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Alice in Wonderland economics Has the Bank of England finished its campaign of driving down UK base rates and forcibly impoverishing savers ? On the evidence of last week’s Radio 4 programme ‘How low can rates go ?’ hosted by my dear and highly valued friend Martin Wolf, the answer is unclear. But a host of government-appointed technocrats from around the world, including Mr. Kuroda, were wheeled out in defence of a monetary policy that severed any ties it might once have had with the real world quite some time ago. (Victor Hill, reviewing the programme, calls it ‘Alice in Wonderland’ economics.)
– Tim Price writing about Monetary Terrorism.
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People who set out to have a “planned economy” are foolish, especially the politically left. A vile curse phrase in the US is “Supply Side” as in supply side economics. “Supply side” involves such “horrible” things as not trying to regulate every fucking thing people and businesses do, NOT placing a “chilling effect” tax on the cost of every level of business exchange, NOT forcing businesses to pay for employee “benefits” or match them…which is really a tax on the employee since it comes out of labor costs and caps the employee’s earning potential at any give rate of productivity.
Yes, horrible things like this. (Shudder), Whereas DEMAND side economics can be manipulated by our wise and honorable government…so-called. ‘Just lower the prime interest rate and companies and people will borrow loanable funds and stimulate the economy…only, well, no.
Currently in the US rates are so low that if you adjusted for inflation, there is actually a NEGATIVE interest rate, meaning that businesses would actually make money by borrowing the funds and just holding it if they desired, only they’re NOT. They’re not because the economy is SOOOO unpredictable that no one dare hang their chain out, ready to be yanked by the economy manipulators.
“Stimulus” is Keynesian, yet he would call the US’s current situation a ‘liquidity trap’.
Interest rates are about as low as they can reasonably go. No one is borrowing, businesses are stagnant, and everyone on the left is terrified of doing anything on the supply side.
And so….here we are, leaving dregs like Hillary to lie about it and the ignorant to believe her.
In banking, the converse of low, or non, performing assets, is low or non-existent real interest rates.
It is the asset structures of “Central” Banks rather than “interest rates” that need closer observance.
That should have been low real market value assets
And excellent article, full of salubrious phrases. So of course it will be ignored. “Monetary terrorists, all.” Quite so.
“Demand-side economics” is simply textbook Keynesianism. It is demonstrably ineffective, yet with three-plus generations of economists thoroughly inculcated in that fallacious doctrine they are intellectually incapable of figuring out what the problem is. So all they can do is double down on their failed nostrums. More leeches! Yeah, that’s the ticket.
By contrast, supply-side economics is simply classical economics, the application of Say’s Law. Keynes never refuted Say’s Law (indeed, he couldn’t; not only is it a sound principle, but Keynes himself was not enough of an economist to attempt a refutation), so he merely ignored it. As was his wont.
There is no longer any intellectual rigor in mainstream economics; the profession has degenerated into intellectual rigor mortis. Its practitioners are incapable of admitting error and searching honestly for truth; they are mere cargo cultists, witch doctors reciting incantations without any real understanding of what they’re doing. What passes for economics today is just as much “science” as is the fraud of climate science.
The answer to “How low can [interest] rates go” is very simple and very well known. The absolute zero of interest rates is minus 100%, which corresponds roughly to hyperinflation ticking along at a healthy 50% a month (which, strictly, is an annual interest rate of minus 99.7%.) And as y’all know this is not a unicorny joke, it’s a been there, done that, in fact done that several times, not-funny-any-more, kinda joke.
If you think about it, inflation of 50% a month, while it may have all sorts of distorting effects and frictional costs, is still quite consistent with paper (or electronic) money being used as money rather than just as loo paper.
What’s more debauching the currency is not quite so disastrous as the article makes out. Most of the problem comes from people not having alternative, better, money readily available. Either because the government bans the use of better money, or because the sheeple have placed their trust in the government money and don’t cotton on to the scam. Hyperinflation is not so bad if the people can easily flip to using other, better, money at will. And if it destroys people’s faith in government money, and makes them reluctant to buy government debt, well so much the better. Hyperinflation also destroys tax collection, and shreds government spending programmes, so it certainly has its plus points. The most negative point is that it destroys the bourgeoisie, those with some savings, but not lots of hard assets. And the bourgeoisie is a bad thing to destroy.
