Posted by: Dirk | May 13, 2019

Monetary policy and the zero lower … oh, wait!

Warren Mosler spoke in Berlin last night. His talk was very impressive, questioning many “self-evident truths” that economists hold dear for just a little too long. Among his slides, this was a very good one:


This is the LIBOR (Euro), a market rate that is based on surveys from banks that are asked at which rates they would lend and borrow in the market. As you can see, the rate moved seemlessly from positive to negative in mid-2017. Zero lower bound? What is that supposed to mean?

Let me also point out Sweden’s repo rate below:


Again, the rate just went from positive to negative. Zero lower bound? What is that?

Of course, people talk about the zero lower bound a lot. But then, people talk about dragons, dwarfs and Hobbits as well. Economics seems to have a problem in that it is ruled to some extent by fairy tales that are very popular among economists but that the layperson does not understand because there seems to be no logic to it. Economics needs more debate and more common sense or it will be irrelevant to the real world. Fairy tales are nice, but you wouldn’t want the actor who played Gandalf to guide your economic policy.

Investment is not very sensitive to interest rates, anyway, so even if we can go negative without problems, there is still the problem that low and negative interest rates are very unlikely to increase private investment. Even working papers from the Federal Reserve Bank from five years ago say that.

Time to turn to fiscal policy perhaps?



  1. The problem is bank lending for speculation on land.

    The case for 100% land value tax and basic income:

    A land/location value tax (LVT), also called a site valuation tax, split rate tax, or site-value rating, is an ad valorem levy on the unimproved value of land. Unlike property taxes, it disregards the value of buildings, personal property and other improvements to real estate, only “location, location, location” value remaining. A land value tax is a progressive tax, in that the tax burden falls on titleholders in proportion to the value of locations, the ownership of which is highly correlated with overall wealth and income.

    Bearing this in mind, can it really be right that land owners (from the largest to the smallest, and including indirect landowners, i.e. the banks who collect land rents via mortgage lending) are allowed to enjoy or collect all this rental value for little or no payment, even though it is clearly the whole of society which creates rental values – whether directly or indirectly, whether through their own presence, the work they do or the taxes they have deducted from their earnings?

    A tax on land values is merely a user charge and largely voluntary – if you want to live in a nice house, you pay more, and in return for that payment you get a direct tangible benefit in return, which you would have to pay for anyway, with or without LVT.

    So if it is acceptable for private landowners to collect land rents, it is more than acceptable for “society as a whole” to collect those rents. The current tax system just boils down to welfare for the wealthy, paid for by taxes on the middle (who also have to pay for welfare for those at the bottom).

    The owner of a vacant lot in a thriving city must still pay a tax and would rationally perceive the property as a financial liability, encouraging him/her to put the land to use in order to cover the tax. LVT removes financial incentives to hold unused land solely for price appreciation, making more land available for productive uses. Land value tax creates an incentive to convert these sites to more intensive private uses or into public purposes.

    The selling price of a good that is fixed in supply, such as land, decreases if it is taxed. By contrast, the price of manufactured goods can rise in response to increased taxes, because the higher price reduces the number of units that are made. The price increase is how the maker passes along some part of the tax to consumers. Land tax incidence rests completely upon landlords, although business sectors that provide services to landlords are indirectly impacted

    Assuming constant demand, an increase in constructed space decreases the cost of improvements to land such as houses. Shifting property taxes from improvements to land encourages development. Such infill of underutilized urban space also combats sprawl.

    LVT is less vulnerable to tax evasion, since land cannot be concealed or moved overseas and titles are easily identified, as they are registered with the public.

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