Marshall Auerback: We Are Clearly Living in a Bizarro Capitalism Era—And It’s Time to Change How the World Manages Economies

Lambert here: For those not familiar with “Bizarro World”:

More pertinently:

By Marshall Auerback, a market analyst and commentator. This article was produced by Economy for All, a project of the Independent Media Institute.

Remember “Bizarro Superman,” the character who represented the polar opposite of Superman and all that he stood for? Today we have an economic equivalent in the form of Bizarro Capitalism. In the good old days, borrowers paid interest on the money that was loaned to them, and bankers paid depositors a savings rate to entice them to store their money at the bank. Now it’s increasingly the other way around.

Judging from the speeches given at the recent annual Jackson Hole gathering of the various bigwigs in the global central banking scene, the mutation of our economy hasn’t fully dawned on them. For the most part, we heard the same old shibboleths. Indeed, the very notion of having a high-profile forum in a glamorous setting to highlight the views of central bankers symbolizes how far we have come in terms of prioritizing monetary policy over fiscal activism, despite the fact that this has led to a policy “black hole,” according to former Treasury Secretary Lawrence Summers.

The hesitation in embracing fiscal policy further (despite the anomalous presence of negative rates that could be arbitraged away by fiscally generated economic growth) is largely the product of a number of myths that have governed policy-making during the 40-year period of neoliberal ascendancy. Among them: the misconception that excessive government spending “crowds out” private sector investment; the belief that “responsible” fiscal policy and reduced budget deficits in and of themselves create the conditions for sustained economic growth; the questionable notion that “quantitative easing” actually does anything to benefit the real economy (as opposed to merely inciting financial speculation); and, lastly, the very idea that independent central bank technocrats are better suited than democratically elected officials to solve our current problems when the record shows the opposite. Far from being disinterested umpires, the monetary authorities have consistently prioritized financial interests and, in so doing, have acted more like arsonists adding to a major fire. The irony today is that central banks have historically been the traditional agent of deliverance for the financial sector. But in the current environment of negative rates, they are becoming its angel of death.

The huge rally that has characterized this summer’s trading in the global bond markets has culminated with a new phenomenon hitherto unseen: the presence of negative yielding bonds, a growing and increasingly widespread feature of the economic landscape. We now have over $16 trillion worth of negative yielding bonds (out of a total global bond market size of around $100 trillion). Adding to this topsy-turvy financial landscape, UBS in Switzerland has introduced a charge of 0.6 percent on deposits larger than 500,000 euros. Similarly, Denmark’s Jyske Bank has just announced plans to charge negative rates on deposits. To be sure, it’s only wealthy clients who will incur this charge for now (a nice socialist touch, for this Scandinavian social democracy), but it’s an ominous precedent for any saver nonetheless if the banks ultimately decide to extend these charges to the less affluent. Functionally, a charge on deposit represents a penalty on savings that acts like a tax increase. It represents the perverse apotheosis of a “too big to fail” banking system in which depositors are now starting to pay to store their money at banks that survive in their current form because our monetary and fiscal policy officials backstop them.

Think about the implications: Banks are charging depositors to store their money at their institution, and $16 trillion worth of borrowers are now being paid by the world’s creditors for the “privilege” of holding their bonds. Imagine what that is doing to your pension fund (how does a trustee calculate his/her firm’s pension liabilities with a negative interest rate?), or your insurance annuities, let alone the money you deposit in your bank account. Or consider buying a home in Denmark now that Jyske Bank, the country’s third-largest bank, has launched the world’s first negative interest mortgage: 10 years at -0.5 percent. What this means is that borrowers still make monthly payments, as is usual on all mortgages, but the outstanding loan is reduced each month by more than the borrower has paid, by virtue of the negative rate. We are truly in uncharted waters.

We started down this road decades ago in Japan, and it is to the Land of the Rising Sun that we should look for a glimpse of the future. The Bank of Japan owns almost half the stock of the country’s outstanding public debt, so effectively it is the Japanese Government Bond market; secondary trading activity is virtually nonexistent. Not that we should shed any tears for Japanese bond traders (who are gradually becoming extinct—no bond vigilantes here), but perhaps we should ponder the fate of Japanese savers, whose savings income has dwindled as a consequence of decades of virtually zero interest rates. This makes the economy particularly vulnerable to external shocks (such as the planned consumption tax increase, which twice before has created economic relapse in this aging country of savers) because there is minimal income flow to cushion the sharp change.

