Lilley and Rogoff Recommending Negative Interest Rates

We are commenting with respect to Andrew Lilley and Kenneth Rogoff’s “conference draft” discussing the advisability of a FRB policy of negative interest rates:

 Lilley, Andrew and Kenneth Rogoff, April 24, 2019: “The Case for Implementing Effective Negative Interest Rate Policy” (Conference draft for presentation at Strategies For Monetary Policy: A Policy Conference, the Hoover Institution, Stanford University, May 4, 2019, 9:15 am PST) [Lilley and Rogoff, 2019]

 Lilley and Rogoff recommend a FRB policy of negative interest rates to fight a “deep recession.”  Within its limited scope the “draft” is reasonably comprehensive and L&R’s arguments are clearly developed. A note of thanks to Lilley and Rogoff for their attempt to tackle an important issue.

However, L&R’s “draft” fails to recognize the relation of money to the most fundamental explanatory elements of production in the pretio-quantital, dynamic, economic process.  The real and most effective preventive and corrective for a severe recession exists primarily in the private sector’s proper management of its production and compensations, and only a) secondarily, b) by default, and c) marginally in the Fed’s actions.  Thus, L&R are fundamentally disoriented; they do not have a good explanatory theory; their prescription is based on conventional common sense rather than a scientific governing theory; their presentation fails to hit the mark.

A good theory is a handy thing to have around in times of trouble.

real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis.  If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory.  But it doesn’t say the way the thing works. [CWL 21, xxviii]

… money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation.  … Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. (CWL 21, 101)

Behind all the symbols rests the central requirement of faith.  Money serves its indispensable purposes as long as we believe in it.  It ceases the moment we do not.  Money has well been called the promise men live by. Philip McShane, Implementing Lonergan’s Economics (quoting R.L. Heilbroner, The Economic Problem (New Jersey, 1972) p. 532 in The Lonergan Review, Culture Science and Economics, Vol. III, No 1, Spring 2011, Seton Hall University p. 198

We-the people seek enlightenment from academia as to the laws of the objective process and as to its norms to which we must adapt.

It is the viewpoint of the present inquiry that, besides the pricing system, there exists another economic mechanism, that relative to this system man is not an internal factor but an external agent, and that the present economic problems are peculiarly baffling because man as external agent has not the systematic guidance he needs to operate successfully the machine he controls. [CWL 21, 109]

The one issue is the locus of that control.  Is it to be absolutist from above downwards? Is it to be democratic from below upwards? Plainly it can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives … [T]o deny the possibility of a new science and new precepts is, I am convinced, to deny the possibility of the survival of democracy. [?]

The problem L&R address is how to get out of a deep recession.  But, first, one must understand and explain the divergences from normative equilibrium that exist.  One must explain the recession rather than merely sense, feel, have a hunch, describe, and merely postulate.

How to get out of a deep recession requires an explanation of how the system was deconfigured or disfigured in the first place, how the deformation has to be reversed or mitigated, what countervailing remedies are both effective and possible.  That is to say, managing the economy requires the understanding of a normative theory which explains – rather than postulates – the configuration constituting the present disequilibrium of flows and the reconfiguration required to return to dynamic equilibrium.  One must know the normative field theory of how the process must really work.

It is quite true that, were a long-term acceleration to get underway, the situation would be remedied, for sooner or later the weaker firms would begin to obtain sufficient receipts to make ends meet. … spontaneously (a “deep recession”) will work out through the mechanism of falling prices and contracting total income; (but) that under current inadaptation an expansion could be expected against such difficulties is evidently preposterous. (CWL 15, 155)

L&R see the problem as primarily a monetary-policy problem rather than as a problem of disequilibrium in the production and compensation process  They mistakenly assign primary responsibility to correct a “deep recession” to the weak-tooled Fed rather than to an enlightened triunity of We-the people.

  1. We-the-people-acting individually (the private sector),
  2. We-the-people-acting collectively in the person of our elected representatives (the fiscal, government sector), and
  3. We the-people acting by the agency of the Fed (monetary authority).

All have a role to play, especially the private and government sectors.  It is not to be three blind mice, nor is it to be see no evil, hear no evil, speak no evil.

Lilley and Rogoff fail to do real analysis.  They don’t understand how the divergences of productive and monetary flows from their normatively correlated courses actually constitute the devolution to a deep recession; and so, they don’t understand the corrective configuration of production and monetary circulations required to climb out of the deep recession.

We have no quarrel with negative interest rates as representing negative real-growth prospects.  But, as imposed, let’s call it what it is; negative interest rates are constructively a tax on savers.  L&R’s recommendation implicitly presumes that savers for retirement or housing or socially-beneficial capital investment do not deserve their stash.  L&R fail to treat interest rates in the light of the explanatory variables which explain the economic process.  Their prescription of taxation on savings by imposing negative interest rates does not take into account factors that are prior to changing interest rates and more effective.  Again,

real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis.  If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory.  But it doesn’t say the way the thing works. [CWL 21, xxviii]

Manipulation of the interest rate is double edged.

