2012/10/17

About the policy of negative interest rate that the capital infusion to the government deposit from the central bank

This post written about the policy of capital infusion to the government from the central bank.

Now rewrinting. 現在書き直し中

Original is here.



The economic effects of the negative interest rate policy that the capital infusion to the government from the central bank.

Merits

It will no default on bonds. And the bonds redemption will stabilized.

To improve the fiscal balance and can realizing the financial reconstruction.

The capital infusion to the government makes negative interest rate effect which diluted money. It form is realistic that to topped the lower limit of the interest rate. This enables to eliminate the liquidity trap.

Money will be able to accurately reflect the economic conditions. This can eliminating the tariff.

It will be currency depreciation which to promote trade balance surplus. This will facilitate strengthening the external demands.

It can be tax cuts and public investment expansion.

It can fix the trade balance and fiscal balance which can solve the twin deficits.

It makes to expand public investment and thus to facilitate the expansion of domestic demand.

It can be to promote job creation by the expansion of public works. This create positive multiplier effect.

It can to dilution also dead money. This is made aggressive investments and disabling the long term dead money.


Demerits

It will increase inflation rates depending on the size of the capital infusion amount to the government.

It will dilute assets denominated in domestic currency depending on the size of the capital infusion to the government.

There is a risk to change the new currency at a frequency of once ultra long term.



The 12 steps of the capital infusion to the government type negative interest rate policy

1,The central bank fills capital to the government.

2,Supplement government revenues by this capital infusion.

3,The Government will provide appropriate investment or eliminate the taxes.

4,The government will stabilize the redemption of bonds.

5,Need to be warn of the trends of various indicators.

6,By the capital infusion control the inflation rate between 3% and 7%.

7,Raise the policy rate to curb inflation. If bond yields have risen, the central bank to curb.

8,Create an environment that is easy to take the risk of bank policy rate rise.

9,To revitalize the bank loans to the company.

10,To activate the corporate investment.

11,Improve the employment situation.

12,Improve the deposit,consumption, unemployment.



Negative interest rate calculation

I = 1 - TMS / (TMS + GMS)

I: Interest
TMS:Total money supply(Currency and deposit)
GMS: The money supply to the Government



Inflation target

IT = IR + (-I)

IT: Inflation Target
IR: Inflation rate (CPI etc)
I: Interest

Here is an example.

IT = 0.002 + (-1 * -0.07)


IT = 0.072

In the above example, the inflation target is 7.2%.

My own opinion is that should be 3% to 7% per annum inflation rate.This has been 7.2% and 7% surcharge for clarity.

Calculate the money supply to the government.

Total money supply : 1,000 T (Tln JPY)

GMS = TMS * -I


= 1,000 T * 0.07


= 70 T

I: Interest
TMS:Total money supply(Currency and deposit)
GMS: The money supply to the Government
T: Trillion JPY

A,It is possible to supply money to the government to 70 tln yen per year.

This is modeled after Japan. The revenue of japanese government is 81 tln yen.

This means can be tax cuts and pay the cost of reconstruction of the earthquake.

Of course, it is possible to solve the debt problem in Europe and the United States.



The ratio of GDP assets and debts

B=(G+A)/D

G: GDP per capita
A: household financial assets per capita
D: total debt per capita

B set to 300% from 100%.

Less than 100% means too much debt.

More than 300% means less debt.

Japan is now around 150%,it is desirable to issuance of government bonds.

This indicator is not used in their own national economic analysis techniques, it is very special. So many assumptions, Please refer to the link here.



Money supply and debt ratio

MDR=M/D

MDR:Money supply and debt ratio
M:Money supply(Currency and deposits)
D:Debt

I recommend the MDR = 33% ~ 300%.
More secure range from 50% to 200%.

Closer or over 300% then decreases the yield on a bond.
→If the country growing then bond yields decrease. And active investments become bubble.

→If the country recession. Bond yields decrease.
In the recession has no valid new investment, will degrade the existing investment.Therefore, the commercial banks to reduce lending.

Closer or lesser 33% then rise bond yields.
→If the country growing then become slow growth by rising of government bond yields.Investment in new and existing active investment more likely to decline because they could not get enough money.

→If the national recession, increases the risk of default. This is the global financial crisis and the Great Depression.



Currency deterioration speed

The money supply to the government will always happen to currency deterioration.

