Yves here. While most NC readers are skeptical about quantitative easing and negative interest rates, those reactions are often aesthetic: they are so far away from any normal operation of financial markets that something has to be wrong with the idea. The problem is that while that instinct may be (and we’d argue is) correct, policy wonks who have drunk the Fed’s Kool Aid will treat those who have visceral negative reactions as simply having a case of novelty aversion, which means they can be ignored.
Ed Harrison provides comparatively short and accessible explanation of why QE and negative interest rates are bound to bomb. I encourage you to send his post to friends and colleagues who’d like to be able to discuss in a more rigorous manner why these approaches are deeply flawed.
By Ed Harrison, founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. Originally published at Credit Writedowns
This is going to be a short thought piece. But the takeaway should be that the convergence to zero will continue unabated as the threat of inflation is muted given the combination of excess capacity, high private debt and unfavourable demographics. The subject is monetary policy.
Last week, when Mario Draghi spoke to the press after the ECB’s decision to conduct large scale asset purchases of euro area government bonds, his language was clear and telling. He indicated at that time that he believed ECB policy, while not wholly effective in lieu of fiscal policy, had two ways in which to work.
The first way Draghi saw policy working was via the portfolio balance channel. Draghi explained the effect by noting that banks which sell bonds to the central bank must redeploy capital, and in doing so they have “an incentive” to not just let the reserves they receive for their assets sit idle as those reserves would be taxed due to the ECB’s negative rate policy. In Draghi’s view then, this would provide an incentive for lending, not just for redeploying money into other government bonds or into riskier assets.
The second way that Draghi saw policy working is through expectations. He believes that inflation expectations would be pushed up as a result of ECB action and that the expectation of higher inflation would feed through into actual consumer prices in some fashion, leading to higher inflation, which I assume he believes is a good thing even in the absence of higher real wages.
I do not agree with either line of argument. However, rather than trying to pick apart Mario Draghi’s view, let me supply an alternative line of thinking.
First, our monetary system is really a credit system because it is credit that matters, rather than narrow base money or monetary aggregates that most people use as a proxy of the broader money supply. What we want to see for economic growth to occur is that financial institutions are making loans to productive parts of the economy that have the greatest impact on sustainable long-term economic growth. Further, we want to see this economic growth underpinned by household and business income that supports further growth down the line. The key here is that the growth comes not from the financial sector or financial assets but from productive assets that throw off income which can be used by businesses and households to repay the debt and take on even more as productive ventures become available.
In this process, the loans that are made create a deposit in the banking system that then requires an individual lender to increase its reserve balances. It is the loan that creates the need for the reserves. And to the degree the individual bank does not have enough reserves, it can borrow them in the inter-bank market. Moreover, to the degree that the whole of the banking system is at its reserve limit when this loan creates a reservable deposit, the central bank will increase the reserves in the system. Two things are notable here. One, not increasing the system-wide reserves at any one discrete point in time when the system is at a limit would create a disruption in the payments system, whose function the central bank is legally mandated to ensure. So the central bank will supply the reserves. Second, to the degree the central bank wants to stop supplying more reserves to the system, it will have to raise its policy rate or regulate the banks’ credit allocation process more assiduously.
The modern central bank is an interest-rate targeting monopoly supplier of reserves because central banks know that they can reliably hit a target for overnight interest rates since they are the only game in town. However, the trade-off in setting an interest rate is that the central bank is forced to meet the reserve needs of the system irrespective of how great those needs are. To the degree the central bank believes the need for reserves is too high because credit growth is too high and the economy is overheating, then it can always raise the overnight lending rate. But it cannot restrict the supply of reserves or the payments system breaks down and inter-bank payments clearances begin to fail.
All of this is important to point out because it is the supply of credit that determines the need for reserves, not the other way around, as often stated directly or implied through money multiplier analogies in economic textbooks. Thus, when you think about quantitative easing and its transmission into the real economy, it’s clear that If the central bank injects base money into the financial system in its large scale asset purchase program as a swap for government bonds, this increased amount of base money does not force credit creation to occur. This does not directly drive growth. It only works via some sort of portfolio balance effect. And here I am not implying that banks will lend, rather I am saying that they financial institutions will alter the composition of their portfolios in response to perceived easing. They can reach for yield and increase risk, knowing that the central bank is effectively backstopping them by signalling accommodation for the foreseeable future. The portfolio balance effect comes from the accommodation signal that a central bank supplies, which allows players to engage in ‘carry’ strategies with a longer exit timeframe. This is not a real economy effect. It is a financial economy effect. And so we should expect asset prices to rise and for the real economy only to receive a tertiary flow through.