“… a lowering of interest rates may encourage the expansion of basic industry; but it also will encourage the expansion of well-intentioned but not well-thought-out innovations, the number of bankruptcies, etc.  What is needed is the egalitarian shift in incomes, that will compensate for the previous and shorter anti-egalitarian shift, and will produce the things that people really need and can learn to purchase without the help of self-seeking advertisers.”   [CWL 141 ftnt 198]

Rates of interest, when increasing, encourage saving (but discourage borrowing).  This double edge is not the per se means of effecting the enormous shift in saving to bring about the transition ……. [CWL 141 ftnt 198]

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

Traditional theory looked to shifting interest rates to provide suitable adjustment (required by the basic expansion).  In the main we shall be concerned with factors that are prior to changing interest rates and more effective. … …  Evidently, then, suitable migrations (within the strata of income groups) are a means of providing adjustments in the community’s rate of saving.  To increase the rate of saving (in a surplus expansion), increase the income of the rich; while they may be too distant from the current operations of the economic process to judge, at least they can put their money into the bank or bonds or stocks, and perhaps others there will see how it can best be used.  To decrease the rate of saving (required by the basic expansion or the deep recession), increase the income of the poor. … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle. [CWL 15, 133-134] (See The Cycle of Basic Income, CWL 15, 133-44)

L&R fail to understand the structure – how flows relate to flows – of the velocitous and accelerative productive process.  The laws of its expansion are the analytical basis of monetary circulations, and in particular, the intelligibility of interest rates, which are the rental price of circulating money.  The process expands in phases having shifting requirements for consumption vs. savings, The immanent intelligibility of the structured production-and-sale process is analytically prior to and more fundamental than the tag-along, concomitant payments of dummy money.  Their payments are to be congruent with the proprietary network of the process and correlated with the flows of point-to-point and point-to-line products in the process.  Payments are concomitant; payments must keep pace.

A look ahead; further contents:

  • KEY IDEAS
  • NEGATIVE INTEREST RATES AS A TAX
  • THE INADEQUACY OF THE FED’S TOOLS
  • LAWS OF THE PROCESS
  • DISORIENTATION, ILLUSIONS, AND MISMANAGEMENT
  • MANIPULATION OF THE INTEREST RATE IS DOUBLE-EDGED
  • REAL ANALYSIS, AND MONEY IS A DUMMY
  • PERSPECTIVES ON THE INTEREST RATE
  • THE INTEREST RATE IS AN INTERNAL RELATION, A MONETARY REPRESENTATION OF PRODUCTIVE OPPORTUNITY
  • CRITIQUE OF LILLEY AND ROGOFF’S ANALYSIS
  • INFORMATIVE LISTS

KEY IDEAS:

  • The private sector (We-the-people-acting individually), the fiscal, government sector (We-the-people-acting collectively in the person of our elected representatives), and the monetary authority (We the-people by the agency of the Federal Reserve Bank) are all unitarily effectors in and of the economic process.
  • We-the people, the so-to-speak external efficient cause of the process, seek enlightenment from academia as to the immanent intelligibility (the formal cause) of the objective process and as to the norms to which we must adapt in the conduct of our lives.
  • real analysis (is) identifying money with what money buys. If you want to treat payments as though they are not strictly correlated with the movements of goods and services, you will have a degenerate monetary theory, such as Modern Monetary Theory, which disconnects flows of products from flows of money and will, systematically, sooner or later, cause stresses, torture the flows, and wreak havoc.  Modern Monetary Proponents have no understanding of the laws of the process of production and sale. [See CWL 21, xxviii]
  • The dynamic structure of the productive process constituted by interdependent, functionally-explanatory flows is projected onto the universe of payments to derive explanatory classes of payments. The correspondence is a mapping.  Classes of payments flows are correlated with classes of product flows.  In the theory of the process, there must be a disciplined connecting.
  • The expansion of the productive process occurs in a series of phases requiring changing ratios of point-to-point activities (the basic process of basic outlays, incomes, and consumption) and point-to-line activities (the surplus process of surplus outlays, saving and investing)
  • Government deficits are clearly explained by the intelligibility of a superposed circuit.
  • The interest rate is explained as the internal relation among several functional technical aggregates in an economic process featuring phases, increasing and decreasing (to zero) accelerations, and shifting ratios of incomes.
  • This “real interest rate” itself is interpretedas the monetary correlate of the potential real growth rate attributable to opportune, responsible, invention and investment The rental price of dummy money is connected to the benefit of what the dummy money finances.
  • Either a) excess investment, or b) initially-wise investment followed by failure to properly adjust income distributions, mistakenly results in idle capacity, which acts as a drag on further investment opportunity, mistakenly results in deleterious counterproductive, corrective cutbacks in employment and in the incomes which would constitute healthy monetary demand.
  • We-the-people collectively are identically our representative Central Government; and the Central Bank (the Fed) is We-the-people as a specifically-purposed arm of We-the-people individually and We-the-people collectively. The Fed is not, in reality, a third party. It has the power of attorney for We to act for or against ourselves, in an understanding of the process or in ignorance of the process, or in support or violation of the laws and precepts  of the process.
  • Primary responsibility, first to avoid, or second to correct, insufficient demand relative to capacity lies with the private and government sectors, not with the Central Bank – no matter what an ignorant Congress erroneously thinks and mandates.
  • Modern Monetary Theory – so called – violates the principle of constant value, is fallacious as theory, is contaminated by psychopolitical wishful thinking of people who think by symbols rather than insight and reason, and is folly threatening chaos if implemented
  • Covid-19 temporarily necessitates government deficits which would otherwise constitute Modern Monetary Folly
  • Objectively, the imposition of negative interest rates is equivalent to retroactive taxation of what the government believes to be excess reserves bloating secondary markets.
  • Negative interest rates most likely result from some combination of a) destruction of investment opportunity by excess investment, b) failure to implement the basic expansion which should normatively follow the surplus expansion, c) disincenting and discouraging socially-beneficial expansionary investment by unwise taxation, d) Central Bank’s interventional flooding of monetary reserves into purposeless idleness in the Redistributive Function’s secondary markets of stocks and bonds by open-market operations.
  • The channels in the Diagram of Rates of Flow account for booms and slumps, for inflation and deflation, … [CWL15, 17]