Outside Japan, the broad global rally in bond prices (which has led to a corresponding decline in bond yields) represents a collective panic attack that, notwithstanding all of the monetary gymnastics of the world’s central bankers, the global economy is rapidly slowing down. The signs are out there: In China, the escalating Sino-U.S. trade war is adversely impacting overall growth; in Germany, a degenerating banking sector and rapidly slowing exports are grinding down the economy; and in the rest of Europe, especially the UK, the imminence of Brexit is engendering a crisis of confidence, as fears of No Deal chaos are rising as we approach the October 31 deadline.

For some decades since Bretton Woods, the tools available to central banks did the trick. Most recently, the markets have increasingly taken to heart European Central Bank president Mario Draghi’s “whatever it takes” pledge to save the euro. Draghi has repeatedly used the ECB’s balance sheet to backstop sovereign euro-denominated paper, leading investors to pile into government bonds in countries once thought to be on the threshold of insolvency. Overall credit spreads between southern periphery and the more “fiscally sound” north have accordingly diminished considerably to the point where 100-year bonds are becoming a thing: Ireland and Austria have both issued 100-year paper (likewise non-Eurozone Argentina, which historically has been a serial defaulter, but still was able to capitalize on this mania). Markets today discount totally the risk of national bankruptcy in the mad grasp for yield and additional income. This is moral hazard run amok.

All the norms of a market economy are being subverted by the very agents—central banks—that embody the market fundamentalism that has taken deep root in the global economy. Borrowers get paid, savers get charged. The solvency of pension funds is also coming under risk in countries like Germany where institutions by law have to buy negative yielding government bonds. The entire German Bund yield curve trades at negative yields, so Berlin is in danger of being hoisted on its historic fiscal austerity petard. The “cure” of negative rates is proving to be as bad as the disease for many, which yet again illustrates why excessive reliance on interest rate manipulation is a terrible way to conduct economic policy.

All of this is to say that governments, not central banks, have the optimal tools for our challenges: money distributed to the public for the general welfare through a range of projects and programs as opposed to central bank-engineered bailouts to a potpourri of financial institutions (many of which should have been shut down in 2009 and beyond). As much as it might frustrate the designs of financiers and billionaires and their fear of government money going to the public, that’s the only thing that’s going to move the needle. Certainly, there is no way out, absent a robust government fiscal response that borrows at these historically unprecedented rates and generates sufficient economic growth to arbitrage away the negative yields.

Far from “crowding out” private investment (the usual argument deployed against “excessive” government spending), public investment via properly targeted fiscal policy could provide a new source of growth that “crowds in” additional business investment. As I’ve written before, “the basis of the ‘crowding out’ claim is that… [excessive] government spending causes interest rates to rise, and investment to fall. In other words, too much government borrowing ‘crowds out’ private investment.” That’s totally wrong, as J.M. Keynes came to realize almost a century ago: “For the proposition that supply creates its own demand, I shall substitute the proposition that expenditure creates its own income.”

For all of his multifold flaws, perhaps Donald Trump’s one singular virtue is that he is not a deficit hawk. In spite of what many have criticized as the president’s fiscal profligacy (in reality, because of it), the U.S. economy remains a conspicuous oasis of growth. As economist Paul Krugman has wryly noted, “[that] isn’t really a surprise given the GOP’s willingness to run huge budget deficits as long as Democrats don’t hold the White House.” Trump’s lack of attachment to prevailing economic orthodoxy, and the political imperatives of the 2020 election, likely mean he will pull out all the stops to try to prevent a recession next year in the U.S. The recent funding agreement secured with Congress on the debt ceiling will likely ensure another fiscal jolt to sustain some growth going forward into the first quarter of 2020, as the government budget deficit as a percentage of GDP is now running at around 4.5 percent.

Which is not to say that all is well in the U.S. It remains a major problem that the bulk of the fiscal policy benefits continue to flow to the top tier, which has the highest savings propensities, and historically unprecedented sums are going to the military. Consequently, the U.S. economy fails to get maximum bang for its fiscal buck (at least as far as the civilian economy goes). It doesn’t grow as efficiently as it could because more and more of the economy’s gains are being funneled to increasingly fewer people.

Moreover, the employment gains that the president has continued to hype have been overstated, according to the Bureau of Labor Statistics (BLS), and companies are now cutting back on hours worked. Normally when the workweek is being cut like this, it signals a slowdown or, at the very least, diminishing confidence in future growth prospects on the part of the private sector. So Trump’s instinct to spend now might not be mistaken, but if past policy is any indication, the president is likely to misallocate in favor of his fellow oligarchs and generals. Only properly targeted fiscal policy that takes aim at raising living standards and delivering the public investments in education, technology and infrastructure will deliver real long-term prosperity for all of us, not just the privileged few.