Now, to the degree the portfolio balance effect does impact the real economy, if private debts are high, sustainable credit growth will be more limited without wage growth. Yes, credit can grow but unless wages are also growing in real terms, credit would have to be growing relative to income, which is dangerous when private debt is already high. Moreover, demographics work against credit growth as older people are less likely to substantially increase credit given their shorter high-income time horizon and accumulated savings.
On negative interest rates, I will be brief; they are a tax. And like all taxes, this tax reduces net financial assets in the private sector. It is highly dubious that taxing deposits will give an incentive to banks to lend responsibly. What we should expect instead is for banks to either eat the losses from the tax, pass on the tax to customers, or to try and recoup the loss through increasing risk or leverage. In short, negative interest rates are, while a deterrent to hot money flows, not stimulative to the domestic economy.
The bottom line, then, is that I expect QE style strategies to fail both in creating inflation and in creating economic growth. I believe we are going to see a continued downtrend in nominal GDP until wages rise or debts fall relative to wages. The strategies being employed by indebted developed economies are not geared to either wage growth or debt reduction relative to wages. And that is why we should expect nominal GDP to continue to decline, and long-term interest rates as well.
Good post, and Harrison has likely forgotten more about economics than I’ll ever know. However, while I understand the basic definition of “overnight interest rates”, is he not on thin ice when claiming that:
“The modern central bank is an interest-rate targeting monopoly supplier of reserves because central banks know that they can reliably hit a target for overnight interest rates since they are the only game in town.”
In other words, given the crushing sovereign debt loads carried by certain countries at present, does that not severely limit the ability of central banks to significantly raise even the overnight rates? How could the Japanese or American central banks, to use two obvious examples, possibly “target” rates significantly higher than their currently suppressed levels?
Debt doesn’t affect the ability of a central bank to reach its target rate. For countries like those of the eurozone, rising interest rates can, however, make issuance of new debt unsustainable if they are incapable of servicing the interest payments. Is that what you’re asking about?
Yes, that’s what I’m talking about. And forget the Eurozone, how do you imagine that the U.S. and Japan would be able to service the interest on their current debt loads if interest rates were to rise to any meaningful degree?
For Japan or the U.S. a rise in short-term rates would present no difficulty in servicing the appropriate payments as the money is credited by Congressional order. If the short-term rate rose to 10%, once the security matured on a zero coupon security the principal would be paid back along with the fixed yield, and new securities are issued to cover that created money. It can’t even be inflationary as there is no impact to the money supply.
But isn’t an interest rate the price of money? And if the interest rate is zero, what is that telling us about what the money is “worth”?
I’m struggling to think of something that is valuable that is not scarce. A bag of shredded paper (confetti) is not worth anything, a piece of paper that has a Leonardo drawing on it is very valuable indeed. Surely we still need money to be “valuable”?
The other dimension of course is “risk”, CBs would love to pretend it somehow magically went away. The ability of a debt issuer to make principal and interest payments, or the discounted price of future enterprise cash flows are supposed to be variable based on the *quality* of those claims, not some imagined “unlimited” backstop provided by the issuer of the paper they are denominated in. Am I missing something here? When the curtain is pulled back on the Wizard of Oz do we still have unlimited faith in his magic claims, even if all of the other Wizards in the club are putting on the same special effects show? Why are we somehow “richer” when more and more pieces of paper are used to describe the same quantity of houses, stocks, and items on the grocery shelf?
I hit a wall when MMT’ers say “oh no, we’re in a new era now, the quantity theory of money doesn’t apply any more”. Why not just use air or a bucket of seawater, they’re already available in unlimited amounts. When you unpack that argument you might come to the conclusion that scarcity does have a relationship with value, no?
Debt is not a commodity with a price like grain or porkbellies.
Virtually nothing, by itself. Certainly not that money is worthless.
Scarce to whom? Money is scare to currency users, not currency issuers.