Here are Figure 14-1, Diagram of Rates of Flow, and Figure 31-1, Diagram of Government Spending and Taxes. (CWL 15, pp. 55 and 174, respectively)

 

 

 

 

 

 

 

 

 

 

Money injected into the system can go in any one of five directions:

  1. To basic supply (“justified”) (S’ – s’O’)
  2. To basic demand (“unjustified”) (D’ – s’I’)
  3. To surplus supply (“justified”) (S” – s”O”)
  4. To surplus demand (“unjustified”) (D” – s”I”)
  5. To gambling within the Redistributive Function (intrinsically inflationary within that function)

NEGATIVE INTEREST RATES AS A TAX :

 Let us, first, affirm emphatically that an efficient government must receive revenues from taxes imposed for good reason.  We-the-people-collectively, in the person of our elected government, must collect taxes to finance the collective good.  The scheme of taxation is a matter of a) how in what aspect of operations, b) how much from whom, and c) when in the particular phase of an expansion.

There are several ways for we-the-people, usually in the person of the Treasury, to be in receipt of funds to expend for any and all operational needs for social well-being.

  • Direct taxes on current personal and corporate incomes
  • Direct value-added or sales taxes on current personal and corporate expenditures
  • Direct current taxes on past personal and corporate incomes
  • Voluntary philanthropy directed into the public good (Click here and here)
  • Violating the principle of the constant value of money by the Treasury or by the Fed’s gradually or slowly causing inflation and debasing the currency, which swindles holders of cash and receivables by reducing purchasing power while moving people into higher tax brackets unadjusted for inflation

A negative interest rate imposed by the Fed to collect money from savers’ reserves is a delayed or retroactive tax on those savers.  If it looks like a duck, walks like a duck, and quacks like a duck, it’s a duck.  It’s Quack! Quack! and Tax! Tax!  If its purpose is to stimulate the economy by inducing savers to spend and invest, rather than be taxed on, part of what they saved from the operative circuits, the Fed should consider whether or not the reserves are a) vital to the savers for near or longer-term future purposes such as imminent needs, housing, retirement, death, catastrophe, investment for the public good, or philanthropy or b) not vital to savers, i.e. frivolous.  The Fed’s quasi-tax action of imposing negative interest rates must be for the purpose of a desirable and justifiable goal.  On the other hand (prescinding from the issue of the deficit and debt’s contribution to accumulated savings), if its purpose is to help the Treasury to refinance its existing debt and current deficit with lower interest rates, it must remember a) that it will still be required to repay or roll over the principal amounts down the road, and b) the inflation (debasement of the currency) caused by injection of too much money into the Redistributive Function is itself a tax on savers.  (Alarmism and, perhaps, exaggeration to make a point – Welcome to post-World War I Germany and recent Zimbabwe.  The government can’t pay its bills.  It prints money willy-nilly and unconstrained to pay its bills.  Make sure that the kids skip out of school, get to the factory gate by noon, and rush Dad’s paycheck home to Mom so she can spend it all immediately before prices rise 20% later this afternoon.  25 years of saving has already been wiped out by inflation.  Welcome to liberal Modern Monetary Theory allowing unconstrained spending for self-aggrandizing political purposes.)  (Click here and here)

As we have consistently maintained, the free private sector of we-as-individuals and we-collectively through our elected re-presentatives, not the Fed and not a power-mad, profligate, totalitarian central bureaucracy, bear primary responsibility for implementation of the basic expansion phase in the pure cycle of expansion.  This implementation is characterized by full employment and higher incomes for those who spend so as to effect full utilization of capacity, a match of normative and market interest rates and thus avoid excess investment, inflation, recession, depression, crash, and government collapse.

THE INADEQUACY OF THE FED’S TOOLS:

By its open-market operations the Fed purports to a) infuse money into the economic process by purchasing government securities with newly-printed money, and sometimes b) affect the shape of the yield curve by purchasing certain maturities while simultaneously selling other maturities.

