At "interfluidity" comment by JW Mason:
I understood Krugman to be saying that in a world of IOR significantly above zero, we need to change the definition of base money. Reserves held for their yield are not base money, in that scenario; when we talk about “the money multiplier” we should start talking about “the currency multiplier” instead. I’m not sure (and don’t actually care) if that argument is coherent, but I think it’s what he was saying.
The interesting question to me is whether SRW is right that zero interest rates are here for good. The beginning of wisdom in this is to forget about the “natural rate” and ask whether there’s been a secular fall in desired expenditure relative to income at any given interest rate. I think there’s reason to think there has been. The shareholder revolution (and neoliberalism in general) has permanently shifted investment demand downward, by depriving firms of the low-cost pool of internal funds that formally financed investment. Another way of looking at this is that the effective (as opposed to legal) owners of nonfinancial corporations’ earnings have shifted from long-tenure professional managers, who were happy to convert those earnings to fixed capital since they were tied to the firm anyway; to rentiers with a strong preference for holding their wealth in financial form. This means that new investment needs to pass a much higher hurdle rate than before. (One nice way of seeing this empirically is the rise in Tobin’s Q after 1980 from less than 0.5 to around 1.) There may also have been a decrease in physical capital as a source of profits, toward IP-type rents; this would also tend to depress investment demand.
These are secular shifts, not cyclical. The cyclical phenomenon is the intermittent masking of this long-term fall in investment demand by asset bubbles, first tech then real estate. In the absence of a bubble inflating expected returns, desired investment even at zero interest rates may not be enough to sustain full employment.
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