Here are the following assumptions.
Inflation rate: 0% at all times
Negative interest rates: -3%,-7%

Of course,in fact always takes a certain amount of inflation or deflation.

60year 120year
3% 572% 5,415.55%
7% 3,370% 313,812%

This is a bit confusing. We can now see what happens in the first year is 1 ¢.

60year 120year
3% 5.72¢ 54.1555¢
7% 33.7¢ 31$38.12¢

I personally thinking need to do denomination when inflation of 100,000%, and the one cent become 10$.

Therefore, if negative interest rates -7% continued,in this case 104 years (10$62¢) when will need to do to denomination.



Currency migration risk

Here are some examples of the new currency migration risk.

Denomination in Turkey

· 2005 January 1 Denomination 1,000,000 : 1


The inflation rate in Turkey from 2004 to 2011.

Has remained stable in 2005.


Denomination in Argentina

・1992 January 1 denomination 10,000 : 1

・ 2002 February 11 Migration to floating rate system


The inflation rate in Argentina from 1989 to January 1992.

In 1989, inflation has been more than 5,000%.

1992 january denomination 10,000 : 1


The inflation rate from 1992 to 2011.

2001 December Argentine government bond default.

2002 February 11 Migration to floating rate system


The Argentine peso / USD rate from 1992 to 2011.

Spike formation in 2002, inflation rates may be due in sharp fluctuations in exchange rates.

Ukraine 1996 denomination 100,000 : 1


Iraq will denomination in these years.

Venezuela 2008 january 1 denomination 1,000 : 1


Venezuela has seen a sharp rise in inflation during the same period.

Peru 1985year 1000:1 1991year 1.000,000:1


Germany, Japan, and Hungary in the denomination are held. The exact rate of inflation here is unfortunately not ready.

By example and increase inflation proof shows that the denomination is not necessarily. Examples such as Venezuela, monopoly of market by the richest man in some extreme, in the state can not ignore other factors.



Application to the U.S.

If the policy of domestic currency supply to the government apply to the U.S. government, it is possible to solve the extreme disparities between rich and poor.

I did not get U.S. indicators completely. So this example is guess.

Unfortunately, please regarded as unreliable data.

M2 money supply : 9586.9Bln $ → 9.6Tln $

Total debt : 54,568.5 Bln $ → 54.6Tln $

Household financial assets: 35,2 Tln $ (stock or other securities, cash and Annuities)

Inflation rate: 3.80%

GDP: 14.66Tln $

Revenue: 2.162Tln $

Appropriations: 3.456Tln $

Population: 313,232,044
GDP per capita →: 46,802 $
Household financial assets per capita →: 112,376 $
Total debt per capita →: 174,311 $

To calculate the money supply to the Government

If the desired rate of inflation to 7%...

・Apply the rate of -3.2%.

GMS = TMS * -I

= 9.6 * 0.032

= 307.2Bln$(0.3072Tln$)

GMS:Money supply to the Government

TMS:Total money supply(Currency and deposit)

A,U.S. can be supplied to the government 307.2Bln $ per a year

・The ratio of GDP assets and debts

B=(G+A)/D

G : GDP per capita
A : Household financial assets per capita
D : Total debt per capita

B = (46802 + 112376)/174311

= 91.318%

A,91.3%

Too much debt.

・Money supply and debt ratio

MDR=M/D

MDR:Money supply and debt ratio
M:Money supply (Currency and deposit)
D:Debt

CDR = 9.6 / 54.6

= 0.175824

A,17.5%

Less money supply.

To summarize the overall trend of problem is too much debt and less money supply.



Application to the euro area

If the policy of domestic currency supply to the government apply to the euro zone government it can solve the problem in Greece.

I try enumerating the indicators in the euro area. Unfortunately, these accurate data has no reliable.

M3 money supply: 9,755 bln euro (17 countries)

Total debt:

Household financial assets:

Inflation rate: 3.00%

GDP: 16.07Tln $

Annual Revenue:

Expenditures:

Population: 492,387,344
GDP per capita →:
Per capita household financial assets →:
Total debt per capita →:

Very sorry I could not get numbers by myself.

I suppose the case of a negative interest rate - 4%.

GMS = 9.755 * 0.04

= 0.3902Tln Euro (390.2Bln Euro)

A,EU can money supply to governments 390.2Bln Euro per year.

It is said that a total of 3400 bln euros of the current Greek government bonds.

Compression can be sufficient if the debt supply 3902 bln euros a year.