A final question is whether maturity management is a substitute for monetary policy.  Although early evidence suggested some effect from pure quantitative easing in the United States (again, this means central bank buying of government bonds) the strong consensus of later work has been that the effects were extremely limited and in no way comparable to conventional interest rate policy (See Greenlaw et al., 2018 and Chung et al., 2019)  So pure quantitative easing is at best a fairly weak instrument that provides no special role for the central bank outside perhaps of an extremely short-term crisis management situation. [Lilley and Rogoff, 2019, 8]

Outside of emergency situations, fiscal QE can perfectly well be executed by having the central government issue debt guarantees.  Fiscal QE certainly has an effect, but outside crisis situations, it once again is much less powerful than normal interest rate policy, as the Bank of Japan experience has clearly illustrated. [Lilley and Rogoff, 2019, 9]

The Fed can also, by declaration, change the overnight Federal Funds rate.  One must ask first: Is manipulation of interest rates an effective tool for correcting booms and slumps?  If so, might that imply that a previous manipulation of interest rates was the main culprit or cause of the boom or slump?  Or, if interest rates are monetary elements based upon internal relations among prior and more fundamental real factors, what was the dynamic configuration of the real factors?  And isn’t the undoing of the culprit’s effects what is really necessary for the correction?  Is the manipulation of interest rates just a default action because the primary and more effective actions – avoidance of excess expansion in the surplus phase and adjustment of the distribution of basic incomes in the basic phase – have not been implemented by the private- and government-sector stewards of the economy.  Is there a solution “prior to and more effective than” manipulation of (L&R p. 22) interest rates?

The Fed’s tools are adequate neither to effect realization of the economy’s full potential nor to correct distortions.

Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective.  [CWL 15, 133]

The purpose of this section is to inquire into the manner in which the rate of saving W is adjusted to the phases of the pure cycle of the productive process.  Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective.  [CWL 15, 133]

The most effective and most elegant tool is the continual balance of the crossovers, c”O” and I’O’, which is really an adjustment of incomes.  The crossovers between circuits are, at once, concomitant flows of outlays-incomes and expenditures-receipts.  So, adjustment of the crossovers is, at once, an adjustment of classes of outlays-incomes to match correlated classes of expendtures-receipts.  Incomes are, by theoretic principle, concomitant with both outlays and expenditures.

Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective. … …  Evidently, then, suitable migrations (among strata of incomes) are a means of providing adjustments in the community’s rate of saving.  To increase the rate of saving, increase the income of the rich; while they may be too distant from the current operations of the economic process to judge, at least they can put their money into the bank or bonds or stocks, and perhaps others there will see how it can best be used.  To decrease the rate of saving, increase the income of the poor. … The foregoing is the fundamental mode of adjusting the rate of saving to the phases of the productive cycle. [CWL 15, 133-134]

Similarly a lowering of interest rates may encourage the expansion of basic industry; but it also will encourage the expansion of well-intentioned but not well-thought-out innovations, the number of bankruptcies, etc.  What is needed is the egalitarian shift in incomes, that will compensate for the previous and shorter anti-egalitarian shift, and will produce the things that people really need and can learn to purchase without the help of self-seeking advertisers.   [CWL 15, 141 ftnt 198]

Rates of interest, when increasing, encourage saving (but discourage borrowing).  This double edge is not the per se means of effecting the enormous shift in saving to bring about the transition from a slump or a basic expansion to a surplus expansion. [CWL 15, 141 ftnt 198]

LAWS OF THE PROCESS; PRECEPTS FOR FREE PEOPLE; PERSONAL CONDUCT: 

Lonergan’s intention was to formulate the laws of an economic mechanism more remote and, in a sense, more fundamental than the pricing system…laws which men themselves administrate in the personal conduct of their lives. In 1978 he began to refer to Nicholas Kaldor in support of his judgment that the significance traditionally accorded to price theory by conventional economics since Adam Smith’s Wealth of Nations (1776) amounted to a virtual derailment of economic theory. [CWL 15, Editors’ Introduction xlv]

The one issue is the locus of that control.  Is it to be absolutist from above downwards? Is it to be democratic from below upwards? Plainly it can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives … [T]o deny the possibility of a new science and new precepts is, I am convinced, to deny the possibility of the survival of democracy. [?]

The idea of engineering human welfare is repugnant to Lonergan, for ‘managing people is not treating them as persons.  To treat them as persons one must know and one must invite them to know.’  Making the survival of democracy possible by ‘effectively augmenting the enlightenment of … enlightened self-interest’ cannot be identified merely with the Enlightenment’s project of steering public opinion from unenlightened to enlightened self-interest.  Instead, Lonergan envisaged a vast and long-term educational effort.  He insisted that rational control of the economy ‘can be democratic only in the measure in which economic science succeeds in uttering not counsel to rulers but precepts to mankind, not specific remedies and plans to increase the power of bureaucracies, but universal laws which men themselves administrate in the personal conduct of their lives.’ [CWL 15, lxxi]

See Practical Precepts For Free People – Consumers, Entrepreneurs, Bankers, Investors

DISORIENTATION, ILLUSIONS, AND MISMANAGEMENT 

There is, in the first place, an ignorance on the part of government and private-sector of how the economic process actually works; in the second place, a mismanagement of the economic process by the government and private-sector based upon this ignorance; in the third place, failure on the part of government and private-sector to implement the most fundamental and effective correctives; in the fourth place a default to the manipulation of interest rates by the Fed, which manipulation is only ineffective and distortive.  And thus, there is at bottom, a lack of understanding of how the process actually works and an erroneous belief that this manipulation can effectively correct the fundamental problem.

See Letter to the Bureau of Economic Analysis

See Notes Regarding FRB Monetary Policy and a Theoretic of Credit

See Interest Rates and Payments

See Notes on the Nature and Purpose of Money

The Fed is charged with responsibilities for which it has not adequate tools.  The Fed is mandated by Congress to maintain constructive full employment and achieve a 2% rate of inflation.  The Fed’s regulatory tools are limited to

  1. Fixing the overnight interest rate (the Federal Funds Rate)
  2. Money-market operations to add or withdraw money from the operative circuits
  3. Fixing the reserve rate for loans on deposits
  4. Stating its own intentions or expectations of future Fed actions and of future economic conditions.

