Courtesy of Mish.
Lower Interest Rates May Reduce Consumption
Saxo Bank CIO and chief economist Steen Jakobsen made a few comments the other day that hit me in the face like a bucket of ice water.
Here they are again, taken from Steen Jakobsen Warns "Euro is Not a Good Idea and ECB About to Make Biggest Mistake in History"
Jakobsen says success stories like the three QE Federal Reserve (Fed) cannot be extrapolated to the Eurozone. His reason? The US is a net debtor and falling interest rates affects international creditors and rising national income. In Europe the opposite is true. Citizens of the euro countries are net savers, which means that falling interest rates deteriorates their income and does nothing to activate the economy.
That paragraph stood out because Michael Pettis at China Financial Markets has made similar statements about interest rates in China.
Pettis on Strains in China's Banking System
Please consider this snip from Pettis on Strains in China's Banking System; Avoiding the Fall (an excerpt from Taking Stock of China’s Transition by Michael Pettis – via email – no link available – emphasis in italics mine).
In cases where consumption is a relatively small part of total demand, in which household savings are high and tend to occur in the form of bank deposits, and especially if most new credit is allocated to producers rather than consumers, lower interest rates actually reduce consumption by reducing household income (lowering the return on savings), and increase production by lowering financing costs for producers.
The same can happen with currency depreciation, which reduces disposable household income by raising import prices while subsidizing the tradable goods sector. In cases like China and Japan, the net effect is more likely to increase total production of goods and services by more than it increases total consumption, so that the pressure on prices is disinflationary, not inflationary.
For years we have seen massive monetary expansion in China accompanied by low consumer price inflation, and most of that inflation was anyway driven by higher food prices, which were caused not by loose money but rather by agricultural shortages. For the past three years we have also seen the yen depreciate by nearly 40%, and yet not only has there been no corresponding increase in Japanese inflation, but we are constantly surprised by much weaker-than-expected consumption. Disinflation and even deflation, in other words, is going to be very hard to fight.
Europe vs. China
I pinged Michael Pettis with this question two days ago. "Is Steen saying the same thing as you in a more concise way, or are there differences between Europe and China in regards to lower interest rates."
Here is the reply from Pettis… …
