Martin Sandbu does not believe in learning and acknowledging counterarguments. Undeterred by evidence, week after week (sometimes more than once a week), he keeps hammering away at the marvels of zero interest rates, debt monetisation and now, negative rates, unmindful of evidence that they do any good and the costs they continue to impose on society in predictable and not-so-predictable ways. Most of the comments that have followed his recent article expose the non-sense of his arguments. But, since when it has stopped him?
Sample this gem: If negative interest rates force bank depositors to withdraw cash, then governments can tax cash withdrawals (on top of negative rates) or ban cash altogether, forcing people to spend or invest.
Well, the record of zero rates forcing people to invest is, if anything, embarrassing. Yours truly has recounted more than once, in these pages, the behavioural signal that excessively low interest rates send. More recently, when the Bank of Japan lowered its rate to -0.10%, I had written the following in this column in MINT:
Negative or 0% interest rates might work if ‘other things are equal’. In reality, other things do not remain constant. They keep evolving. In theory, interest rates = compensation for postponing consumption + inflation premium (for relative scarcity of goods over money, over time).
The first component is mostly a constant through time. Hence, if interest rates go negative, what is happening is that the inflation premium goes deeply into negative. In other words, the message goes out that there is no need for inflation premium and that there won’t be a relative scarcity of goods over money. In other words, it is a signal that there is no reason or incentive to invest in physical or real assets—the opposite of what central banks say they are trying to achieve through unconventional policies.
Indeed, I had referred to Mr. Martin Sandbu in my column!
If people are penalised or criminalised for keeping cash, imagine the social consequences. I am reminded of Oscar Wilde who once said that consistency was the last refuge of the unimaginative. The likes of Martin Sandbu are nothing if not consistent and for them, it is not the last refuge. It is the only refuge, it seems.
In addition, there are empirical surveys that companies do not lower their hurdle rates when interest rates drop but increase them when rates go up! So, more investments are not undertaken when interest rates drop, as theory would predict. If memories are short, check this out – a Federal Reserve Board working paper from December 2013.
What do you say about people for whom even evidence does not matter?