The ‘backstop’ isn’t imaginary, any more than dollars are imaginary. There is no risk that the Government or CB that issues its own currency will ever run out of dollars, any more than the scorekeeper can run out of points in a baseball game.
To the extent that new money mobilizes idle resources towards productive ends, we (as a society) are richer than otherwise. This applies to bank money creation just as much as Central Bank money creation. Otherwise, you’re right- if we merely used new money to make the same transactions as before, all you’d wind up with is inflation.
The quantity theory of money probably was never accurate. Even under the gold standard you had endogenous bank money.
Yes, it is supposed to be scarce to users. In MMT, taxes serve to enforce that scarcity.
Hyperinflation is not simply a question of extremely high inflation of consumer prices but a loss of trust in a currency. This process may start with avoiding cash and investing e.g. in financial assets and housing, thereby creating corresponding bubbles (especially when applying leverage to take even more advantage) and will continue with increased volatility, higher amplitudes of economic cycles (boom/bust) and phases of deflation that will demand ever higher doses of monetary “stimulus” until the whole Ponzi scheme is exposed for all to see. At some point in time the trust in the faulty doctrine of monetary policy evaporates and the monetary system will implode.
To reduce the function of money simply to the manipulation of economic outcomes neglects other important aspects that are important for freedom and peace, namely the reliability of measure, the important signals derived from price mechanisms, society’s fabric etc. as “money” serves as an important communication medium as well.
Therefore Hal, you are on the right track.
Supply shocks accompanied by trade imbalances proceed every case of Hyperinflation.
Skippy…. at least with hard currency’s you didn’t even need that to occur… your fleet of ships with GLD et al from the new worlds finding the bottom was enough… ask the Spanish…
It’s very true, the economy runs on credit as set out here and in e.g. Steve Keen’s The Roving Cavaliers of Credit. It is also true, as implied, that the economy is thus systemically addicted to economic growth. The author is thus compelled to reference sustainable long-term growth as the sole way out of this otherwise apparently endless economic malaise, but is such a thing possible? I don’t see how. Herman Daley and Kenneth Townsend had it right in the early 90s:
Important point: the economy is a subset of nature. Nature is not a subset of the economy. In other words, the economy must adapt to Natural Law, not the other way around.
(I recall hearing Daly talking recently to the UK outfit Positive Money, expressing cautious support for the idea that the current money system fosters constant growth (or requires it to function properly), something I think he had not considered previously.)
In his recent simplistic parable in defence of constant growth, Krugman clumsily juggled oil tankers of ever increasing fuel efficiency to prove orthodox economics’ point, and was promptly debunked by the physicist he thought he was proving wrong (too lazy to track the exchange between economist and physicist down). Nothing can grow forever, not even with ephemeralisation. Moreover, is economic activity so a priori wonderful that we must keep it growing at all costs? And why must productivity be measured in numbers of widgets and services that come with a price tag?
Stupid questions? Maybe fifty years ago, but today? Well, just look at the crappification of products and jobs produced in pusuit of growth.
If economists like Daly, Townsend, Boulder and any number of physicists are right about the impossibility of perpetual economic growth, if automation can do most repetetive grunt work and if consumerism is kept going by adverstising, meaning that today’s anemic demand is artificially high anyway, surely our cultural ideas about value, productivity and work, and by extension orthodox economics itelf, all need a profound rethink.
And I mean a really profound rethink.
Excellent comment. So what we really need is qualitative easing and quantitative tightening.
A-men. To add my layman’s simple perceptions (Yves described them as “visceral negative reactions”) as to why quantitative easing will fail, I would say that in recent times more and more individuals have lost their personal affectation to “growth” in their own lives. Perhaps through force of circumstance, we’ve tasted personal reduction and found with some surprise perhaps, that the chalice is not as bitter as feared, and weaned ourselves of consumer addictions. Ultimately it isn’t the supply of credit only that matters, but the demand of it. When one realizes that not only the wholistic system is put at risk by the perpetual-growth religion, but also one’s personal life, the appetite for credit diminishes significantly. One’s personal economy is also a subset of nature (to paraphrase your comment) – our own individual nature; and as individuals I believe more and more of us are being weaned from a life-time of never-satisfied accumulation. If you add to the personal-satisfaction equation that fact that stagnating wage-growth (a natural bi-product of de-growth) further reduce my opportunities for achieving the “next level” in my imaginary growth-ambition curve … suddenly the personal cost of covering increased debt is no longer worth the trouble, frankly. My choices are no longer driven by a need to grow, rather by a need to find what I do satisfying. The moral of the story is … Mr Draghi should not be so certain those “expectations” driving markets are as predictable as they once were (beyond the restricted circle of the utterly-addicted financial world, of course). Stock markets will respond but require ever-increasing dosage of dope, while the real economy de-couples and shrinks.