Government control of banking is bound to happen if the government is the monopoly supplier of money. The only route to common sense is a return to private money, with competing suppliers. Common sense is of course a very long way away indeed.
“Hyperinflation also destroys tax collection, and shreds government spending programmes, so it certainly has its plus points.”
While hyperinflation (or any government generated inflation, for that matter) destroys economic activity and productivity, it does not destroy “tax collection, and shreds government spending programs”. Putting aside definitional issues of what is “inflation”, nominal GDP increases during periods of inflation (this is the reason why the monetarists have inflation targets, but are really aiming at nominal GDP). “Government Revenue” is generally a fairly steady percentage of total nominal GDP, so this “Revenue” number would increase as inflation increases. However, the nominal amount of existing debt of the Government would not increase, making the debt to GDP ratio decline. This is the heart of the game of inflationary policies. So, no … inflationary policies are Big Government’s life’s blood and hyper inflationary policies are only destructive of government to the extent that they bring a complete collapse of society.
Other than that one point, I think the rest of Lee’s comment is spot on (as usual).
I recommend a look at the details of the German hyperinflation of the early 1920s, which is by no means the only example, but is probably the best documented. The reason why tax collections fall almost to zero is that by the time the tax is paid, it’s not worth anything. So if you make 100 in 1921 and owe taxes of 40, which you have to pay in 1922, prices have quintupled, and so even though you pay 40, it’s only worth 8. And however sophisticated you think you are about indexing, in practice you never catch up. German tax collections fell to a tiny proportion of spending.
But spending also falls too – in real terms – because you can’t keep up with indexing everything. It doesn’t fall so far and so fast as tax collections, because the stuff you absolutely must have, you buy by printing whatever you have to. But if you imagine the UK budget with inflation clicking along at 50% a month, you can easily see that things like pensions, welfare benefits, government salaries, staged payments for capital procurement etc are never going to keep up. Likewise new procurement is going to be slowed because suppliers will be wary of any contract that contains any possibility of deferred payment. And that’s exactly what happened in Germany.There was a huge budget deficit financed by printing money (even though real government spending fell by at least half) because virtually no tax was being collected by 1923.
Good comment, Lee. I have to admit that, without having exact details, I always assumed the deficits during the German hyperinflation were the result of the size of reparations as opposed to falling tax receipts. Well, you know what they say about assumptions.
Laird,
There are plenty of good economists – they are normally working on microeconomics or econometrics (the rather key issue of how you measure economics – I travel with an econometrist occasionally, and he is excellent value for observing the actual figures (or lack of them) behind things – the one time he has admitted a number is real is the 45 minute target for clearing Chinese immigration when as the queue grew a very frantic officer started bringing in more and more staff to clear the backlog…). Basically the sort of economist who can tell you how to run a state is still working on guesswork (or at least is no better informed, other than some more statistics, than Hayek or Keynes was), whilst the sort of economist who wants to understand the subject is working on technical questions. Whilst the latter type should inform the former, the former often seem to ignore insights that do not suit them by citing their own type rather than those working on the actual questions.
Incidentally, I think this applies to all fields of human knowledge, even engineering – there is a lot of work done by people on solving actual problems and questions, and there are some people who try to synthesise all the knowledge (fine – as a historian, the syntheses are generally the better read) but who risk then ignoring the issues in favour of their own personal biases. I would say this is a left-wing or statist issue, but apart from the fact that few liberatarians and classic liberals seem to be inclined to synthesise too much (seriously – there are a lot of free market academics and the like, but most of them are focussed on technical aspects from my experience), I don’t think there is really an argument that anyone is capable of synthesising a complex issue without importing their own biases (I know I do quite frequently).
Lending should be from Real Savings – not book keeping tricks and so on.
The whole policy is wrong – insane. And it is getting more and more insane.
And the enemies of the policy are often insane as well.
They will say “this policy of zero interest rates and buying government and private debt is madness” [correct] “therefore we should reintroduce Glass Steagal and other regulations on the banksters” (what?).
Or “therefore we should end globalisation” (i.e. go for Donald Trump style Protectionism).
The policy is insane – and the “alternative” (from “RT” and so on) is also insane.
Time to check out.