Fools or Knaves?
[ed. note: this article was written shortly before the ECB decision was announced, so the deposit facility rate mentioned in it is still the old one; it has been reduced to – 30 bps in the meantime]
BALTIMORE – Thursday is the big day. Mario “whatever it takes” Draghi is expected to goose up stock markets with more stimulus measures. On the table is more QE… and further cuts to the key lending rate.
The good Lord adds jerks to the mix to keep things interesting … we’re happy to report the operation was a success. It may actually have been a tad too successful.
The Chinese feds are also supposed to come forward with another gift to asset holders. According to the Wall Street Journal, the expectation is for something targeting property purchases and another interest rate cut (which would make it cut No. 7 since last November).
China’s central bank administered one-year benchmark lending rate – click to enlarge.
And yesterday, Fed chair Janet Yellen told the Economic Club of Washington:
“Were the FOMC [the Fed’s policy setting committee] to delay the start of policy normalization for too long, we would likely end up having to tighten policy relatively abruptly to keep the economy from significantly overshooting both of our goals. Such an abrupt tightening would risk disrupting financial markets and perhaps even inadvertently push the economy into recession.”
In Europe, Asia, and America, central bankers, we are told, have the situation in hand. But these policies – in fact ALL central bank policies for the last 30 years – are either a mistake or flimflam.
Purveyors of flim-flam: the world’s leading central bank bureaucrats
They are perpetrated by either fools or knaves… depending on how you look at it…and they are either an intentional transfer of wealth from the people who earned it to the world’s elite insiders. Or the transfer of wealth is an unintended consequence of botched policy.
We lean toward the larceny explanation.
QE may have been a mistake when it was first tried by Japan 20 years ago. But after so many years of trial and error, we now know how it works: It takes wealth from some people (mostly middle-class savers) and gives it to others (mostly wealthy speculators).
This is a problem. Because we know from both theory and experience that trying to rob the rich to make the poor better off doesn’t work. The rich duck and dodge. And the poor lose the incentive to make it on their own.
Now, we’re discovering that the opposite approach doesn’t work either. You can’t rob the poor, give to the rich, and expect the economy to improv
Already, the European Central Bank’s key lending rate is MINUS 0.2%. We have been amazed and befuddled by these negative rates for a long time. They suggest an impossibility: That the value of money is less than nothing.
And if that is so, the value of everything money buys – including labor – must also be less than zero…which is such a strange and preposterous thought that it can’t be correct.
But after a few nights of light meditation and heavy drinking – aided by insights from Charles Gave, the chairman of Gavekal Research – we think we have a better understanding of it.
A knave stealing tarts.
An Affront to Nature
First, says Charles, negative rates are an affront to nature… and an insult to the gods. Money today is inherently worth more than the same amount of money a year from now. Because something could happen in the intervening period.
Someone else could buy the house you wanted. The borrower might die and not pay you back. Or you might die, without ever seeing your money again. That’s why lenders need to be paid for the risk that something will go wrong…
Meanwhile, the Old Testament tells us that God chased Adam and Eve from the Garden of Eden, with this curse: From now on, “you will earn your bread from the sweat of your brow.”
Adam and Eve are getting the boot in this painting by Benjamin West. No more lazing about in the Land of Cockaigne … it’s sweat of the brow time, baby!
But the goal of central bank demand management is to upset God’s applecart. The feds want people to consume their bread before they even put on their work gloves.
In the long run, this clearly won’t work. Spending credit is essentially spending someone else’s money. And sooner or later you will run out of other people’s money.
Lord Keynes – from whom the feds draw inspiration – said not to worry. In the long run, he said, we’re all dead anyway. Keynes is dead. And we are in the long run now.
Keynes is dead – unfortunately his etatiste nonsense didn’t expire with him. Meanwhile, the long run is catching up with those who have so far failed to die.