For centuries, people living in Western Civilization have been accumulating capital. They have not simply subsisted, and left the world the same as when they entered it. They have been creating more than they consume, passing on new wealth to their children. The Fed’s falling interest rate has slammed this process into reverse. It has put the entire economy into liquidation mode. It has forced people to consume their capital.
|
|||||
|
We are developing the social individualist meta-context for the future. From the very serious to the extremely frivolous... lets see what is on the mind of the Samizdata people. Samizdata, derived from Samizdat /n. - a system of clandestine publication of banned literature in the USSR [Russ.,= self-publishing house] Authors
Arts, Tech & CultureCivil LibertiesCommentary
EconomicsSamizdatistas |
Samizdata quote of the daySamizdata Illuminatus (Arkham, Massachusetts) · Economics, Business & Globalization · Slogans & Quotations August 23rd, 2015 |
 19 comments to Samizdata quote of the day |
Who Are We?The Samizdata people are a bunch of sinister and heavily armed globalist illuminati who seek to infect the entire world with the values of personal liberty and several property. Amongst our many crimes is a sense of humour and the intermittent use of British spelling. We are also a varied group made up of social individualists, classical liberals, whigs, libertarians, extropians, futurists, ‘Porcupines’, Karl Popper fetishists, recovering neo-conservatives, crazed Ayn Rand worshipers, over-caffeinated Virginia Postrel devotees, witty Frédéric Bastiat wannabes, cypherpunks, minarchists, kritarchists and wild-eyed anarcho-capitalists from Britain, North America, Australia and Europe. CategoriesArchivesFeed This PageLink Icons   |
|||
All content on this website (including text, photographs, audio files, and any other original works), unless otherwise noted, is licensed under a Creative Commons License. |
|||||
How does that work, exactly? If I know how to build a factory that builds widgets, wouldn’t the ability to borrow at a lower interest rate increase my incentive to build that factory? Holding the prices of factory parts and of widgets constant, reducing my financing costs only increases my profit.
Yes, low interest government bonds have sucked up ten trillion dollars that might have been invested rather than spent… but the fact that investors picked those bonds rather than widget factories is pretty good evidence that the natural rate of interest wasn’t *too* far off from the fed’s rate. This feels like the macroeconomics version of seeing someone selling ice at 10,000% markup and then blaming that “profiteer” for the prior hurricane.
roystgnr
If you have an incentive to build a factory based not on the ‘real’ interest rate (an oversimplification but this is a blog comment) that would apply in the absence of fiat money manipulation, then you might be building something that is not actually economic, even if it appears to be profitable and in fact makes a return. Hence you (or someone else) may malinvest capital. Your profit may turn out to be an accounting gain, but in capital terms, a loss, as the distortion to the pricing system arising from, say, the Fed lending money out to many comers has given you an accounting profit whereas the real value of your contribution is in fact a consumption of capital and its sinking in something as economically unproductive as a typewriter factory might be. Or it might be real estate, or an interest rate swap derivative, or a ‘sub-prime’ mortgage (heck, the clue was in the name, wasn’t it?).
In short, you, or your neighbour, may be having that mythical ‘free lunch’ from low interest rates that, when the boom subsides (or sooner, or later), that typewriter factory might find it is not actually responding to the consumer’s most urgent preferences and be found to be a malinvestment and a sink of unproductive capital.
But then again, some gain from the boom, some lose. If the boom changed nothing, there would be no ‘point’ in having it.
Fortunately the most valuable element of capital accumulation is not consumable – knowledge. With successful Taliban-style government, you can cause the people to forget what they once learned; and with successful Soviet style government you can prevent them using what they know. But mostly what the past spent a lot of time and effort discovering remains discovered, and useful.
Actually, roystgnr, if you had read the linked article, and not merely the extract quoted here, you’d see that Weiner answers your question.
The fallacy in your example is that even though you know how to build terrific widgets, there is in reality no market for them, or at least not enough of a market to justify your factory expansion. And that is true across the economy. The proof of this is that corporations are hoarding unprecedented amounts of cash and conducting stock repurchases at record levels. This is because they can’t find any other reasonable uses for the money. Companies may justify stock repurchases as being in the best interest of the (remaining) shareholders (which merely confirms my point), but as a practical matter it is a self-liquidation.
Substantially all of the dollars created by the Fed have found their way into the financial sector, not manufacturing or even services. Banks are sitting on massive excess reserves because there is no better place to invest the money (the Fed pays interest on those reserves). The Fed’s zero interest rate policy serves only to support the stock market at unjustifiable levels (when measured in historical terms, such as earnings multiples). The “carry trade” (borrowing at essentially zero cost and profiting on the spread when the money is invested in anything with a positive yield) is prospering, but no one else is. Retirees are forced to liquidate their savings in order to live, because they cannot get any reasonable return on those savings. Their alternative is to accept higher risk (which is happening), but even there the returns are inadequate: increased demand has squeezed out most of the risk premium.