The Fed does not directly hire millions of people to achieve full employment; nor does the Fed produce and sell goods and services so as to achieve precisely a 2% rate of inflation.

MANIPULATION OF THE INTEREST RATE IS DOUBLE-EDGED:

The Fed along with its proponents, critics, and advisors from academia are stuck in the illusion that the market interest rate is a single-effect, external magic lever to be operated from outside the system.  In reality, the normative interest-rate relation is implicitly contained in – i.e. internal to – the normative functional flows.  Any manipulation of the normative functional flows induced by open-market operations or rate adjustments will be double-edged, producing some definite, but not-precisely-predictable, asymmetric double effect in the non-systematic manifold of economic events.

The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

Rates of interest, when increasing, encourage saving (but discourage borrowing).  This double edge is not the per se means of effecting the enormous shift in saving to bring about the transition from a slump or a basic expansion to a surplus expansion. …. [CWL 141 ftnt 198]

a lowering of interest rates may encourage the expansion of basic industry; but it also will encourage the expansion of well-intentioned but not well-thought-out innovations, the number of bankruptcies, etc.  What is needed is the egalitarian shift in incomes, that will compensate for the previous and shorter anti-egalitarian shift, and will produce the things that people really need and can learn to purchase without the help of self-seeking advertisers.   [CWL 141 ftnt 198]

Though the adequate human adaptation to the demands of the process is “demonstrated,” by the technique of implicit definition of classes of functional flows among themselves, to be a shift of incomes, instead the inadequate ineffective strategy of manipulating interest rates is “felt” to be the answer.  The Fed and its advisors from academia do not understand the normative system of flows in the light of which supply, demand, and interest rates are to be interpreted.  The Fed is charged to produce a single effect with a double-edged tool.

(Functional Macroeconomic Dynamics’) account (of the monetary distributions analytically distinguished as basic and surplus incomes) springs from a (scientific) characterization of possible types of productive rhythms which lead (in turn) to the (scientific) specification of the adequate human adaptation to the (intrinsically cyclical) demands of the process, and also to (an identification and) determination of inadequate strategies of adaptation such as variations of interest rates, varieties of taxation and monetary policy.  [McShane, 1980, 125]

In order to correct a process that is “felt” to have gone awry, one must, in the first place, “understand and know” the principles and laws of the process, its norms, and the current divergences from the norms.  “… money has to conform to the objective exigencies of the economic process, and not vice versa.”

REAL ANALYSIS; MONEY IS A DUMMY:

We-the people seek enlightenment from academia as to the immanent intelligibility of the objective process and as to the laws and norms to which we must adapt.

real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis.  If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory.  But it doesn’t say the way the thing works. [CWL 21, xxviii]

… money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation.  … Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. (CWL 21, 101)

These differences and correlations (of the productive process of a hierarchical, advanced economy) have now to be projected into their monetary correlates to set up classes of payments.  Thus a restrictive supposition is introduced into the argument.  The productive process is now envisaged as occurring in an exchange economy.  It will be supposed to be an economy of notable size, complexity, and development, with property, exchange, prices, supply and demand, money.  [CWL 15, 39]

Behind all the symbols rests the central requirement of faith.  Money serves its indispensable purposes as long as we believe in it.  It ceases the moment we do not.  Money has well been called the promise men live by. Philip McShane, Implementing Lonergan’s Economics (quoting R.L. Heilbroner, The Economic Problem (New Jersey, 1972) p. 532 in The Lonergan Review, Culture Science and Economics, Vol. III, No 1, Spring 2011, Seton Hall University p. 198

… the dummy (money) must be constant in exchange value, so that equal quantities continue to exchange, in the general case, for equal quantities of goods and services.  The alternative to constant value in the dummy is the alternative of inflation and deflation. [CWL 21, 37-38]

(We) state the necessary and sufficient condition of constancy or variation in the exchange value of the dummy.  To this end we compare two flows of the circulation: the real flow of property, goods, and services, and the dummy flow being given and taken in exchange for the real flow….Accordingly, the necessary and sufficient condition of constant value in the dummy lies in its concomitant variation with the real flow….More briefly, if there is concomitance between the two flows, then the proportion in which dummies and goods exchange remains the same.  If there is lack of concomitance, then this proportion changes.  But exchange value is a proportion.  Therefore, the concomitance of the two flows is the condition of constant exchange value. [CWL 21, 37-39]

The alternative to constant value in the dummy is the alternative of inflation and deflation.  Of these famous twins, inflation swindles those with cash to enrich those with property or debts, while deflation swindles those with property or debts to enrich those with cash; in addition to the swindle each of these twins has his own way of torturing the dynamic flows; deflation gives producers a steady stream of losses; inflation yields a steady stream of gains to give production a drug-like stimulus. [CWL 21, 37-38]

While we can effect the anti-egalitarian shift with some measure of success, in fact the egalitarian shift (required for the basic expansion) is achieved only through the contractions, the liquidations, the blind stresses and strains of a prolonged depressions. CWL 15, 153-54

PERSPECTIVES ON THE INTEREST RATE:

Conventional viewpoints on what the interest rate is, including its double edge:

