Comments on: Why Negative Nominal Interest Rates Miss the Point http://wallstreetpit.com/8294-negative-nominal-interest-rates-on-reserves-or-currency Tue, 22 May 2012 19:21:52 +0000 hourly 1 http://wordpress.org/?v=3.3.1 By: Daniel Habtemariam http://wallstreetpit.com/8294-negative-nominal-interest-rates-on-reserves-or-currency#comment-35073 Daniel Habtemariam Tue, 14 Jul 2009 20:29:51 +0000 http://wallstreetpit.com/?p=8294#comment-35073 You're right that negative interest rates would have a (small but) significant deflationary effect, in the sense that destroying money would directly decrease the money supply. But did you know that every time a bank makes a loan, the vast majority of the money the bank uses to make that loan is instantly created out of thin air? (something like 91% of it - this is because we have a fractional reserve system) The major (intended) effect here would be to lower interest rates so far that not only is your mortgage or car loan free, but the bank (and indirectly the Fed) actually pays you if you're willing to take out these loans. The spike in lending is meant to spur aggregate demand and consumption and thus spur GDP. The downside is that all of these loans mean a lot more money in the sloshing around in the money supply, which means it's only a matter of time before prices adjust accordingly, and we get inflation. Again, it's not inflationary because of its direct effects of destroying money but because of its indirect effects in galvanizing spending and (more importantly) borrowing. You’re right that negative interest rates would have a (small but) significant deflationary effect, in the sense that destroying money would directly decrease the money supply.

But did you know that every time a bank makes a loan, the vast majority of the money the bank uses to make that loan is instantly created out of thin air? (something like 91% of it – this is because we have a fractional reserve system) The major (intended) effect here would be to lower interest rates so far that not only is your mortgage or car loan free, but the bank (and indirectly the Fed) actually pays you if you’re willing to take out these loans. The spike in lending is meant to spur aggregate demand and consumption and thus spur GDP. The downside is that all of these loans mean a lot more money in the sloshing around in the money supply, which means it’s only a matter of time before prices adjust accordingly, and we get inflation.

Again, it’s not inflationary because of its direct effects of destroying money but because of its indirect effects in galvanizing spending and (more importantly) borrowing.

]]> By: Mario Sanchez http://wallstreetpit.com/8294-negative-nominal-interest-rates-on-reserves-or-currency#comment-34416 Mario Sanchez Mon, 13 Jul 2009 22:17:35 +0000 http://wallstreetpit.com/?p=8294#comment-34416 All the examples I've seen of negative nominal interest rates are variations of money destruction (currency expires based on serial number, currency expiring if is not stamped, banks paying reserve fees to the central bank) or fiscal contraction (paying taxes if you don't spend quickly enough). How exactly is negative nominal interest inflationary? All the examples I’ve seen of negative nominal interest rates are variations of money destruction (currency expires based on serial number, currency expiring if is not stamped, banks paying reserve fees to the central bank) or fiscal contraction (paying taxes if you don’t spend quickly enough).

How exactly is negative nominal interest inflationary?

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