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Keynesian economics assumes falling lending opportunity lowers profit.

Under negative rates less lending actually means More Profit. So how does this change things?

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Over the past several years, we have seen many countries that have risk free debt yield negative returns. Even some corporate bonds are yielding negative returns now. However, most corporate debt and riskier debt still yields positive returns. And I expect it will be a long while (if ever) before the entire risk curve is yielding negative returns.

While this may be a concern for other reasons, it doesn't change the fact that "falling lending opportunity lowers profit". The less positive yielding debt that exists, the less opportunities to profitably lend. And while I am dubious of the sustainability, negative yielding debt can apparently be profitable too. Keynesian ideas will be relevant for a long while.

In fact, one of the most relevant concepts in a world of negative yielding debt is the notion of a liquidity trap, which was originally popularized by John Maynard Keynes. To combat this, in the next recession, we may see more unconventional monetary policy ideas like helicopter money be implemented.

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When interest rates are negative the entire point of keynesian economics is reversed and doesn't work.

Interest has been negative for a long time with subprime etc. It's just now obvious.

We need a new economics to deal with this situation.

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  • $\begingroup$ (-1) Risk free interest rates may have been negative for a while in some countries but riskier debt has positive interest rates. Keynesian ideas will be relevant for a long while. $\endgroup$ Sep 30 '19 at 5:29

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