Weiner is right. The Fed’s destructive policy, which might have had a plausible justification as a short-term emergency measure, is creating an entire economy which is eating its seed corn. It cannot last.
Sorry, Lee, but I don’t agree. Knowledge can be important, yes, but it is useless without the means of putting it into application. In practical terms that means actual physical capital (money or hard assets). (And of course, this assumes that the “knowledge” has any value to begin with. A lot of what passes for “knowledge” being dispensed by universities today is anything but.)
And knowledge is a wasting asset. One must keep investing in it in order to remain current (again, that requires cash). And of course ultimately it disappears altogether when you die. You may have passed along some of it to your intellectual heirs, but not that portion which we call “experience”, which is often the most valuable part.
Of itself, knowledge is sterile. To claim that it is “the most valuable element of capital accumulation” is as facile an untruth as is Marx’s labor theory of value. Both require real capital to have any value.
“The problem is that fewer and fewer businesses can find decent opportunities to expand”, or as you restated it “they can’t find any other reasonable uses for the money”, are not answers to my question, they are restating my question, begging the question. What is the mechanism by which offering low-interest bonds reduces the market (by which I must assume you mean the price) for widgets, and the price of cars, and the price of vodka, and a million other prices, but does not reduce the price of the capital which could be created to produce more of any of those things?
Is the answer uncertainty? It becomes harder to predict which of cars/widgets/vodka/etc will go up or down in price in the future, so it becomes harder to safely decide which production to invest in? This would depress the incentives for small businesses to invest, but anyone large enough to diversify would still have reason to do so.
Is the answer that Fed actions aren’t time-invariant? The price of everything (including factories) gets pushed up now while credit is expanding (and your investment costs are thereby increased) but the price of everything will get pushed down later while the bonds come due (and your investment revenues are thereby decreased)? This would imply that large businesses should hold dollars, true, but it would also imply that you and I should hold dollars; would you really recommend that as an investment strategy?
1) The Central Banks in Western countries are enablers of Ponzi Scheme transfer payments to ‘needy’ people (read reliable voting bloc). The Western nations and Japan are bust and need 1% interest rates. Example:
25% of Japan’s tax receipts go for interest payments @ a 1.00% blended interest rate. Rates normalize @ 4.00% and 100% of tax receipts go to interest. Jopan then is toast.
2) Corporations are using debt and cash flow to retire shares. That increases earnings per share and stock prices while getting huge bonuses in terms of long term stock options management receives in payment in lieu of salary. Doesn’t do much for innovation.
3) So, in the West’s quasi Socialist countries, the leftist parties are increasing the size of government, increasing transfer payments and forcing Central banks to pay for this spending instead of wiser fiscal policies that guarantee that only the politicians doing so will not be elected.
4) This all ends within the next 10 years or so when the jig is up.
5) Meanwhile we have (57) Muslim countries freeloading and trying to destroy what is left of Western civilization while innovating nothing whatsoever. Leftist political parties are importing these freeloading ‘Muslim refugees’ as fast as possible in efforts to destroy their own culture. That is another matter.
We are in trouble from multiple fronts but it is 100% purposeful and 100% intentional.
This is hardly the first time we have been here. So, I doubt it will destroy civilization. Just, wound it by holding it back for a while.
It does reduce the price of capital. Well, more specifically, it reduces the cost of debt required to purchase capital. The problem is that capital becomes artificially cheap, causing unprofitable ventures to actually appear profitable. Thus, precious capital gets diverted to unproductive uses. Furthermore, low interest rates cause investors to chase returns in riskier investments, such as junk bonds and subprime loans, as those are the only markets giving a return.
5) Meanwhile we have (57) Muslim countries freeloading and trying to destroy what is left of Western civilization while innovating nothing whatsoever. Leftist political parties are importing these freeloading ‘Muslim refugees’ as fast as possible in efforts to destroy their own culture. That is another matter.
We are in trouble from multiple fronts but it is 100% purposeful and 100% intentional.
THIS.
Laird touches upon it inferentially (it’s in his bailiwick) that in the U S we have passed from Industrial Capitalism into (and now passing through) Financial Capitalism, which as some note is coming to its close as well.
We are well into Managerial Capitalism which has the pitfalls of managerial motivations, much as the earlier periods reflected motivations of those operating in finance.
Noting the reference in one post to “earnings per share,” that is finally, as Drucker advised, losing its significance.
But the more vital issue has become: “What is being done with the accumulating surpluses?” (surpluses as = profits). Managers accumulate surpluses or they redeploy them. There is no credible evidence that their decisions on redeployment of surpluses are significantly affected by low rates of returns on accumulated surplus, nor by lower “borrowing” costs. (The latter being a hangover from Financial Capitalism).
The trends seem to be risk avoidance (such as not looking for new needs to fill and maintaining ability to absorb financial shocks). Schumpeter’s entrepreneurs are running up against the managers of the regulatory state who broadly nullify their activities (particularly those which conflict with the expansions [and penetration] of the regulatory state and increasing roles for those administrators).