Exactly, QE is increasing the volume of material wealth and power going to a narrow subset of the world’s population. Can billions of lives be improved with economic growth, yes, but the growth is being concentrated amongst the privileged populations (the growth of a tumor rather than that of a child). Balance the growth globally, then stop “growing” and optimize what is there. This way, we can still progress scientifically/technically without robbing ourselves of a future, and, more importantly, we will be much happier.
Galbraith’s conclusions in The Affluent Society come to mind.
The limits to growth were outlined in book, “The Limits To Growth” by The Club of Rome. When this came out in 1972, it came about during a period of historically high levels of political dissidence globally and fundamental questioning and rejection of the consensus reality of the planetary social order. In the US, one result of the intellectual backbone to the environmental movement was to establish the EPA as a cabinet level position and also as a ministerial level policy concern in governments around the world to this day. In 1976, Amory Lovins published in “FOREIGN AFFAIRS”, an extensive essay arguing against fossil and nuclear fuels as unsustainable and disaster producing policies. The immediate impact of this position on policy hit the governments of the world with an alarm from within the high levels of decision makers own think tanks.
From this point in the mid 1970s, the policy choice for energy development by changing consumption via changing designs of housing and consumer appliances and developing a renewable energy source based on the vast power of the sun absorbed by the earth was the logical conclusion in contrast to the impossibility of unlimited economic growth. And fortunately, the solutions were simple, in hand and the birth of the Solar Energy Era was a clear policy path. Even the supposed bullet-proof source of energy, nukes, has the very real problem of unreliable intermittent production so frequently claimed for solar by even sympathetic, well read and otherwise intelligent people. Again, from Lovins:
“Lovins says that nuclear power plants are intermittent in that they will sometimes fail unexpectedly, often for long periods of time. For example, in the United States, 132 nuclear plants were built, and 21% were permanently and prematurely closed due to reliability or cost problems, while another 27% have at least once completely failed for a year or more. The remaining U.S. nuclear plants produce approximately 90% of their full-time full-load potential, but even they must shut down (on average) for 39 days every 17 months for scheduled refueling and maintenance. To cope with such intermittence by nuclear (and centralized fossil-fuelled) power plants, utilities install a “reserve margin” of roughly 15% extra capacity spinning ready for instant use.
Nuclear plants have an additional disadvantage; for safety, they must instantly shut down in a power failure, but for nuclear-physics reasons, they can’t be restarted quickly. For example, during the Northeast Blackout of 2003, nine operating U.S. nuclear units had to shut down and were later restarted. During the first three days, while they were most needed, their output was less than 3% of normal. After twelve days of restart, their average capacity loss had exceeded 50 percent.
Lovins general assessment of nuclear power is that “Nuclear power is the only energy source where mishap or malice can kill so many people so far away; the only one whose ingredients can help make and hide nuclear bombs; the only climate solution that substitutes proliferation, accident, and high-level radioactive waste dangers. Indeed, nuclear plants are so slow and costly to build that they reduce and retard climate protection”. With respect to the 2011 Japanese nuclear accidents, Lovins has said: “An earthquake-and-tsunami zone crowded with 127 million people is an unwise place for 54 reactors”.
—————————- from Wikipedia on Amory Lovins.
The central bank is in the description of Ed Harrison, a perpetual energy machine that requires rising wages and income to cover the debt service of the credit formation that fuels economic growth. Growth is not unlimited, wages to service debt are typically pegged at fixed percentages as input costs for production, not to be exceeded but suppressed as much and as often as possible, thus hampering growth. Development as an ecologic necessity is replacing economic growth which has stagnated. Banks will have to function less as a mechanistic perpetual engine of growth and more as a provider of financial enabling for economic development.
