My title is a Chinese expression that I read in a recent WSJ China Real Time Report. A synonym is “endure suffering.” That article was about how the Chinese financial system is a stacked deck for the high-saving Chinese earning very low, even negative in real terms, rates of interest on their bank deposits. Their deposits exceed their bank loans by a large margin, and they lose money (purchasing power) on each net Yuan deposited.
This caught my attention because I had just written my previous post according to which just about everything in the American and Chinese economies are opposites. They save, we consume. They have a positive export balance; we have an import balance. We borrow from our trading partners; they lend to theirs. And so on.
But in this regard—the extremely low nominal and negative real rates of interest earned by bank depositors—the two situations are very similar. Low to negative real rates occur from time to time when we have a recession that the Fed fights with low short-term rates. Everyone knows that those low rates hurt bank depositors while they are intended to help bank borrowers. Everyone knows that, including Fed and other policymakers, but nobody talks about it much because it is expected to be temporary. That’s just an unfortunate cost that must be paid to stimulate the economy with low interest rates.
But it isn’t so temporary this time around. The Fed reduced its target Federal Funds rate from 5 ¼ percent to 0 to ¼ percent by December 2008, where it’s been ever since. That’s over two years now that we ordinary people with some money in the bank have been eating bitterness. That’s long enough.
It may be too soon to start raising the target rate, but I’m not so sure moving it up a percentage point or two would be so bad. There might be some spending snuffed out, but there would also be fewer distortions in the economy. This will no doubt be taken as very naïve, and I’ll probably regret suggesting such a thing, but I think Mr. Bernanke and Company should explore ways they might allow short term interest rates to rise a bit without a significant tightening of monetary policy.
If you think of policy as manipulating interest rates, you probably can’t ease and tighten at the same time, even though it was tried in the “operation twist” experiment in 1963. The idea was to push down longer term rates to stimulate domestic economic activity while supporting short-term rates for balance of payments purposes—that is to retain or attract mobile capital. As I recall that didn’t work very well, although we survived the experiment.
If, on the other hand, you think of policy as manipulating the growth of the money supply, you probably can’t ease and tighten at the same time either. But think about it. What we have now is a low short-term interest rate policy that looks to last as far as the eye can see combined with quantitative easing focused on the quantity of money rather than the rate or price to rent it. Monetary policy currently is part price or rate and part quantity. Doesn’t that open up some possibilities, at least in the math of the situation? Something about the number of equations and the number of unknowns?
I don’t have a fully developed thought here, I know. But I hope it’s a germ of an idea that folks smarter than I am can take and run with. We need some relief. We’ve eaten enough bitterness.