No Zero Bound On Reason

Tyler Durden's picture

From Sean Corrigan of Diapason Commodities Management

No Zero Bound on Reason

Now it may be that Professor Krugman can insist that the grossly inequitable distributional effects which this brings about – letting the GINI out of the bottle as we have elsewhere categorised it – are somehow benign (his irrational hatred of the thrifty clearly overlapping with his bien pensant contempt for the rich with whom he presumably identifies them and thus overcoming his equally demagogic distaste for bankers). But we are far more sympathetic to the analysis presented by that eminently more reputable economist, Axel Leijonhufvud, who, in an address to Cordoba University in Argentina a few months back, dealt decisively with just this malign side-effect of the central banks’ ‘every tool is a hammer’ approach to policy, declaring that:

“Most of all, reliance on monetary policy has the inestimable advantage that its distributive consequences are so little understood by the public at large. But relying exclusively on monetary policy has some unpalatable consequences. It tends to recreate large rewards to the bankers that were instrumental in erecting the unstable structure that eventually crashed. It also runs some risks. It means after all doubling down on the policy that brought you into severe trouble to begin with.”

Prof. Leijonhufvud, noting that the privileges extended to our limited liability money-creators are ‘in effect transfers from taxpayers as well as from the mostly aged savers who cannot find alternate safe placements for their funds in retirement’ and talked of the effortless enrichment to be had by those who can borrow at near zero rates from the central bank and leverage it up multiple times to buy higher-yielding government paper, all the while patting themselves on the back – and padding themselves in the pocket - for their genius.

Coincidentally, we were sent a report condemning the large French banks’ lack of progress in restoring their finances to anything resembling a structure which could endure the slightest adverse gust were all these implicit and explicit state guarantees not so readily extended to them. Taking a quick look – more at random than out of any more studied approach to finding the worst offender – we checked the broad-brush financials for one of them, Credit Agricole, on the Bloomberg.

Mon vieux CA disposes of assets of around €1.8 trillion – not far short of a year’s worth of French GDP – against which it holds in reserve an official ‘Tier 1 Risk- Based Capital Ratio’ of 10% and a ‘Total Risk-Based Capital Ratio’ of what looks likely a highly conservative 15.4%. But therein lies the rub – namely, in the weasel words ‘Risk-Based’ and ‘Tier 1’. If we look at a good, old-fashioned measure like, say, tangible common equity to total assets, the cushion between continued existence and business failure falls to the exiguous level of 1.27%.

Putting that another way, for every euro of equity to hand, this one bank has piled €78.74 of assets – funding a hefty portion of them, no doubt with the BdF’s favourite little, officially-endorsed, ECB collateral-eligible, exceedingly short-dated TCNs. Our good Swedish professor would be in danger of choking on his smorgasbord if he were to read of such a degree of state-sponsored hyperextension.

We would also gently remind the reader here that, in Hayek’s sophisticated reading of the economic problems we create for ourselves which we quoted above, he relied heavily on a similar concept of distributional unevenness – rather than of an indiscriminate aggregate shortfall - for an explanation of why the  Gutenberg School of Economic Quackery should never be allowed the final word.

So, no, Prof. Krugman, savers cannot presume to be ‘guaranteed’ a positive real return on the sums they set aside (though you no doubt hope that those looking after your own, no doubt substantial nest egg will manage to achieve this very feat). But what they can rightly demand from a just society is that the only risks they run are everyday commercial ones and they are not systematically robbed by feckless politicians following the kind of crude leftist trumpery which you and your kind never cease to espouse.

Finally, no treatment of these issues would be complete without a brief nod to the spreading predilection for invoking an explanation for the inconvenient fact that we are not responding in textbook fashion to the potions, poultices, and bleedings being administered to us by our leeches at the central banks. This is the hackneyed old idea that we have somehow lapsed into a period of ‘secular stagnation’ – a wasting disease wherein our utter satiety with all the riches which a technologically mature society can shower upon us leaves us enfeebled and enervated, all compounded by the fact that our ineffable ennui has led us to procreate with ever decreasing regularity to the point it is threatening, horror of horrors, to make our blue sapphire of a planet a little less crowded than once we feared it might become.

Heaven forbid, but the latest sermoniser to propagate this nonsense was none other than Larry Summers – the man some thought might actually be a bit, well, less open-handed had anyone had the temerity to risk installing him as Blackhawk Ben Bernanke’s successor – suggesting that maybe Madame Yellen was not the worst choice, after all.

Dear old Larry has come over all Zero Bound constipated, fretting that the natural, real rate of interest has somehow become fixed down there at negative 2%-3% where conventional policy (if you can still remember of what that used to consist) cannot get at it – unless we blow serial bubbles, that is, these episodes in mass folly and gross wastefulness now being raised to the level of such perverse desiderata of which Krugman’s only partly-facetious call for a war on Mars forms an infamous example.

In fact, this entire notion is another piece of nonsense to spring from the one of Keynes’ least cogent ramblings, the notoriously insupportable notion of ’Liquidity Preference’ – a logical patch fixed over the lacunae in his reasoning when, having insisted that saving must always equal investment, all he could think of to determine the rate of interest was our collective desire to hold money for its own sake. From such intellectually bastard seed soon sprang, fully-armed like Minerva from the head of our economic Jove, the even worse confusion of the ‘Liquidity Trap.’

Not only Austrians, not only Robertsonians, not only Wicksellians like our man Axel Leijonhufvud have shown this to be a nonsense - easy enough since all of these generally look in some way at the balance being struck between the funds made available for loan according to potential savers’ subjective degree of time preference and the eagerness with which these funds are sought with regard to would-be entrepreneurs’ estimations of the profitability of their projects. But even Keynes himself all but confessed he had the whole thing backwards less than a year after that infernal tract, ‘The General Theory’, was first published.

Responding then to concerted criticism of his peculiar concept of interest rate determination as an internal mental conflict conducted in the heads of ‘framing’- prone, stick-in-the-mud, ‘college bursar’ bond-buyers who would, he felt, resolutely reject unusually low market rates on gilts in favour of accumulating cash hoards , he was forced to admit that the main part of that demand for money which he found to be the root of all macroeconomic evil was not at all related to people’s supposedly irrational desire to hoard it for its own sake, but rather was due to their wholly unobjectionable aim of ensuring a ready supply of funds prior to making planned outlays from them, something Keynes, with uncharacteristic humility, admitted in print that he ‘should not have previously overlooked’.

Since Summers himself made reference to a man dubbed the ‘American Keynes’ – that avid New Dealer Alvin Hansen – who raised this spectre, seventy years ago, let us also refer the reader to the complete dismissal of this strain of thought accomplished by George Terborgh in his contemporary 1945 work, ‘The Bogey of Economic Maturity’.

As Terborgh summarised in what he called a ‘thumbnail sketch’ of this theory:-

‘Formerly youthful, vigorous, and expansive… the American economy has become mature. The frontier is gone. Population growth is tapering off. Our technology, ever increasing in complexity, gives less and less room for revolutionary inventions comparable in impact to the railroad, electric power, or the automobile’

-- Robert Gordon and Tyler Cowen are hardly the trailblazers they like to imagine they are, either, it appears -

The weakening of these dynamic factors leaves the economy with a dearth of opportunity for private investment… Meanwhile… savings accumulate inexorably… and pile up as idle funds for which there is not outlet in physical capital, their accumulation setting in motion a downward spiral of income and production… the mature economy thus precipitates chronic over-saving and ushers in an era of secular stagnation and recurring crises from which there is no escape except through the intervention of government.’

‘In short, the private economy has become a cripple and can survive only by reliance on the crutches of government support.’

Two hundred-odd closely-argued and empirically-rich pages later, Terborgh sums up as follows:-

If… we suffer from a chronic insufficiency of consumption and investment combined, it will not be… because investment opportunity in a physical and technological sense is persistently inadequate to absorb our unconsumed income; but rather because of political and economic policies that discourage investment justified, under more favourable policies, by these physical factors.’ Here! Here!

As Wikipedia laconically notes in its biographical sketch of Terborgh’s protagonist, Hansen, the verdict of history was unrelenting:-

‘The thesis was highly controversial, as critics… attacked Hansen as a pessimist and defeatist. Hansen replied that secular stagnation was just another name  for Keynes's underemployment equilibrium. However, the sustained economic growth beginning in 1940 undercut Hansen's predictions and his stagnation model was forgotten.’

So, why should we not forget it, too? Only because, as Terborgh was only too aware, the popularity of such views is a gilt-edged invitation for continued, large-scale interventionism by the Bernankes, Summers, and Yellens of this world and there will surely come a point where the slow drip, drip of these will utterly undercut the foundation of our modern order and usher in to office a much darker series of opportunistic overlords and aspiring saviours.

On that somewhat sombre note, we will leave matters for now, with only this series of question to ask of our present leaders by way of an epilogue:

If, as you and your ilk mostly do, you affect to fear that we are somehow exhausting the planet’s capacity to give our species a domicile, how can you also be worried that we may be slowing down, dying out, and using less—and doing so, moreover, in a wholly voluntary fashion?

Furthermore, if you really do believe that we are on the verge of such a ‘stagnation’ as you describe—with all it implies for the potential dwindling of income streams and the drying up of future returns on capital—how can you reconcile the current, extraordinary buoyancy in the stock market with your firm insistence that no part of the policies you have been implementing can have contributed to what must therefore be an untoward degree of optimism in the valuation of its components?

Answers, please, on a postcard.

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stant's picture

they can blow smoke about negative rates all they want. the economy is shifting ftom public to private. money will go to stocks and corp bonds. thats why they will taper back on buying the banks garbage. so they can buy more of the govs garbage when the time comes

Richard Chesler's picture

Double down on systematic theft by feckless politicians.


fonestar's picture

0%?  No thanks, I bank with Satoshi and I like my returns in the four figures.

knukles's picture

These people are scared shitless of something.

DoChenRollingBearing's picture

President Hitlery in 2016?  Jooooos?  Uncle Janet (ah, but which one)?  Batman (the Caped Crusader)?  My Uncle Bill?

So many people to be scared of...  

(should I hide?)

knukles's picture

Those (aside from Batman and your drunken Uncle Bill a la We the Robots) are but symptoms of the problem.
They're scared of mediocre to bad economic prospects, and deflation

Yes, deflation.

I'm not saying I'm worried about deflation.

They are.

Else they'd not be so supportive of the magnitude of fiscal and monetary largesse of the past and future (desires as prognosticated) ....  And not even address why they've had zero impact, from a historical perspective.
They're scared shitless of the Liquidity Trap and it's implications.
They're scared shitless of the reason for the Liquidity Trap, a monetary phenomenon cause by non-monetary factors. 

I leave the blank canvas for others to fill in.

BringOnTheAsteroid's picture

You're doing well if you can get 0.0001% after tax and inflation, four figure return indeed.

ZH Snob's picture

you can't use a monkey wrench to make a flower bloom


...and you can't artificially control a market for any good, nor for very long.  but this should come as no surprise, coming from the minds of men with no sense or fear of God.  they blaspheme the Almighty with every breath they take.  the important to consider though is: do I?

whatsinaname's picture

Is this what they are talking about ? Sending feelers about negative int rates ?

DoChenRollingBearing's picture

Mon Dieu, that was hard to read!

Maybe we should just keep things simpler.

Save in gold!  That will beat ZIRPs and QEs.


And you can look at Bitcoin as an interesting niche.

"Fun with Bitcoin for Beginners: Part Two"

(And learn what a "Golden Shower on the US Dollar" is...)

fonestar's picture

Would I be that hyper-bloviating Bitcoin fan?  Sorry, but there is just too many people being wrong on the internet and someone finally has to do something about it.  I am like Gresham's lawman.

BTW, just register on  It's far safer than mailing cash (and waiting) for your BTC.

DoChenRollingBearing's picture

Guilty as charged!  Both of us!

I took a quick look at  I did not see a quick & easy way to find locals.

Is that a site you know well?  Is it easy to use?  Remember, Bearings are beginners at almost anything, other than passively rolling along

willwork4food's picture

Hey Foonz,

why is the bid price much higher than the ask price on localbtcs market block charts?

DoChenRollingBearing's picture

"Beginner" is the operative word with me.  Ask the more knowledgeable "seek" and "fonestar".

DoChenRollingBearing's picture

My bad too.  I was going to edit my comment (as I then figured out who you were referring to), but you beat me to it.  

Peace, Love, Woodstock (and all that).

fonestar's picture

I believe it is because the sellers on localbitcoins can choose to have their selling tied to Mt.Gox or other exchanges and then charge a percentage more.  Plus there's some delays involved too.  I no longer list a sell ad on so someone correct me if I am wrong.

seek's picture

I don't sell on localbitcoins either (hey, I just don't sell!) but I think the delays are starting to dominate the equation -- localbitcoin rules have a 48 hour window, and I guess quite a few people are gaming buy/sell orders and cancelling to maximize profitability in a really slimey way. So with the uptrend, the sellers are going to bake in a higher price to account for what the delay might cost them.

fonestar's picture

It is pretty easy to get set up and use.  It's like eBay, stick with sellers that have good feedback and many transactions under their belt.  The seller does not have to necessarily be close to you at all, it will just give the sellers nearest to you.  Follow the seller's instructions *exactly* as they describe (if you don't they may have their funds frozen and be on the phone with their bank explaining what a Bitcoin is).

People wonder why all the threads on ZH are becoming Bitcoin threads?  It's because Bitcoin changes everything.  Bitcoin is the most disruptive of all emerging technologies.

Yen Cross's picture

  Shitcoin looks like a good short to me. I wish it had a liquid counterparty. Hmmm, that big hammer yesterday and failure to close on the lower high today looks ugly.  Bitcoin Charts / Charts

fonestar's picture

Yeah, it's been generating 1000% returns for three years now.  What could go wrong with shorting it dumbass?

Yen Cross's picture

  You're a clown and always will be a clown! 100% returns on what? Gold ,silver, oil, fucktard!

fonestar's picture

It's been outperforming gold, silver, oil, platinum, palladium and will continue to do so.  You can say that is not true but then you are just arguing against reality.  A lot of members here seem to have deep-seated problems accepting reality.

Yen Cross's picture

  Hi, my name is fonestar, please buy some Shitcoins from me! They're a great inflation hedge.  They'll save you a fortune on printer ink and paper. You don't even have to scan the barcode like coupons. 

MAROON<> Take some Shitcoins to the farmers market, and trade them for your cabbage head... Shitcoins are priced in fiat moron! They have no value other then what they can be echanged for in FIAT! GOT IT?

 Precious metals and commodities have tangible value! Go hand your shitcoin USB thumb drive to a bartering complex, vs a bag of gold nuggets, and see where it gets you "numb nuts"! I'm not knocking Shitcoin per se'. Anything that knocks down fractional banking is a good thing! Shit is in a bubble, and when things go south it will cave in, like a worn out hooker!  That is all...

fonestar's picture

Bitcoins will most likely be priced in gold, silver or other commodities.   So feel free to rage against reality but virtual currencies are here to stay.

Yen Cross's picture

 You're so deluded by your own hype you couldn't hear a stack of Shitcoins fall in the matrix...

fonestar's picture

Or I meant to say commodities may be priced in BTC.

Yen Cross's picture

   How would that happen? Commodities are priced in fiats no?  foneclown!

fonestar's picture

You're a moron.  Thankfully people like yourself will be priced out of the future.

fonestar's picture

Please explain how you would go about shorting Bitcoin?  It's cash and carry, no options, no ETFs, nothing.  It's hard enough to even buy Bitcoin right now!

Face it, you're another no-nothing fuckwad spouting off about shit you have no fucking clue about.  Yes, by all means stick to things you can touch because it's about all your diminutive mental capacity can handle.

Yen Cross's picture

   Hi I'm foneclown. I've absolutely no understanding of "price discovery" or "counterparty risk", so I'll make an imbecile of myself on Z/H trying to claw back some semblance of my original justification for buying Shitcoins!

  foneclown should start his own sovereign Shitcoin fund... Ohh, wait he can't. Foneclown doesn't have an army to protect his (virtual) Shitcoin vault. Thereby making his Shitcoins worthless chits at the local casino on Wednesday free BB-Q rat night!

fonestar's picture

Still waiting for you to explain how you would short Bitcoin moron?  Oh right, you can't (because you're full of shit).

Give Matt Mellon a call, I'm sure he would be interested.

Wen_Dat's picture

fonestar, have some serious q's about digcurr. do you have chat enabled?

fonestar's picture

I have enabled chat now.

seek's picture

I don't think it's because bitcoin changes everything, I think it's because bitcoin is the only place where there's change.

Seriously, AU is almost constantly dribbling lower, and controlled just like the stock market. Controlled, predictable, boring. At least with bitcoin for the moment it's not manipulated and we have wild roller coaster rides in both upside and downside.

Yen Cross's picture

  Are you HIGH? Bitcoin has been a rollercoaster ride because of lack of counterparty risk and liquidity. You need new meds!

StychoKiller's picture

Make up yer mind, "lack of counterparty risk" is NOT a bad thing!

Yen Cross's picture

    I think you got my drift. Greedy littalbuggar...

seek's picture

Now you just need the bitcoin ticker to join the PMs at the top of the page.



DoChenRollingBearing's picture

That's not a bad idea...  Who's got a little widget that will work on Blogger?

DoChenRollingBearing's picture

Thank you, seek.  I just put it up, but if I can't get it to "behave" better (figure out how to make it look OK), I will take it off.  I have taken "bad widgets" off before.  (Bad Widget, bad!  Out you go!)

seek's picture

There's a small writeup in the bitcoin forum I linked abut adjusting the size etc if that's the issue.

texas sandman's picture

Yeah, hard to read.  Paragraph 11 is over 80 words by my count....and one sentence.  Brevity is the soul of wit, 80 word sentences are rambling words in search of a thought.

seek's picture

For my own amusement, I ran the Flesch-Kincaid score on the text. The reading level ranks as post-doc.

CheapBastard's picture

Interest rates will remain near zero for the rest of my life. The housing industry is  now so enormous--banking, workers, construciton, sales people, investors, and on and on---any up-tick in rates can cuase that entire glass tower to crumble and cause serious ripples.

max2205's picture

In 5 years a whole old generation is going to die off with zirp but the next group wont allow it I bet


These people have to raise rates or they will doom their careers and the system

uncle.bigs's picture

Sounds like Larry has his beany cap tied around his balls.

q99x2's picture

Wow, what an impressive literary style. That's some good writing dude.