Which is why any real recovery from the current state of play can only be led by industrial and economic policy led by the State itself. The State will have to mass-hire and build something, anything, to kickstart new economic activity, because the private sector is just not going to do anything.

On the topic of rescussitating the economy, funding public works projects would certainly have better long-term success than the current QE policy (i.e. the FED buying securities that never should have been legally issued in the first place).

Even better would be a modern debt jubilee, a la Steve Keen's suggestion, in which all citizens are given a cash infusion that automatically pays down any outstanding debt, if present, or becomes a liquid asset if the citizen is debt free. This would reset the monetary system back to a state in which further investment can be financed within the system. The amount would of course need to be controlled so as to not induce immediate inflation, and restrictions on banks (e.g. Glass-Steagall) would need to be reinstated and enforced so as to delay the inevitable return to record high private debt levels.

But the problem is exactly that this correlation doesn't seem to apply in the opposite direction today: decreasing interest rates are not generating inflation across the board, quite the opposite. You can debate why that is the case, but that's what we see: central banks keep cutting rates expecting economic activity to get hot and generate inflation, but this is not happening. The Japanese experience would seem to indicate this is "the new normal", where monetary policy is simply a brake and not an engine; which means we have to find alternative engines.

Enabling (arbitrarily) negative rates is equivalent to lifting the power limit on the engine and would simply allow the driver to keep the car at constant speed on all hills (the brakes already have unlimited power)

The economy is not physics - it's psychology.

http://www.economist.com/news/finance-and-economics/21569378...

I don't claim to understand all the implications, but it's an odd experiment we would probably be better off not trying. What's worse, how do we ever get back to some range between [-2,2] once we've gone that far negative?

it really does nothing to spur growth, if anything its an acknowledgment that those in charge cannot see the problem which means the credit market will stay stagnate and growth won't occur. Sadly it can also lead to more government borrowing under the idea "its free!"

if they want to spur economic growth they really need to look at the regulations which impact it and the tax laws the deter it. then top that off with forcing governments back to spending within their means so as not to take so much money out of the system

Every currency can have low interest rates at the same time. It's not rates relative to each other that matters that impacts nominal activity, it's the absolute rate of each.

All currencies could have -10% rate at the same time (if they all introduced an exchange rate between cash and digital deposits).

Hard to claim that credit is the problem because we know for a fact that monetary policy is too tight right now (as indicated by where the nominal aggregates are). In any case the govt should largely not attempt to influence credit.

Until monetary policy is back to neutral, all other problems most economic ills are likely to be a consequence of bad money policy.

I'm not inventing this, this is from Milton Friedman.

You judge monetary policy by its result: where are the variables you are targeting vs your targets?

The Fed's target is "low inflation and full employment". Since over the past decade we've had very little inflation and high unemployment, we can conclude that Fed monetary policy was tight.

You might blame the less-than-specific target that the policy makers have chosen for this and you'd be right, it's way too vague and not that useful.

A much better target would be the level of average nominal wage per capita, or highly related but simpler: level of nominal GDP.

Based on these targets, monetary policy has been very tight over the past few years, particularly in the Eurozone.

Monetary policy is neutral if nominal GDP remains on a 5%/year growth path. Big drops in NGDP is basically equivalent to the central bank punching the economy in the stomach.