Good post. You think this would be intuitive to everyone. When discussing the idea of a sustainable economy I always talk about the difference between maximizing and optimizing. We are only concerned with maximizing (this includes maximizing war and sickness if they result in profit). Optimizing, is more nuanced, maximize some things, improve others, and leave some things be. Changing the metrics of a healthy economy is one of the most pressing issues in economic theory, particularly in the twilight of the oil based economy.
Optimizing is maximizing when accounting for constraints.
This was my first thought too. The difference between financial sustainability and environmental sustainability are sometimes two completely different subjects. The objective of CBs is to maintain “the payments system.” OK. So what happens when the payments system comes up against so much environmental degradation that it is an absurdity? (Sort of like right now.) The CB system is strictly a financial system because under the various prescriptions it can use there isn’t one that can financially sustain the environment. We won’t ever see the day, under QE and zirp, where the environment suddenly “takes off” and snowballs its way to prosperity. I’m pretty sure everybody knows the game is up.
Is a good life possible without economic growth? In an economy with no defence against hyper-accumulation, a small class of individuals can bid up the cost of housing, food, and medicine to the extent that a stable income means a declining standard of living. I hope we can rebuild our economic immune system while it’s still possible. If this keeps up, it will be interesting to see what happens to the psychology of those unfortunate enough to believe their fortune is just around the corner. I believe they have been the most important tool of the money hoarders. I don’t think no growth is desirable without effective punishment of cheating and hoarding.
I mean a really profound rethink, and I believe Marco Menato is on the right track. There’s the possibility that we’re going through peak consumerism, at least in the West, and that people’s growing hunger for authentic community and relationships is removing energy from the growth machine, a process the machine cannot accomodate. But what all of this means for what we do as a species within the framework of state and/or civilisation will involve a deep reassessment of things like value and wealth.
OpenThePodBayDoorsHAL: “I’m struggling to think of something that is valuable that is not scarce.”
Air and water spring to mind, though the latter has become scarce due to market forces and externalities.
HAL’s struggle is exactly what I mean about redefining value. As the saying goes, we know the price of everything and the value of nothing. Culturally, we have steadily ‘outsourced’ our ability to value things to a market system that insists everything has a price (i.e. can be made scarce and thus ‘valuable’), and that price discovery is a proxy for value discovery. Surely the wasteland earth’s ecosystems are being exploited into is evidence enough of the vacuity and vanity of market fundamentalism. As Midas discovered, you can’t eat gold. The Midas parable is a very simple expression of the hollowness of endless economic growth, and the wrongheadedness of believing money is wealth. Deep down, I suspect we all know this. The question is what to do about it.
In Immoderate Greatness, William Ophuls describes the situation succinctly: “As a process, civilization resembles a long-running economic bubble. Civilizations convert found or conquered ecological wealth into economic wealth and population growth.” A shorter version might be: Civilisation turns ecosystems into economic systems. (Of course, modern economics is nowhere near concerned enough about the ‘home’ planet earth is to us, the ‘home’ economics is supposed to concern itself with, etymologically speaking. So when I say “economic systems”, I really mean anti-economic.) About four decades earlier, Lewis Mumford put it like this: “The point to be grasped has been staring Western civilization in the face for the last half century: namely, that a predominantly megatechnic economy can be kept in profitable operation only by systematic and constant expansion.” So we’ve kinda known this issue is there for a long time, but the reality is that vested interests will not relinquish their grip on power.
The practical and pragmatic issue, then, is not how to keep the system going as the elites are bound to insist, but how to revolutionise it to keep civilisation viable. This is obviously a mighty challenge; civlisation has almost always been about expansion, exploitation and elitism. Money systems tend to be vehicles for or drivers of that deeper programme. A different civlisational vision or raison d’etre is thus needed to give rise to environmentally sustainable money systems: the latter flows from the former. I suspect institutions like private property will need a deep overhaul too, and thus law. Again, the end of growth requires a really profound rethink of pretty much everything. In other words, we have to want this. Then act wisely, patiently, creatively, cooperatively and compassionately.
For what it’s worth, I don’t believe some fantastical return to hunter gatherer ‘bliss’ is what awaits us, but if we are to retain some sort of civilisational cohesion, the systems and institutions that accomodate such a success will necessarily be very different indeed.
No mention of Frederick Soddy?
