Posted ByWarren Mosler on June 25, 2003 at 14:50:50:
In Reply to: interest rates less than zero, & household savings posted byPaul Palmer on June 25, 2003 at 12:47:41:
: This from the morning's financial news:
: Japan's call rate falls into minus territory by Allen Wan
: Japan's overnight call rate dipped to minus 0.001 percent Wednesday, the first time it has fallen below zero, Kyodo quoted the Bank of Japan as saying. A below-zero rate means that lenders are paying interest to borrowers. The call rate is the rate charged on overnight loans between commercial banks.
: Next time somebody says interest rates can't go below zero, tell them this!
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: Also, it has come out of Fed meeting that Alan Greenspan thinks that home equity serves as most American's primary savings. He may be thinking that lowering the interest rate (assuming banks follow along) spurs home refinancing, spurring house price increases, making people feel that they have "saved" more since their home values are now up. If this satisfies people's need to net save, it stimulates demand.
: Could there be a method to his madness?
Yes, some, but it's unsustainable, and not sufficient to cause employment to increase. There's also evidence that low rates cause people to desire to save more, as their savings doesn't earn interest, and they have an aversion to spending principal, especially as they get older.
Pension funds need to get additional funding as assumed rates decline as well, etc.
but that's part of a different story.
With employment lagging, income falls short of that needed to buy the output if govt. deficit spending is insufficient. Japan's housing prices 'rolled over' about 2 years after the stock market peaked. We seem to be about at that point now, so if insufficient employment and turns into 'overbuilding' and declining home prices any benefit from the effect you described vanishes and then.
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