those private banks ultimately come from anyhow?
      Should private banking be a for profit enterprise, or, should it be relegated to performing it’s ancient historical safe storage of cash role on a fee for service basis, with the community in the drivers seat when it comes to dispensation of credit? That way the interest is returned to the community if it’s decided there is to be any.

      • The interest paid on loans to a bank is the income of the bank, which goes to meeting the operational expenses of the bank, paying interest on deposits and profits distributed to shareholders. So it reenters the economy as spending potential in the hands of the banks employees, depositors and shareholders. As long as the loans are for productive purposes or prudent personal acquisitions of creditworthy individuals, the system works fine. However, if loans are disbursed for speculative purposes it becomes completely unstable and is unsustainable.

        Are you suggesting that private entities be prohibited from lending at an interest or that any entity that actually has the power to create state money be a publicly owned (not shareholder owned) entity? While the former is impossible, the latter is certainly possible even if its desirability is open to question.

        • To allow Private For Profit Banks (PFPB) to ‘print’,’ issue’, albeit ink or dotted printer should be re-legislated as counterfeit. Also the fact that they are allowed to tax, yes tax, that counterfeit by means of charging interest that results in at least 200% ‘revenue gain’ should be declared a crime against humanity. That’s how I feel.
          As for the redistribution of these gains they have made, please note: the wealthest 10% received over 60% of that revenue.

      • In a lot of cases John C, the interest comes from other people who take out loans, or even further borrowing by the initial borrower, but however it is created, it leads to the perpetuation of the debt cycle within the society. It is an obvious fact that in a closed community, it is impossible to operate on a profit system without continually increasing the supply of “money” and the interest payable on loans is the profit component. Individual Nations can be compared to closed communities in this respect, but because of the concerted push for globalisation and “free trade” agreements over the past years, the whole world has now come to resemble a “closed community.”

        • Yes, the interest comes from the people. All $100 trillion since the legislation to allow the PFPB to ‘print’,’issue’ our own money.
          $60 trillion turned over to the top 10%. The other 40% probably had to use that money to pay their “interest” on their mortgages.
          How’s this for “Truth In Lending”.
          PFPB make mortgage loans for some new homeowners for a total of $1billion with a rate of 4% for 40 years. They are allowed to issue that money without withdrawning ONE CENT from their bank balance. They turn zero cash into $1 billion in loans which when paid in full ; place more than $3.5 billion as deposits in their banks. OMG they have to subtract the $1billion they ‘temporarily’ created, leaving them a “revenue gained” of only $2.5 billion.
          God bless the poor smucks that were happy to get $15-30/per hour building those house.

  4. Ralph, its interesting that you cite the positive money folks, who call for Govt issuing money aka non-interest bearing Govt liabilities directly and yet you disagree with Mosler who is also advocating for the Govt issuing non-interest bearing liabilities. Creating and spending Reserves is issuing zero-interest money by the Govt. T-bond issuance is totally separate and one method for controlling interest rates. The only way for the Govt to set the interest rate without Bond issuance is by paying IOR.

    • Auburn,
      Positive Money is advocating that we reform the money system so that government directly issues the money.
      A read of their proposals finds money being issued as a liability of the people, yes, but this liability being the people’s equity….. and specifically not debt.
      Warren, first of all, usually says, like most MMT proponents, that the government already IS the monopoly issuer of the nation’s money (colloquially, currency), therefore no reform is necessary. Meanwhile, he advocate that same monopoly-issuing government BORROWING money and issuing debt instruments that require repayment, albeit at zero, or near- zero, coupons. If you want money to be public equity, go for the Positive Money proposal. If you want money to be debt, stick with the fixed-income securities specialist.
      Only the central bank can create reserves, and only banks can spend reserves, which can never leave the interbank system. Money is the universally accepted and used exchange media that fosters commerce in the real economy in the nation of issue, where we all live and work. Reserves are not ‘money’, and nothing about them is equivalent to zero-interest ‘money’.
      Notably, in adopting the Positive Money, debt-free, direct-issuance model, you have already achieved ALL that interest-rate targeting and management can hope to achieve as monetary policy results. The nation’s money supply is commensurate with national economic growth potential and, there is no need for any active interest rate policy mechanism. The times they’re a changing.

    • Auburn,

      I don’t see why I’m disagreeing with Warren. All I’m saying is that he hasn’t gone into the practical problems involved in implementing his ideas. Plus I’m saying those problems are not too hard to solve.

      • Ralph,

        After reading through your original comment with new eyes after your response, I certainly accept that my characterization of you “disagreeing” with Warren was wrong. Mea Culpa.

  5. Love.This. It’s two-fer IMO.
    – “Euthanize the rentiers”
    – De-facto de-sanctioning of “money as a store of value”

  6. During the hyperinflation in Zimbabwe, in 2005, the Treasury Bill interest rate was 340%.

    (the 1-year US Treasury Bill interest rate is currently 0.12%)

  7. But it gets better. From 2004 onwards the Zimbabwe central bank (RBZ) began to issue its own bonds, which paid an interest rate of over 900%.