Clear, concise and precise. WELL WRITTEN AND POSTED!
Well I’m no expert on QE, but according to the Bank of England QE targets broad money and increasing reserves is only a side effect. The BoE is clear that raising reserves has no effect on lending and that this is not the purpose of QE. I’m sure many readers remember this document but for those that didn’t see it you can see their explanation here:
Briefly, assets bought under QE are not owned by entities with reserve accounts, but instead with private entities with accounts at commercial banks (eg pension funds). So the increase in reserves at the commercial bank is accompanied by a symmetrical increase in liability to the pension fund. It is how the pension funds spends these deposits which is supposed to boost growth, but I guess in reality will only increase demand for types of assets bought by pension funds.
If the only assets the ECB buys are held by entities with reserve accounts then Ed Harrision’s article applies. If they are held by institutions without reserve accounts, broad money increases with QE.
One of the major points of the article is that it is CREDIT that drives the economy, not the supply of base money. Of course QE increases the money supply, regardless of what sort of institution the CB is buying assets from. According to your “logic” if every dollar in the economy was kept in a bank account, the money supply would be zero, since all the financial assets in those bank accounts would be offset by the banks’ liabilities….but that isn’t how money supply is calculated. I don’t think you’ve quite grokked what you’ve read.
Not my logic, but that of the Bank of England. Maybe I haven’t grokked it but even though I agree QE will be ineffective, it is not for the same reasons as Harrison. He argues that it will be ineffective because QE will not increase the supply of credit. I agree but is this is straw man economics because it is not intended to work in his way. What is credit if it is not an increase in broad money? QE is replacing a portion of the missing credit if it creates broad money. If it just creates reserves it is pointless as Harrison argues. It is fundamentally important that QE buys assets from non-bank entities otherwise it doesn’t work. Somehow Harrison misses this critical point.
My logic is standard chartalism, no?
“…policy wonks who have drunk the Fed’s Kool Aid will treat those who have visceral negative reactions as simply having a case of novelty aversion, which means they can be ignored.”
And, by transitive properties, you can ignore?
Ed: our monetary system is really a credit system because it is credit that matters, rather than narrow base money or monetary aggregates that most people use as a proxy of the broader money supply. What we want to see for economic growth to occur is that financial institutions are making loans
That is an accurate description of how western capitalism works. However ….. what Ed (and hardly anyone else) does not say is that this is a policy CHOICE. Capitalist nations deliberately choose to allow private credit to be the main driver of the economy, while the size of government is kept small and mostly stable.
There are alternative choices. We could choose to make government 50% of GDP. We could choose to legislate functional finance budgeting so that the size of government fluctuates in response to the economy.
As Minsky pointed out, our existing system of letting private credit drive the economy is inherently unstable. All the various proposals to correct the instability, including QE, are merely bandaids. Even if they work, they don’t address the root cause, and another boom-bust cycle is always around the corner.
It’s better to make ourselves strong than to be always dependent on someone else.
A government is strong by enforcing agreed-on rules that are just and to do that, it doesn’t have to be big.
It is running on an ever accelerating treadmill. Maybe try write-off? The irony of our planet of fiat currencies is we happily embrace its abstraction as an exchange instrument except when it comes to abstracting it into nothingness. That is, for some reason, an unforgivable act.
Or shorter :
Marriner S. Eccles “Pushing on a string”
Banking is no longer just lending – they are now the largest speculators in all markets and also write phony insurance (anybody wanna insure your Greek bonds – then watch the contortions they go thru to avoid anything that triggers a “credit event” which would make your insurance pay you something for your losses?)
Then of course Central Banks must bail out speculation that went wrong in order to preserve the payments system. Then, instead of doing away with toxic waste products they all decided to sell their toxic waste products to the public, because the banking system will be safe in that case. Thankyou Uncle Sam.
And particularly annoying:
Savers get ZIRP – another non-democratic transfer of wealth upwards to banks.
I tell everyone that, according to Einstein, Central Bankers are crazy.
I would never argue with Einstein.
Doncha think the growth of financialism, financial solutions, is offset directly by the loss of real resources from human to marshland? Andalsotoo, some of us humans are marsh creatures.
I wonder if life insurance companies are smart enough to play around with what triggers a payout event.
“No, he is not completely dead, but his soul still lives. He has been…saved.”