We are now well into the Managerial Age. While the “financial” actions will still have effects, the role of the “financial people” is beginning to dwindle and what happens next is more likely to turn on what moves the motivations of managers.
Laird : Of itself, knowledge is sterile. To claim that it is “the most valuable element of capital accumulation” is as facile an untruth as is Marx’s labor theory of value. Both require real capital to have any value.
We will have to agree to differ. Where is the bulk of the world’s “capital” to be found these days ? Certainly a good chunk is land, but I suspect an even larger chunk is to be found in the securities of corporations, and so in their underlying assets. Which consist to a large extent in intangible assets. Google, Apple and all that lot are composed of knowledge. Possibly Exxon too – how much would most of their licenses be worth if they only had 1920s knowledge of how to extract the oil ?
It’s true that the stock value of Google may be composed of legally protected IP rights, and if those state indulgences were removed so that anyone could use the incorporated knowledge, the stock price would fall. But now we need to hop to the side to peruse the question from a different angle. The knowledge that Google uses in its business provides a value of X to humanity. Google stockholders only capture a small fraction of X, even with their IP rights. Most of the value accrues to the users of the service. Take the IP rights away, and Google’s knowledge is still worth X to humanity.
I agree that knowledge alone is useless. You need labour to use the knowledge, and some kinds of knowledge require machines to be useful. In the olden days, a lot of capital was apparently physical – ploughs and machines, though even then machines were composed largely of knowledge. Now it’s more obvious that most capital is intellectual – how much of the cost of a computer is metal and wire, and how much is clever people’s labour ?
And no, knowledge doesn’t NEED to be renewed and refreshed to be useful. If we never learnt another thing, the world’s existing stock of knowledge would continue to be useful. Existing knowledge only becomes redundant if people discover new stuff that gazumps the old stuff.
Good post – and the eating of real capital (and the utter distortion of the capital structure of the economy) started long before 2008.
It has been going on for decades.
I don’t think that anyone here has satisfactorily responded to roystgnr’s question, to I’m going to offer links to a couple of short articles which should help: one from Bill Gross and the other by David Stockman.
Laird, when roystgnr floats ‘reducing my financing costs only increases my profit. he faces the fundamental question of economics and politics: Can costs be reduced by magic*?
*magic being shorthanded for government fiat.
If you believe that costs, i.e. prices, can be moved downwards by monetary games, then you are fundamentally rejecting the reality expressed in the prices that are your costs. Whereas if you find a better way of working, you may well reduce your costs by making a genuine advance in production, taking us another step away from the Stone Age.
If you want the government/central bank to manage your costs, you do not want your property to be private, you want help, ultimately at someone else’e expense, and at the expense of your freedom, that awesome burden.
The corollary of “reducing my financing costs only increases my profits” is “reducing your financing costs reduces the lender’s profits” – thus although the borrower is super-eager to get started on his new factory, the lender is less eager to lend. All other things being equal, that means fewer factories will get built, as the lender will divert some of his money from factory financing to lower risk investments, including government debt and his under the mattress stack. And some of his money will be diverted from investment to consumption, since the value of money later has fallen relative to cupcakes now.
So we will get fewer new factories, but the owners of them will make more profits – per factory – than would otherwise have been the case.
Mr Ed, I don’t disagree with any of that, but it’s a larger-scale issue than roystgnr’s single factory. His costs might, in fact, be lowered by such “magic”, thereby elevating his profits. That is unsustainable for society as a whole, but not necessarily for one single individual.
Of course, his whole premise ignores the fact that if his borrowing costs are lowered by such fiat “magic”, so are the costs of all his competitors. Which will inevitably result in prices settling down to a “new normal” and thus squeezing out all those excess profits he’s so excited about. A receding tide lowers all boats.
Counter-intuitively, the statist want control over the existing more than they want the power that comes with increased revenue and the cretion of wealth. Not only do they try to “stimulate” the aggregate demand curve via mispricing the cost of money, they, strangely enough, stymie the supply curve by shoving more and more regulations down our collective throats, making creating new businesses fucktardedly difficult and mind-numbingly expensive.
We’ve long ago reached the limits of “stimulation” via monetary policy, with the after inflation adjusted short term rate being BELOW zero percent, and still companies are not borrowing because they have no idea what draconian measure the feds will try tomorrow. Supposedly, Keynes promoted “stimulus spending” but he would call our current situation a liquidity trap. The best description I can come up with to explain our current western economy is, this is how you murder an economy by suffocating it with a pillow, because it gives a sense of power and control to senselessly murder rather than to create.
PS
Again in regard to the US economy, not only has monitary policy shot it’s wad, now the only influence on the economy lies in the hands of executive order tariffs or in the hands of congress, i.e. fiscal policy, and the Republicans WANT Obama’s economy to crash and burn, so Obama is a lame duck in this manner also. It’s no conincedence that every modern president’s fourth year economy and stock market crashes and burns.