What to Do With Your Economics Textbooks

Or, “Why Everything You Read During Your Economics Degree Was Wrong.”

Next time you’re looking for a doorstop, try using one of the economics textbooks you last looked at back in university.

After all, it’s more useful than relying on their outdated theories of monetary policy, according to asset management group Payden & Rygel in its most recent Point of View newsletter.

The (anonymous) authors surveyed a number of the “top-selling macroeconomic textbooks” and found them to be “woefully out-of-date.”

Payden & Rygel highlighted two books in particular: Harvard professor Greg Mankiw’s 1997 text Principles of Economics, and Paul Krugman and Robin Wells’ 2005 publication Economics.

Mankiw wrote that “nominal interest rates cannot fall below zero: Rather than making a loan at a negative nominal interest rate, a person would just hold cash.”

In the 2012 third edition of Economics, Krugman and Wells stated that “nobody would ever buy a bond yielding an interest rate less than zero because holding cash would be a better alternative.”

However, since these landmark texts were published, several central banks have employed negative interest rates. Denmark became the first to do so in 2012, followed by the European Central Bank in 2014, Switzerland and Sweden in 2015, and Japan earlier this year. Several countries’ government bonds now have negative yields, meaning investors are being charged for holding them, but many institutional investors have little option but to buy these assets.

“Hopefully the new editions of these textbooks will fix these glaring errors,” Payden & Rygel wrote. “Until then, use those college economics books you keep as doorstops.”

On a more serious note, the asset manager argued that negative interest rate policies were actually “not all that innovative,” with the new limit for rates only being “a little lower” than zero.

“Central banks, meantime, are still pursuing the same strategies as before: attempting to induce spending and investment by lowering interest rates,” Payden & Rygel said. It noted that the Swiss National Bank had first introduced a charge on deposits back in 1973 in an effort to protect its exchange rate. Modern-day negative rates were effectively the same policy, the asset manager said.

“A rising portion of institutional investors and maybe soon retail savers will be forced to pay for safety and liquidity,” Payden & Rygel said. “We doubt they will willingly comply—unless they have no alternative.”

Read the full article, “Monetary Policy Unmasked: Our Take on Negative Interest Rates.

Related: European Pensions Plea for Political Help & Would Seth Klarman Buy His Own Book?