To reiterate, this is a job for elected officials, not central banking technocrats. At this stage, in fact, ineffective monetary policy is making things worse. Central bankers are perpetuating a perverse risk-reward asymmetry as a consequence of this very low interest rate policy, which is also death for financial institutions. This is a profound irony, considering the degree to which central bankers have consistently prioritized the interests of finance over other parts of the economy. And while a shrinkage of finance relative to the rest of GDP may be good for the rest of us, absent a fundamental philosophical change in overall policy (especially on the fiscal front), we will still be facing an environment characterized by wage stagnation, nonexistent job security, rising inequality, and subpar growth potential, all the while continuing to reward irresponsible economic behavior.

The policy world needs to change course and do it quickly. However, the presence of negative yields (and all the implications that flow from that) suggests that we’re still a long way off from that happening.

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.

69 comments

  1. Ignacio

    Trump is not much different from other Republican leaders. Some call it the “starve the beast” strategy. Basically you reduce income from to the point of saying that social security, medicare etc. should be closed. Increasing military expenses also helps. Regarding Social Security, health care and other public expenditures Trump is almost certainly a deficit hawk, isn’t he?

    Reply
    1. Larry

      I completely agree Ignacio. Government contracts are used to reward loyal followers with largess while the poor are left to fight over fewer and fewer scraps. Look no further than the attack on SNAP benefits:

      https://www.npr.org/2019/07/23/744451246/3-million-could-lose-food-stamp-benefits-under-trump-administration-proposal

      All to save $2.5 billion, which is basically pocket change for the Federal Government. But SNAP benefits are distributed and beneficial and no lackey or donor gets the overwhelming benefit.

      Reply
    2. ObjectiveFunction

      And I disagree (with respeck). Trump has no soul, ideology, ethic or philosophy, other than Winning and being seen to Win (using his own yardstick).

      Winning in 2020 though is very much all or nothing, and he knows it. Winning requires him to deliver to his heartland base, which other links on this Indispensable Site have helpfully shewed to be ‘higher earning without 4 year degrees’. That would be what I just decided to call the “Supercab” set: crafts and trades and related business owners (often employers of migrants).

      Naturally in the rigged games of .gov contracting, first fruits of the various Big Digs flow to the Fluors, Halliburtons et al., and then to the lawyers, consultants, etc. who do the paper projects, and to the OEMs (mostly offshored). But enough juice will eventually flow to local civil, electromech, logistics, etc. subcontractors (the aforementioned Supercabs) to keep them feeling fortunate, if not flush relative to the rest of the precariat.

      Timing is a risk though: if the taps aren’t opened soon, will the expectation alone be enough to have the Supercabs voting Trump on 11.6.20?

      Naturally the Dem candidate will be braying “Me too, but I’d do twice as much.” But if that comes across as pandering, or all they talk about is fuzzy greentech and diversity set asides, the incumbent will get the cred.

      For consideration. Happy to be challenged on any of these thoughts by Doc Auerback or the comrades.

      Reply
      1. James Trigg

        Trump wins no matter what. (using his yard stick). He will just twitter that if he was still pres. it would be better.

        Reply
  2. notabanktoadie

    However, the presence of negative yields (and all the implications that flow from that) suggests that we’re still a long way off from that happening. Marshall Auerback

    In order to avoid welfare proportional to account balance, the inherently risk-free debt of momentary sovereigns (like Japan, the US and the UK) should return no more than ZERO percent. Subtract operating costs and we have negative rates. So negative rates on risk-free debt are not bizarre but an ethical necessity.

    That said, individual citizens should have debit/checking accounts at the Central Bank itself that are exempt from negative interest and even from service fees up to reasonable limits on account size and transactions per month – based on the premise that all citizens have the right to use their Nation’s fiat in safe, convenient account form.

    Reply
    1. flora

      I’m starting to wonder how negative interest rates could affect, say, cola based ss or veterans’ benefits. The great and power Ox in DC keeps adjusting cola downward to avoid increasing ss and veterans pension checks. With long term negative rates on bonds what’s next – reducing pension checks instead of just not increasing them? ‘Your pension is being reduced by 1% or 2% this year in line with “negative cola inflation”. ‘

      Wouldn’t surprise me. /foil bonnet off.