    By 2005 the net interest cost of these bonds was equal to 40% of Zimbabwe’s GDP.

  8. Thanks! Looks like you’ve identified another propagator of Z inflation!

    • Here’s some quotes from the paper:

      ‘Central Bank Quasi-fiscal Losses and High Inflation in Zimbabwe: A Note’ (2007)

      “Zimbabwe’s failure to address continuing central bank quasi-fiscal losses has interfered with both monetary management and the independence and credibility of the Reserve Bank of Zimbabwe (RBZ). Realized quasi-fiscal losses are estimated to have amounted to about 75 percent of GDP in 2006.”

      “The aim of the paper is to identify and quantify the main sources of the quasi-fiscal activities (QFAs) by the Reserve Bank of Zimbabwe (RBZ) since 2004 as well as their macroeconomic and financial impact… Some sense of the macroeconomic impact of QFAs can be gleaned by reference to the size of central bank losses. While central bank losses in most countries have not exceeded 10 percent of GDP, Zimbabwe’s flow of realized central bank quasi-fiscal losses are estimated to have amounted to 75 percent of GDP in 2006… Quasi-fiscal losses of this sort, rather than conventional monetary or fiscal laxity, have been the mainly responsible for the surge in money supply in Zimbabwe during 2005-7.”

      “Most of the RBZ’s quasi-fiscal losses were incurred in connection with activities that go far beyond conventional central banking functions. There were four main sources of the losses:

      1.Subsidies in terms of free foreign exchange to public enterprises…

      2. Realized exchange losses stemming mainly from the purchase of foreign exchange from exporters and the public at higher prices than sales of foreign exchange to importers…

      3. Interest payments associated with open market operations to mop up liquidity…

      4. Unrealized exchange losses reflecting official devaluations because foreign liabilities exceeded foreign assets…”

      “In Zimbabwe soaring inflation is due more to the RBZ’s substantial quasi-fiscal activity than to conventional government budget deficits. The average central government fiscal deficit for 2003–2005 has been below 3 percent of GDP and since 2001 the primary balance has been in surplus in all years except 2004. However, as shown above, massive QFAs have been carried out outside the budget without adequate provisions for their financing. Therefore, a truer fiscal picture would include both the activity of the government and the QFAs of the RBZ in the fiscal balance.”

      “Sterilization of monetary expansion resulting from QFA financing has increased central bank quasi-fiscal losses as nominal interest payments have increased rapidly with rising inflation. Rising interest payments have also increased the financing requirement of the central government, creating further monetary expansion (ultimately weakening the effectiveness of sterilization).”

      “In January 2004 the RBZ started to issue its own bills at effective interest rates of over 900 percent per annum. These RBZ Financial treasury bills were naturally attractive to the market but too costly to the RBZ, so they were soon abandoned and replaced by Open Market Operation (OMO) bills, introduced in May 2004, and Special RBZ bills, introduced in June 2004. The OMO bills had the same interest rates as the existing government treasury bills but the accounting for them was clearly separated from holdings of government treasury bills since the interest cost was charged to the RBZ.”

      “The RBZ has accumulated substantial domestic interest-bearing liabilities through open market operations to absorb liquidity. The vicious circle of rising losses and rising remunerated liabilities has resulted in inflation and increases in the interest rates of the bills, further accelerating the interest cost for the central bank. By 2005 the net interest cost of sterilization equaled 40 percent of GDP.”

      So the Zimbabwe government was basically running a budget deficit equal to 75% of GDP, and the central bank was paying 900% interest on bank reserves.

  9. Ironically, the yen’s been perhaps the best store of value for decades with the world’s largest deficits, lowest rates, and highest QE and a central bank that’s put out max effort to inflate!

  10. Since ‘monetary policy’ as defined has always done precious little regarding aggregate demand it’s already the case we are relying on Congress to keep their policies from sustaining an output gap

  11. Didn’t interest rates have a large effect on aggregate demand in the 1980s?

  12. I get it, I see how it can a good thing and I like the idea of no longer tinkering with rates in a poor attempt to control the economy, but when there’s expansion couldn’t it be problematic?
    OR would we adjust to the permanent ZIRP?
    Would it no longer cause potnetial over spending because it simply would become used to as the norm?

  13. I also find the time delay premium of a saver of currency to be a bit of a swindle confusing what saving money really does in the aggregate. People chase dollars in real time. This is confused with contracts that establish asynchronicity that does justify a premium.

    If for example I was required to repay a ride to the airport, the passenger not consuming immediately means I must wait, meaning consumed an hour later is no advantage to me unless that resource is made available. That is why taxi drivers charge more for you to consume it later. Only if the taxi driver is provided with the resource to deliver later to the exclusion of now is it justified. That is why tickets expire. A token with no expiration or specific date is not “later” its “now or later” which is certainly has a different expense that includes a to own rate.

    So the interest rewards of the saver, in the strategic sense , do not seem justified to me. Only when explicitly prohibited from use like the day before the ticket date. So why pay savers interest for it? People chase those dollars in real time.