  • The rental price of money
  • The discount rate in a present value analysis; an estimate of return on investment
  • The opportunity cost of borrowing; what can be earned on a similar investment
  • The monetary aspect of the internal real growth rate
  • The market rate of interest for combinations of real growth, operational risk, FX risk, political risk, and banks’ strongbox-security, mobilization techniques, and record-keeping services
  • The root solution of the characteristic equation of (B – λA)in Burley’s linear models (See Bibliography entries under “Burley”)

 

The interest rate is an internal relation; a monetary representation of productive opportunity.  The interest rate is an inner relation, not an external lever to be raised or lowered.  (See Interest Rates and Payments)

If interest rates are an internal relation (representing growth) among explanatory conjugates (which are flows or velocities) and implicit in an implicit equation, then adjustments of the normative rate are a stress on the normative flows.  The interest rate is informational, but it is not an explanatory conjugate.  An interest payment is an initial, transitional, or final payment of a circulation in either circuit.  And it is a payment of Smith to Jones; what is outflow for Smith is inflow for Jones.  And what helps Smith hurts Jones.  An interest payment is simultaneously an expense for Smith and a revenue for Jones.

The most famous instance of such distraction (by the conventional meanings of the words investment and interest) is John Hicks’ simplistic focus on interest  –  in the financial sense  –  in 1937 which turned Keynes’ effort of 1936 into a simpler business of jollying along with IS/LM curves.  (On debates around the IS/LM muddlings, see my Pastkeynes Pastmodern Economics, 65-69) [McShane 2016, 33]

There was a strong and persistent teaching in the Judeo-Christian tradition, extending from the Old Testament to the Medieval Church, that any taking of interest was usurious, being the getting of something for nothing and therefore illegitimate.  The Section on Circuit Acceleration of Lonergan, however, cites as an obviously progressive development that laws against usury (were) attacked in the ensuing commercial and industrial revolutions!  How are we to understand this contradiction?  The present paper is concerned to answer this question in terms of a von Neumann model representation of the Lonergan production model.  For reasons given by Eichner, whom Lonergan often cited approvingly, we consider the von Neumann representation more parsimonious than the more conventional neoclassical model. [Burley, 2002-2, 61]

We thus have a model for the fluctuations in the interest rate over pure cycles in an intermittently innovating economy, which has mastered the distribution of surpluses to consumption when it has temporarily run out of ideas for innovative investment.  In the upswings there is a general opportunity cost of lending corresponding to the interest one could have got lending to any innovator … an example of what the later scholastic doctors would have called lucrum cessans and in our circumstances of a general expansion would have considered a justification for interest. [Burley, 2002-2, 66]

MISMANAGEMENT OF THE ECONOMY:

The academy, the Fed, and the Bureau of Economic Analysis are, out of ignorance rather than malice, complicit in mismanagement of the economy.

In equity (the basic expansion following the surplus expansion) should be directed to raising the standard of living of the whole society.  It does not.  And the reason why it does not is not the reason on which simple-minded moralists insist.  They blame greed.  But the prime cause is ignorance.  The dynamics of surplus and basic expansion, surplus and basic incomes are not understood, not formulated, not taught….. [CWL 15, 82]

When intelligence is a blank, the first law of nature takes over: self-preservation.  It is not primarily greed but frantic efforts at self-preservation that turn the recession into a depression, and the depression into a crash. [CWL 15, 82]

Lonergan thought of his work in economics as a contribution to a vast educational program ‘to train and equip the masses for economic independence’; to release the spontaneity and the creativeness that reside … in free men. … He considered valid macroeconomic dynamic analysis an instrument that democracy must have, for it is the broad generalization, the significant correlation, that effectively organizes free men without breaking down their freedom.’  Thus, Lonergan called for an understanding of economics in which the economy is properly subordinated in a properly organized polity. [CWL 15, Editors’ Introduction xxxviii- xxxix]

See Why the Basic Expansion Fails to be Implemented:

 

And see CWL 15, pp. 153-56 re the self correction of the economic slump.

appropriate empirical hypotheses have to be formulated and verified. (CWL 3, 41/66)

Some repeats in review:

… money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation.  … Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. (CWL 21, 101)

Traditional theory looked to shifting interest rates to provide suitable adjustment.  In the main we shall be concerned with factors that are prior to changing interest rates and more effective. … … [CWL 15, 133-134]

The present point is a very simple point.  Just as the surplus expansion is anti-egalitarian in tendency, postulating an increasing rate of saving, and attaining this effectively by increasing, in the main, the income of those who already spend as much as they care to on basic products, so the basic expansion is egalitarian in tendency; it postulates a continuously decreasing rate of saving, a continuously decreasing proportion of surplus income in total income; and it achieves this result effectively by increasing, in the main, the income of those who have a maximum latent demand for consumer goods and services. [CWL 15, 139]

Further, without further clarification Schumpeter acknowledged that dynamic analysis called for a new light on equilibrium.  Such new light arises when, over and above the equilibria of supply and demand with respect to goods and services (classic microeconomics), there are recognized further equilibria (crossovers balancing, concomitance of outlays with income and income with outlays and expenditure) that have to be maintained if an economy chooses to remain in a stationary state, (or) to embark on a long-term expansion (and) to distribute its benefits to the vast majority of its members (in a basic expansion), and so to return to a more affluent stationary state until such further time as further expansion beckons.