Or the more pedestrian “Part of him still lives with us.”
Paging Henrietta Lacks!
While I don’t disagree with the author, I question the notion that QE is “failing”. The real question is, failing for whom? The general public, yes of course. But they were never the intended recipient of QE largesse.
While there may be some truly deluded economists who think QE is intended to help the common person, most understand that the goal of QE was, is, and always will be, the rescue of bank balance sheets and restoration of asset bubbles that the financial sector profits handsomely from.
I don’t for a second believe that Yellen, Draghi, and other central bankers truly believe that their actions are helping the common person, despite what their public pronouncements may be. Even if (perhaps) they once believed it, QE has now been established policy for several years and its effects can be seen. It’s no longer novel, and there’s no need to speculate on hypothetical theories any more. What is more likely, that central bankers fail to believe what their lying eyes are telling them, or that they fully understand that they’re impoverishing their citizenry while enriching their banking masters? In the finance world, Hanlon’s razor is wrong. Never attribute to incompetence that which can be explained by malice.
Harrison makes an unconscionable statement for the pages of this blog:
“The key here is that the growth comes not from the financial sector or financial assets but from productive assets that throw off income which can be used by businesses and households to repay the debt and take on even more as productive ventures become available.”
To take on “even more” debt accomplishes two ends:
1) The return to the debt carousel simply brings us back to the old mode of consumerism. In turn, this increases the usage of natural resources, which are turned into products, which are disposed of, and the negative externality for all of these attributes is increased carbon emissions. When we consume excessively, we pollute, and eased access to credit has been the greatest driver of excess consumerism, and thus, climate change.
Please, no more cute Siberian tigers here, if the goal is to seek ways to load more carbon into the atmosphere.
2) Eased access to credit has also driven us to one of the greatest economic travesties of our generation, namely, the ever-widening gap of wealth inequality. As corporations offshored jobs, this effectively squeezed the domestic labor market, thus driving down wages. Even this could have been tolerated in the aggregate, but corporations did not pass along the savings realized when sending production to lower-cost labor markets, in the form of lower prices on the retail shelves. The proper response to this would have seen consumers cut back on spending, as witnessed in Japan and points to why that country experienced its consumers hitting the brick wall in the 1990s.
Here in the U.S., Americans responded to stagnating and, starting in 2004, declining household incomes by increasing their use of credit to buy the goods whose prices were not lowered. This accomplished two ends: a) The massive profits corporations generated by not passing along labor-cost savings, accrued as additional profits and b) this increased use of credit fed massive profits to banks , generated by interest payments. When the American consumers could no longer sustain the use of credit – squeezed by higher debt loads and lower incomes – they subsequently hit the brick wall. Thus, we witnessed the first shock wave of the Global Financial Crisis in 2008. Its aftershocks continue, unabated, to this day.
Harrison relies upon the descriptive powers of Modern Monetary Theory, and indeed these powers of the MMT are great. However, what reality exists, and what normative frameworks we may wish, have two different endings. I would rather we witnessed a return to the old-fashion notion of deposits generating loans, rather than credit. In such a manner, we purposely restrict unfettered growth, aiming for lower, more natural growth rates in our economy, here and across the globe.
The naysayers will scoff at this idea of a slow-growth economy, but in the aggregate it does support an economy, and with it the needs of individuals, families and communities, while eschewing the excesses of centralized capitalism, such as vast wealth inequality and carbon outputs. This also allows us, a nation addicted to prescribed, psychoactive drugs, to slow down our hectic lifestyles, to take a deep breath, to re-engage with our families, friends, neighborhoods and communities.
Most of all, the slow-growth economy organically addresses wealth inequality, by creating a zeitgeist that forces the unthinking consumer to stuff that credit card back into his or her wallet, to buy a smaller home, a less-expensive vehicle. If consumers do not “buy in” to the rampant consuming lifestyle, corporations can no longer lay claim to hard-earned household incomes through excessive profits realized by products of glancing pertinence, or banks laying claim to the remainder of incomes through interest payments. As it stands, corporate powers have created the perfect flow through, selling products that last less time than the payments incurred by buying those products.
Excellent description. We worry particularly about the high private debt constricting the real economy’s ability to grow and producing fragility in the financial sector as debts become more iffy and lenders follow yield into greater risk.