Tuesday, September 6, 2016

It's All About the Interest

All the economists and policy makers state the problems in terms of the interest rates.  But none will state the obvious: the problem is the interest rates themselves.

Interest can overwhelm an economy, as it has and does in the West.  Where once investment was about "skin in the game" risk, it is now about speculation.  Lending ex nihilo credit and speculating in a game at which you cannot lose would become rather popular, as it has.  Like playing monopoly where if you lose, it's just a game, but if you win, the losers have to pay you in real money.  That is how the USA works today, and the foundation is the ex nihilo credit regime built up over the last 40 years.

In a regime in which "anyone can grow up to be president" all eyes are on the prize of being one of the players who loses nothing at monopoly but wins real dollars.  Almost 99% play hoping they can join the 1%.

Here one of the USA FED governors talks about interest rates, in this case the negative rates:
Fischer is a former Bank of Israel governor and a prominent figure in international economics, so his remarks constitute an important acceptance that the unconventional and often controversial policy might be working in other jurisdictions.
“We’re in a world where they seem to work,” Fischer said, noting that while negative rates are “difficult to deal with” for savers, they typically “go along with quite decent equity prices.”
Negative interest rates to incite inflation.  Positive interest rates to incite inflation.  Either way, the policy harms savers and pensioners. Those who are to pay for he damage done in the boom have been decided: first the elderly, the pensioners. The people in charge explicitly state that is the desired effect of the policies.
Fed officials are trying to assess whether they’re close enough to achieving their dual mandate of stable prices -- which they try to hold near 2 percent -- and full employment 
Prices at 2%, they mean 2% inflation, and the policies are directed at "stable prices."  The last thing humanity wants is stable prices.  In a free market prices are constantly falling.  We want that.  We want more for our money every day.  We want computers to get cheaper as they get more powerful, and the computer market gets richer.  We want ever more wholesome food at ever lower prices. To the degree markets are free we get that. Falling prices is proof of the health of a market. Crybaby billionaires hate that.  They need centralized Hegemon power to achieve it. 2% inflation is controlled by, they believe, interest rates.  And to put a halo on 1% welfare-queenism, they say the regime is for full employment. Right. We have 94 million Americans out of work (so much for "full employment.") (Mish deals with the odiousness of the governor's quotes above here.)

Everyone argues it's the interest rate that matters, but few if any will argue that interest, at any rate, for any duration on any amount, does damage.  But no matter what the rate, someone is highlighting the damage done by interest at THAT rate.

The two sides are arguing merely for the other side to be damaged, and their side to be enriched.  Everyone loves a system that works for them.  All policies have winners and losers.  The argument is over who gets to win, and who loses.  This argument flows from interest rate regimes.  All defenders of interest regime are not offended any one else should suffer, they merely want a regime in which they can win.

What neither argues is for a market in which people gain just compensation for their contribution to the economy.  They want something for nothing, and if such a possibility exists, as it does with the interest regime backed by force and fraud, then why would anyone want to produce?  The only work that matters is to argue your side should win, the other should lose. A desire to produce in an interest regime is as rare as initiative in a welfare state.

The something for nothing in our current regime, is the extreme condition of lending ex nihilo credit at interest.  Breathtaking.  But lending anything at interest, on the premise of the presumption he lender is losing something, a premise that can only be assumed, never proven, is voodoo economics.  The only thing we can know is lending at interest is something for nothing.  Yes, it is among consenting adults (we do not let children have cigarettes or credit cards) so it ought not be outlawed, but it ought not be backed by force or fraud or both, either.

Each side argues it is only a question of getting the interest rate right.  The Austrians get the importance of free markets and price signals in that market. Then they note the interest rate is a price signal. No doubt. The Austrians say it should be set by the free market, but in a free market there would be no interest rates.  Interest can only be enforced by force or fraud, and in a free market it is collective opinion, not a sheriff, that enforces good government.  That is anarchy.  What we have now is chaos: negative interest rates, no one knows what is going on.  It merely looks good for now for the 1%.

And interest rates you'll note, at least in my life time, have gone from plus 21% to negative 2%, including zero, and at every step of the way, somebody, one side or the other, said the problem was the interest rates.  Those who declaimed it as a problem had merely shifted to the loser column, and those defending were in the winner column, at any given rate.  This demonstrates that all interest does damage, and it proves all that matters is whose ox is gored in an interest regime.

And as the FED governor notes, right now it is the savers, the pensioners and elderly gored, but the rich benefit by stock valuations, which he is careful to note is pleasing to him.  Of course, since someone must suffer in a interest regime, best it be those who cannot defend themselves.  We would not want the regime itself to be at risk by targeting populations that can fight back, would we?  Thank God for Darwinism, that says "natural selection."  We can look at those suffering and say "I got mine, Jack!"  Malthus consoles us there are just too many people, that is why they suffer.  It's not the system.  It's the victims.

And then there are those who serve the Hegemon by saying "live simply, so that other may simply live." What sanctimonious horse$#!+.  How about a free market where people "contribute abundantly, so we may all live abundantly."

The interest rate regime distorts market decisions.  Mish (I linked above) notes how the negative interest gooses equities in the stock market, causes misallocation of resources (speculative credit directed to an asset class) and malinvestment (a oversubscribed Solyndra wastes resources on what cannot work.)  As we see time and again, ex nihilo credit calls forth a range of deleterious goods and services a free market never would.

Where I part comapny with the Austrian school is they say for a free market there must be interest rates, whereas I say in a free market there will not be interest rates.  I am right, they are wrong.  They are ultimately just another defender of capitalism, the best in fact, because in every other way they get economics right. They merely argue for a more sustainable, less volatile interest-based regime.  But an interest rate regime nonetheless.  And if they were mainstreamed, as the high priests of economics, they'd get theirs, Jack.

The people who usually get the analysis and predictions right are calling for doom and gloom. Most people just feel stuck or hope they somehow get by.  Or they have a plan, or believe they have an out of some sort. Maybe it is here, a Deus Ex Machina.  The negative interest rates is a monster discovered on board the space ship.   So far so good, as far as the officers are concerned, but they have no idea what it is.  Maybe it has a mind of its own, and it turns things around.  Who knows. Right now it is all theory, produced by people who are devotees of a system that is essentially chaotic.  Their thinking may not be up to a rational analysis.

Figuring out negative interest rates, rationally, may be an advantage.

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Anonymous said...

Regarding negative interest rates: