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Negative Interest Rates: Capital's Reproduction Problem
The Great Financial Crisis lingers. The fact that the world economy continues to grow does not change that fact. There are different lenses from which one can view the crisis and seek to understand its implications.
We are drawn to a lens that was central to the political economic discourse from the middle of the 19th century through the Great Depression. It was the idea that capitalism was so terribly successful that it generated a surplus in excess of what it could profitably invest.
Charles Conant, a journalist-cum-presidential adviser in the late-1800s, and early 1900s recognized a limited range of possibilities. Anticipating Mad Men by half a century, Conant understood that increased consumption could absorb the surplus. There was a certain plasticity to consumer desires. Still wedded to the character-building concept of scarcity, Conant saw limitations to this course.
Conant realized the surplus could be redistributed. He accepted some movement in this direction but thought that too much would undermine the work ethic. Conant knew war could destroy the surplus, but he was not war-monger. He rejected this option on humanistic ground.
The alternative he advocated was to export it. However, he also recognized that the other industrialized nations faced similar "capital congestion". The US surplus could not go there, but rather it would directed toward the emerging markets of the era. Conant wanted the surplus capital to build infrastructure, including railroads. This would absorb the surplus savings and help integrate those regions via trade in goods and services.
The Great War destroyed tens of millions of people and the capital stock of Europe and Japan. The idea of surplus capital, a central thesis, moved to the margins of the economic and policy making circles. However, by the late 1960s and early 1970s, Europe and Japan were rebuilt, and the excesses began growing again. The cultural critique of the 1960s and the stagflation of the 1970s saw some interest return to the surplus capital lenses.
Reagan and Thatcher can be viewed through the lenses as turning Conant on his head. The export the surplus only aggravated the general congestion in the world. Instead, the Anglo-American economies would absorb the world's surplus capital. This meant importing the world's products and capital. This meant current account deficits and capital account surpluses. This required the liberalization of the capital markets and financial innovation.
The Great Financial Crisis marked the end of that strategy of dealing with the surplus. There were political limits on how large of a trade deficit the US could run without triggering a protectionist backlash. Keeping the surplus out of production and into financial assets worked for the better part of two decades. The press for deregulation succeeded in weakening the oversight and the allowed the gaming of the system, while the financial engineering created complex, opaque and illiquid financial products, with incredible leverage and risk beyond comprehension. The Great Moderation not only reduced the magnitude and amplitude of the business cycle but also served to fan the belief that asset prices could only rise.
This side of the crisis, there is still too much capital. Much of the capital that was destroyed was recovered and/or redistributed. Modern representative governments (and many of those that may not be so modern or representative) are loath to follow Andrew Mellon's advice to Herbert Hoover: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.”
Seeing this through the liberal lenses or its close cousin neo-, some economists talk about secular stagnation and insufficient aggregate demand. The political program they advocate is boosting aggregate demand through the government-sponsored infrastructure, which is indeed needed in most of the high income countries, let alone the rapidly urbanizing moderate and low income countries.
However, it does not break the cycle. It will not solve the challenge of surplus capital. What good, for example, is another tunnel into Manhattan if the toll costs most than an hour's work at the average pay? Among the periphery in Europe, Portugal has among the most modern infrastructure, yet it has not boosted the country's competitiveness. China has spent billions on infrastructure, but the economy is maturing, and growth is clearing slowing.
The liberals are reformers. They think there is a problem with capitalism and it can be fixed by this program or that. They do not appreciate that the main challenge comes not from capitalism’s weakness but its strength. It produces wealth in such abundance that we are choking on it.
The end of the Reagan-Thatcher solution leaves us with out a new strategy to deal with the surplus capital. It has given the body politic a fever. A fever is both a symptom of the illness and an attempt by the body to cure itself. That is what negative nominal interest rates are—a symptom of the surplus capital and a cure—namely the destruction of capital.
In order for society to continue, the social classes needed to reproduce themselves. Wages need not just to sustain an employee, but be sufficient to have a family. Capital needs to reproduce as well. This is the return on capital—interest rates and profits. Productivity gains are divided between wages and profits.
The lion’s share has gone to profits as wages have become decoupled from marginal gains in productivity. This forced women into the work force in droves. This still was not sufficient. Increasingly young people were forced into the labor market. This still was insufficient. Rather than win concessions from capital, the state interceded. The fastest growing part of household income comes from transfer payments. Nearly 20% of American households get government assistance for buying food. The rise in the minimum wage in over 20 states and cities this year is another concession from the state (which turns out to be among the largest employers, through contracted work, of minimum wage workers).
This still was not sufficient. Households took on debt to square the circle. The Great Financial Crisis ended that. The consumption in the US (4.3% increase at an annualized pace in Q4) is being done without much of an increase in revolving debt (credit cards). Now we have the first generation of Americans that most likely will not live as well as their parents. This is the way that the inability to reproduce itself is reflected among workers.
Capital is also finding it difficult to reproduce. Facing dismal returns, which Conant understood would be a consequence of capital congestion, capital has sought to increase further its share of productivity. This is one of the under-appreciated reasons why wages, even where the labor market is tight or tightening, like Germany, Japan, the US and the UK, are not seeing wage gains.
There is a political backlash against the concentration of wealth that has resulted. The political repulsion has many expressions and crosses the political spectrum. Capital is subject to the same laws of supply and demand that they insist for the production and employees. The negative interest rates are a prima facie case of too much capital.
The most famous equation last year was Picketty’s r>g. That meant when the return to capital was faster than growth, which historical tendencies showed, it led to a concentration of wealth. The negative nominal interest rates means that r<g. Negative interest rates turns capitalism on upside down.
The crisis will linger until we find an answer to Conant’s question. What to do with the surplus capital that our political economy cannot help but generate. Picketty treated capital as synonymous with wealth. If we widen the definition and return it to its original meaning, it represents a social relationship. Ultimately to resolve the surplus capital problem, social relationships have to change by definition.
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It is pretty 'un-astute' to be so derogatory about the perspectives of this article.
Very 'un-astute'.
'Capital' has an incredible number of 'definitions' - i.e. the word is used for such a wide range of things.
For the purposes of discussion, and I think pretty much in the perspective of this article, let's go with this 'meaning' of capital.
In a system where almost all production and 'wealth' are 'counted' by means of 'money', we will 'define' capital as money not being in circulation for consumption.
So, savings (whether in a bank or under a mattress or whereever) which is being withheld from consumption purchasing, is 'captital'. Profits of companies not used for building more production infrastructure or research are capital. Extra money injection into the system by a central bank by handing it out and 'accounting' for it as an increase in the balance sheet becomes CAPITAL !!!!!
You would have to be incredibly unable to see what is in front of your face to not understand that there is an enormous amoun of 'capital' floating around in the world at this point.
Certainly one of the completely - completely - valid perspectives of the article is that capital is utterly and inherently subject to the mechanics of supply and demand.
Capital comes fundamentally from production output in excess of what is 'needed' for consumption - or, and hugely important, what is withheld from consumption by choice of consuming less (think of the Japanese people and even the Chinese people for decades and decades. think of the thrifty US families before the advent of brainless excess consumerism) Capital also comes from the repressive looting of the plutocracy by deliberate and methodical under-payment for the labor of the people. THINK ABOUT THAT - IT'S INCREDIBLY IMPORTANT. And the other major source of capital is the 'printing' of money by governments/central_banks (where money is indeed created out of thin air by issuing the money with only an accounting liability on the balance sheet). Whether this 'printed' money is used as 'capital' or used for consumption depends on how the money is distributed/used - this is important !
You should think about this greatly important fundamental fact - money that is borrowed is a DRAIN on future earnings OR future capital generation which will NOT be available for 'use' when it is earned in the future. Present use at the SACRIFICE of future use!
Every time a debt is not repaid, SOMEBODY loses that capital who put in considerable honest effort to earn it. Rather horrific when you think about it in plain terms.
One would assess, I believe, that capital should be used to INCREASE how well-off the user of the capital will be in the future. For businesses, it should increase their productive capacity or increase their generation of new capital (return on investment !!) For governments, one would hope that use of capital for infrastructure would increase the productivity of their socio-economic area (city, state, country).
FOR INDIVIDUALS, the capital of savings SHOULD in fairness be available for future consumption AND should be rewarded with interest to the benefit of the saver.
Now consider the horrific notion of capital being wasted for no future gain whatsoever !!! Think of it in simplest of terms - capital being consumed for worthless consumption - EXACTLY equivalent to using it to pay someone to dig holes and fill them back up again. EXACTLY. Squandering.
Once upon a time, the 'money' handling infrastructure of the country (banks, investment financials) were greatly diligent in trying to make sure that every capital dollar was going to be repaid with interest. Which, of course, required that the borrower indeed was going to produce something that increased how 'well-off' the borrower was and that for sure the production of the borrowed would be sufficient to repay to debt. Gosh.
The productivity of modern economies has produced a lot of capital. The greatly significant theme of the article is simply - what has happened with/bcause_of this flood of capital ?? How can it be possible to scoff at the basic fundamental that, in simple supply and demand, a flood of excess capital will result in decreased interest rate ????
So a totally legitimate and totally pertinent query is - what was the result of this flood of excess capital ? The flows and international flows and uses of the capital are covered to some extent in the article. Certainly there is a lot more in depth and I certainly am not going to try to delve into that.
But, it is enormously important to dwell on one extremely significant result of the flood of excess capital. Human nature being what it is, the groups that are functional in the economy to be the go-between between generators of capital and users/borrowers of capital had so much capital to try to 'place' for productive purposes - AND to borrowers who could with almost total certainty repay the borrowed capital --- simply stopped caring about the responsible use of the capital. They were ALLOWED (how can you possibly not say even enabled - and even encouraged) to loan the capital to people/businesses who had little if any possibility of repaying interest much less original capital. To mention only a FEW of those horrific malinvestments, think of dot-com, South American totally unrepayable 'loans' of capital, Asian loans, sub-prime mortgage loans, etc. etc. etc.
Think about it - and then think again --- carefully. The story of the last half-century has been of the incredible squandering of capital in incredibly huge amounts - that capital going into some form of present consumption with ZERO increase in future productivity or well-being. Even worse yet, enormous amounts of 'capital' have been squandered by borrowing against the future by entities (personal, governmental, business) who are never going to repay the capital. This capital came from or came at the expense of --- the people. Simple simple simple. The people have been robbed of incredible amounts of their production. And something on the order of a hundred trillion or two has been robbed from the future needs of the people during old age - what an incredibly heinous process.
And - again, stop and think carefully. Again, look at what is in glarinlgy plain sight. Not only has so much present and future capital (AND future basic production) been squandered in the process of the incredibly heinous actions of the governments and financials at total malinvestment, but useful/productive_return investment of capital has virtually --- disappeared. Right in front of your eyes. Think of public infrastrure that has been so neglected that it is falling apart.
The incredible danger should also be obvious to anyone who stops to use even a little common sense. The squandering of capital that should have been reserved to meet future needs may have left such a huge demand on future production - that future production MAY NOT be able to meet the dwmands of the deficit created for the future !!!! Think - carefully. Think about huge needs for refurbishing massive amounts of deteriorated infrastructure. Think about the enormous need for drain of production for caring for the elderly in the face of looted pension capital.
There is NO possibility that the producers of the future will have enough production to meet the standard of living of the last few generations with the allocation that will be necessary to support the squandered current capital. There is a serious question, I imagine, as to whether the socio-economic structure can be even viable and survivable ..... Certainly there will be, at the very least, draconian results with respect to tradeoffs of fundamental socio-economic infrastructure needs versus the support of the elderly.
Be sure and vote for the incumbent politician when you have a chance to vote again, in a primary especially - if you even vote or have any concern whatsoever about your succeeding generations - and, ironically, yourself in your old age.
End the Central Banks, pay a fair wage, pay individuals to save, and enforce the rule of law on banks/insurers/corporations. Yes, it is that simple.
Problem being it doesn't enrich the Crony Capitalists nor their Kleptocrat Mandarin lackeys.
Marc to Myass, the flipping intro was a red flag - "The fact that the world economy continues to grow does not change that fact." By grow did you mean contract? How can we be in "The Great Financial Crisis" but progressing?
This is so fucking wrong on so many fucking levels I'm about to have an aneurysm...
First, the entire concept of surplus production is a farce. There can be no such thing. No one ever complained of having too high a standard of living: of having too nuch food, too large a house, too nice a car, too many vacations, etc. As production increases, prices fall, and consumption increases. How could that not be a good thing? The idea that increasing output cannot be "absorbed" is pure economic iliteracy. The basic truth of the market economy is that markets always clear. That's what prices do, they make it such that supply and demand always equate (or tend toward equating over time). If consumers won't buy a million widgets at $2 a piece, then the price falls to $1, or whatever price it is that clears the market. If consumers don't want the million widgets at any price, then businessmen will stop producing widgets, which the right thing to do, since obviously widgets are worthless. Where's the problem?
Now let's talk about Charles Conant. He was not an honest intellectual, he was a hack for various corporate interests who wanted the government to intervene in the economy to reduce competition, which he complained was driving down profits. In other words, he wanted the government to create state-sponsored cartels and monopolies so that his corporate buddies could make artificially high profits. His "theory" was just gibberish to rationalize this lobbying effort.
The OP said: "That is what negative nominal interest rates are—a symptom of the surplus capital and a cure—namely the destruction of capital." No, the ongoing bond bull market is not a result of a rapidly growing capital stock (I don't how one could even arrive at that conclusion), it's a result of the central banks around the world printing trillions and trillions of dollars/yen/euros/etc and dumping them into the bond market! This in fact causes capital consumption, as resources are diverted away from productive use to unproductive (or at least less productive) use. We know this without even checking the details of each transaction, because we know that the market economy naturally allocates resources to their most productive (i.e. most profitable) use, and so any change to that natural order necessarily means a sub-optimal use of resources.
"The crisis will linger until we find an answer to Conant’s question. What to do with the surplus capital that our political economy cannot help but generate. Picketty treated capital as synonymous with wealth. If we widen the definition and return it to its original meaning, it represents a social relationship. Ultimately to resolve the surplus capital problem, social relationships have to change by definition."
= fuzzy gibberish laced with economic illiteracy
Here's the solution for you in one sentence: "let the markets function!"
Yes. Let markets function. The interferences have caused dysfunctional markets that in turn collapse price discovery across most markets. That is evident in the negative interest rate in one case.
Yes. Voodoo Econs to conflate social relationships with surplus capital and both with wealth (defined strictly net of debt savings).
Understand dysfunctional markets and trade (if you must) through new paradigms. When the terrains change, you use new contraptions/algos often untested. In econs parlance, still arbitrages with new tools.
Thank God. For a moment there I was looking for Dorothy and the Tinman, luckily you appear to have clicked the shoes.
"......the market economy naturally allocates resources to their most ...... most profitable.... use..."
Precisely....
Excellent Post.....
Wouldn't writing off debt decrease surplus capital?
Wouldn't it be hilarious if the elite were doing this to themselves as they gut out the middle class?
The more I think about this, the more likely I think it is.
The idiots with the printing press don't realise they are winding down a massive spring that will eventually wipe them and us out. Capital is a claim ticket on goods-it is time deferred consumption. There is no optimum point at which these claim tickets are redeemed . Savers may be accumulating capital for large purchases, investments, downturns in business etc, but the funds are available to be lent for a return.
Wiping out capital wipes out the opportunity for production improvements, new business and kills employment. Eventually the spring reaches a point at which production can no longer be undertaken and we return to a basic agricultural economy. Bits of paper and contracts are not produced goods no matter how the Pikettys of this world see them.
At one time the wealthy could flee, but it's now a global economy. The same conditions apply everywhere. Paintings, jewels and expensive cars are useless in a place in which wheat, vegetables and meat are the only production in play.
Precisely so. Thank you.
Amen.
Well said.
I would only add that government is not just inefficient.
Government is evil. Let the producers chose what to do with our money.
Lots of brain farts on ZH lately. WTF?
This has got to be the stupidest fucking thing I've ever read. Does this guy really expect that capital grows for it's own sake, becoming "congested" in the process?
This article is so divorced from reality that it's hardly worth rebutting. Somebody needs to beat him about the head with a copy of Rothbard's "Man, Economy and State."
He is a Wall St and FED ball licker NotApplicable. He writes nothing but nonsense and propaganda when it comes to economics. A shit stain on ZH.
So... he needs beaten with the Scholar's edition of the book, which includes "Power and Market" as well.
Perhaps some tar and feathers afterwards.
Indeed.....
And one of the few books Worthy of Space in my office.....
Buckminster Fuller addressed this in his concept of state sponsored research (on ANYTHING) for ordinary citizens.
Indeed.
And it makes sense to have a theory about the dynamics of gigantic capital sloshing around the world. The FIRE economy causes cost of living increases and the giant pool of money that gets whipped around causing all manner of wreckage. The only new thinking in this area is Taleb's Antifragility.
So I'm reading Tom Brokaw is calling for B. Williams to be fired for Lying.....Yet he is silent on all of the lies B. Obama has told.
Those aren't lies (that would imply he knows the truth), but rather, uninformed opinions. Letting one know the truth destroys any value a Manchurian Candidate might possess.
Capital for investment comes from savings not from prinitng moar debt reciepts. Crony-socialists have turned the pyramid upside down, not capitalism.
Oh yeah, fuck you Brian, its over. The pilot of your chopper speaks:
"Brian Williams began to tell the story, from 2003, that the lead aircraft in our flight had received this ground fire.
This was not true.
Brian Williams then began to give account that the aircraft he was traveling on received this ground fire.
This is not true.
Brian Williams reported on the David Letterman show that the “captain” of his aircraft had received a Purple Heart for a wound to the ear. I was the pilot in command of the aircraft carrying Brian Williams. I do not have a Purple Heart, and my ears are just fine.
The MSNBC video coverage is a blend of Brian Williams riding on my aircraft followed by footage of the parked “Big Windy” aircraft that was shot up long before our arrival.
Brian Williams’ account is not true.
Chris Simeone, 39, is a retired US Army warrant officer 4. He started his 21-year career in the military prior to the War on Terror but went on to serve during the start of the US invasion of Iraq. He now teaches flight courses for the Army.
http://pagesix.com/2015/02/05/pilot-of-brian-williams-flight-all-that-hit-us-was-dust/
Worthless POS.
Brian Williams, a liar for empire, is a liar?! I'm shocked. Not!
The more important questions are:
The Pentagon and CIA had to have known about his lies then, so why are they outing him now?
http://newsbusters.org/blogs/curtis-houck/2014/12/10/brian-williams-form...
Looks to me that the Pentagon was a bit pissed off that Williams took an unscripted shot at super-traitor Hayden in December.
Live by the lie, die by the lie. Scumbag.
The banksters need to repay us.
"Crony-socialists have turned the pyramid upside down, not capitalism."
Amen, brother.