Instead of moralizing about profit, Lonergan’s analysis of the natural intelligibility of the pure cycle reveals how profit as ‘constant and normal’ is related to profit as ‘pure surplus income,’ which is a social dividend.  It is intrinsic to the intelligibility of capitalist process that there be an exigence for the ‘anti-egalitarian’ requirements of the major surplus expansion to yield eventually to the ‘egalitarian’ requirements of the major basic expansion. (CWL 15, Editors’ Introduction, lxv)

Rates of interest, when increasing, encourage saving (but discourage borrowing).  This double edge is not the per se means of effecting the enormous shift in saving to bring about the transition from a slump or a basic expansion to a surplus expansion.  What is needed is a contraction of purchasing power that will direct spending from the basic market of the poor to the surplus market of the rich.  The surplus phase is anti-egalitarian……. [CWL 15, 141 ftnt 198]

CRITIQUE OF LILLEY AND ROGOFF’S “CONFERENCE DRAFT”: 

The Lilley and Rogoff paper addresses the issue of whether or not negative interest rates are a suitable tool for the Central Bank, but they fail to address satisfactorily the more fundamental issues of a) money is a dummy instrument invented by humans to serve the economic process, not to dominate the economic process, b) the real intelligibility of the normative interest rates as a mere internal mathematical solution shown in Burley’s model as the root solution of the relations among real explanatory functional variables which explain the process, and c) the market interest rate as the rental price of money, which, as a price, must be understood in the light of explanatory variables.

Lonergan agreed with Schumpeter on the importance of systematic or analytic framework in order to explain, rather than merely record or describe, the aggregate phenomena of macroeconomics; he agreed with Schumpeter that to be able to explain the booms, slumps, and crashes of the trade or business cycles the economist’s analysis had to be as dynamic as the subject matter under investigation; and he agreed that the economist had to know what are the significant variables in the light of which price changes are to be interpreted. According to Lonergan, standard economic theory had successfully achieved none of these desiderata. [CWL 15, Editors’ Introduction liii]

We note that Lilley and Rogoff  are interested, not so much in discovering the theoretical primary, preventive and corrective of a deep recession but rather in identifying the most effective and least thwartable tool that the Fed can use.  Instead of identifying prior and more effective factors, Lilley and Rogoff examine the monetary veneer and the commission and tools of the Fed, and they mistakenly prescribe a double-edged and ineffective action.  But the Fed, for its part, should a) initially gain an understanding of the fundamental dynamic process of production and sale, b) achieve a new and deeper wisdom to replace traditional superficial wisdom, and c) unabashedly and courageously communicate to the private and government sectors what is best for them to do in concert for proper management of the process.  The Fed should not pay obeisance to Congress with its ignorant mandate.  The Fed should  serve the economic process properly as a) admonitory, and b) supplying the proper amount of money needed for timely transactions.  The mess of responsibility and tools must be corrected.

With Lilley and Rogoff’s disoriented and superficial focus  on Congress’s mandate to the Central Bank, they say that, in the case of a recessionary situation of insufficient demand relative to potential available supply, “if negative interest rate policy can be implemented, it would be by far the most elegant and stable long-term solution to the severe limits on monetary tools that have emerged since the financial crisis,” and “… the elegant and effective tool to restore monetary policy effectiveness at the zero bound would be unconstrained negative interest rate policy, assuming all necessary legal, institutional and regulatory changes were first instituted.”[Lilley and Rogoff, 2019, 2 and 22-23]  They assume that manipulation of interest rates into negative territory is “the most elegant and stable long-term solution” and “the elegant and effective tool to restore monetary policy effectiveness at the zero bound”, a single-edged effective tool to correct imbalances and inefficiencies.  But,

 

 The traditional doctrine of thrift and enterprise looked to the supply of and demand for money to adjust interest rates and the adjusted rates to adjust the rate of saving to the requirements of the productive process.  But it can be argued that a) this view was not sufficiently nuanced in its estimate of the requirements of the productive process, b) that it missed the magnitude of the problem, and c) that it tended to lump together quite different requirements. … [CWL 15, 140, ftnt. 197]

For emphasis, let us repeat the three arguments in a list:

  1. this view was not sufficiently nuanced in its estimate of the requirements of the productive process,
  2. it missed the magnitude of the problem, and
  3. it tended to lump together quite different requirements.

Lilley and Rogoff talk monetary theory; but they fail to realize that money is a dummy, and they fail to deal in more fundamental real analysis, which reveals norms which, if implemented, prevent a need for manipulation of interest rates. Again for the umpteenth time:

real analysis (is) identifying money with what money buys. … And that is the source of the problem in real analysis.  If you want to treat money that doesn’t make a difference, you can have a beautiful liberal monetary theory.  But it doesn’t say the way the thing works. [CWL 21, xxviii] [4]

The process is not meant to conform to monetary manipulation, rather money has to conform to the objective exigencies of the pure cycle of the economic process.

… money is an instrument invented to fulfill a definite task; it is not the ultimate master of the situation.  One has to place first human society which is served by the economic process, and second the economic process which is to be served by money.  Accordingly money has to conform to the objective exigencies of the economic process, and not vice versa. (CWL 21, 101)

These differences and correlations (of the productive process of a hierarchical, advanced economy) have now to be projected into their monetary correlates to set up classes of payments.  Thus a restrictive supposition is introduced into the argument.  The productive process is now envisaged as occurring in an exchange economy.  It will be supposed to be an economy of notable size, complexity, and development, with property, exchange, prices, supply and demand, money.  [CWL 15, 39]

Behind all the symbols rests the central requirement of faith.  Money serves its indispensable purposes as long as we believe in it.  It ceases the moment we do not.  Money has well been called the promise men live by. Philip McShane, Implementing Lonergan’s Economics (quoting R.L. Heilbroner, The Economic Problem (New Jersey, 1972) p. 532 in The Lonergan Review, Culture Science and Economics, Vol. III, No 1, Spring 2011, Seton Hall University p. 198

Chemistry  was bogged down, for centuries, by the obviousness of fire burning, and the obvious conclusion that there was such a reality as phlogiston.  Lavoisier offered a discomforting shift from the obviously observed.  I am inviting you to a like shift, from the obviousness of the edge of economic process  –  buying and selling, profit and gross product  –  to the functional heart of the process.  [McShane 2017, 23]

Real analysis identifies money with what money buys.  See Why Analyze the Productive Process First,

And, to grasp the intelligibility of interest rates, see The Significance Of Burley’s and Csapo’s Characteristic Equation And Its Root Solution

And see Money: Notes on the Nature and Purpose of Money.

And see Interest Rate Changes are Double-Edged,

We, on the other hand, have stated here and elsewhere that the responsibility to manage unemployment and inflation and to avoid a trade cycle characterized by the excesses of a boom and slump, lies with the we-individually-  and we-collectively-sectors, i.e. the private and government sectors; and the responsibility of the Central Bank is not to manage the economy, but rather to analyze the concomitance and balance of flows, be admonitory as to the equilibrated or disequilibrated state of the current economic process, to possess wisdom, and simply act wisely to supply the proper amount of money for expeditious transacting.  Thus, despite an ignorant Congress’s declarations and mandates to the Central Bank, we should not pin responsibility for tweaking or wrenching the economic process on the Fed; we should pin responsibility for problems and corrections on our enlightened individual and electorally-represented selves – and on academia for its intellectual and advisory responsibility.

INFORMATIVE LISTS:

Let us reduce verbiage into short lists for the readers’ consideration:

Possible corporate actions –voluntary or involuntary – to stimulate the economy:

  1. Pay higher dividends to stockholders, who might then act philanthropically
  2. Pay higher wages to lower paid people (poorer people who would spend it all personal income) to aid full realization of potential
  3. Be charged higher taxes on any and all present and accumulated earnings so that the government can make transfer payments to effect higher real demand
  4. Be charged higher taxes only on excess or frivolous earnings, but not on earning accumulated – no matter how high – for good reasons. Large accumulated earnings by a big unit of enterprise are not in and of themselves frivolous; and meager accumulated earnings by a small unit of enterprise are not necessarily in and of themselves non-frivolous.  What are the criteria by which to decide?
  5. Corporate philanthropy – direct donations into the operative circuits rather than transfers channeled through the unskilled government

Monetary infusions gone awry:

  1. Infused money doesn’t get into and stay circulating within the operative circuits
  2. Money accounted for by the Fed’s bank reserves is ultimately owned by individuals or entities who keep exchanging it in secondary markets so as to inflate the secondary markets and cause greater inequality of wealth

The Fed’s alternatives to direct adjustment of interest rates:

 (1) “Pure quantitative easing” policies that (we argue) do lttle more than change the maturity structure of government debt in a way the Treasury can  do at least as effectively.

(2) “Fiscal quantitative easing” policies where the central bank buys private assets: the same equivalent policy can be achieved by having the Treasury trade government debt for private debt at face value, then having the central bank buy up the government debt via quantitative easing.

(3) Having the central bank engage in pure fiscal policy via (market interest bearing) helicopter money, (p. 10) and

(4) policies that genuinely relate to monetary policy include forward guidance and changing the inflation target. [Lilley and Rogoff, 2019, 5-12]

The Fed’s possible tools

  1. Reducing the overnight funds rate; Central Bank pays lower interest on reserves deposited by commercial banks at the Central Bank. Thwarted by:
  2. Pure Quantitative Easing to stimulate the economy: Central Bank infuses money into the economy by purchasing medium and long-term government debt accounting: debit Government Securities and credit Bank Reserves or Fiat Dummy Money in Circulation.  Rendered ineffective by: 1) commercial banks refusing to lend, 2) Treasury’s issuance of bonds to refinance existing debt or finance new borrowing at a low interest rate so as to reduce its interest requirements
  3. Quasi-Fiscal Quantitative Easing: Central Bank purchases private sector assets by debiting Private Sector Securities and ultimately crediting Bank Reserves or Fiat Dummy Money in Circulation.  Rendered ineffective by: 1) commercial banks refusing to lend, 2) government grabbing the money to refinance itself and reduce its interest requirements
  4. Helicopter Money Easing: Central Bank lends money to the selected entities by debiting receivables and crediting Fiat Issued or bails out selected entities altogether. Problems: bankruptcies and deciding whom to lend to or flat-out bail out
  5. Forward Guidance and Raising Inflation Targets: Central Bank makes promises of future monetary actions to raise inflation targets. Problems: lack of Fed’s credibility and disinterest on the part of borrowers