      Reply
      1. notabanktoadie

        Otoh, negative interest on large and non-individual citizen accounts at the Central Bank could be used to at least partially* fund an equal Citizen’s Dividend to all citizens.

        So citizens, at least non-wealthy ones, have more to gain from ethical finance than to lose. And the wealthy are more likely to keep their heads with ethical finance too. A win-win.

        *All fiat creation beyond that created by deficit spending for the general welfare should, arguably, be in the form of a Citizen’s Dividend too.

        Reply
        1. flora

          Assuming, of course, the pain will only fall on the non-individual citizen accounts. I’m skeptical that will be or remain the boundary line. (See NoChildLeftBehind law in action.)

          Reply
          1. notabanktoadie

            Individual citizens, up to a reasonable limit on account size, are precisely those who need to accumulate savings while large and non-individual citizen accounts are precisely those that should be penalized for fiat hoarding. (As for foreigners, let them spend their fiat on goods and services and thereby reduce a Nation’s trade deficit rather than receive welfare proportional to their account balances not to do so.)

            A side benefit is that banks shall be charged/penalized for using the Nation’s fiat to drive the Nation into debt – thereby reducing their power to do so.

            So individual citizen (under a reasonable account balance) is precisely where the line should be drawn.

            Reply
            1. OpenThePodBayDoorsHAL

              Love your work. Question the idea that the U.S. is a “monetary sovereign”, since our money is manufactured by private commercial banks. As Ellen Brown (summarizing M.Hudson) points out, the Chinese are monetary sovereigns:

              https://www.truthdig.com/articles/the-key-to-a-sustainable-economy-is-5000-years-old/

              The U.S. could have applied that Capitalism thingy they always bloviate about in 2009 and let Citi fail. A year or two of absolute pain, a clearing of the dead wood, then swift recovery. We’ve chosen instead to take a cancer patient with a giant tumor and pump him with drugs, vitamins, steroids, fast food, and whisky instead of simply excising the mass. So now its consequences/banquet.

              Reply
              1. notabanktoadie

                A year or two of absolute pain, a clearing of the dead wood, then swift recovery. OpenThePodBayDoorsHAL

                That’s the Austrian “solution” and ignores that government privileges for private credit/debt creation cheat “borrowers” too by driving them into debt.

                A much more just solution is something similar to Steve Keen’s “A Modern Jubilee” but combined with responsible* de-privileging of the banks (deflationary) to counter the potential price inflation of equal fiat distributions to all citizens.

                *E.g. the progress abolition of government-provided deposit insurance.

                Reply
              2. notabanktoadie

                Question the idea that the U.S. is a “monetary sovereign”, since our money is manufactured by private commercial banks. OpenThePodBayDoorsHAL

                Indeed, the economy runs* off the deposits of (the government-privileged) depository institutions, aka “the banks”, and the banks themselves may create deposits (“Bank loans create bank deposits”) but Federal spending creates bank deposits too.

                *Except for the physical fiat economy – mere coins and paper Federal Reserve Notes.

                Reply
    2. Which is worse - bankers or terrorists?

      I really would like to see more on this wonderful blog on the long-term impacts of negative interest rates. The impact on central banking and pension funds are sort of at the top of the list.

      It seems that nationalizing most forms of property will solve the property here.

      Reply
        1. flora

          Thanks for the link. In the late ’70s inflation was very high (largely due to the oil price shock, imo) and Fed Chair Volker raised and raised interest rates to stop inflation. (That’s the story as I remember it.) By the early 80’s interest rates on govt bonds and T-bill was approaching 15% and interest rates on mortgages were at high as 17%.

          Higher interest rates had an effect. Inflation rates fell, interest rates began to drop, and the financial sector and Wall St. took off like a rocket. Less money going to pay interest could be spent on stocks or houses or other assets. The simple maxim ‘lower interest rates = increased economic activity and profit’ seemed to get embedded in everyone’s thinking. The change from crushing interest rates to lower-but-still-high interest rates to reasonable interest rates kept the game going.

          When the economy started to falter, instead of realizing the lower-interest-rate horse had run its course and a new problem was at hand – interest rates now weren’t crowding out normal economic activity – the economic ptb kept flogging the interest-rate-horse anyway. imo. (The Fed equivalent of a cargo cult.)

          Reply
          1. flora

            Funny the fed doesn’t say a word about exorbitant cc interest rates – in the 17% range – or student loan interest rates in the 6 -7 % range ( higher than mortgage rates right now.)

            If interest rates are crowding out economic activity it is not the fed’s rates doing the crowding, imo.

            Reply
  3. Eclair

    I was subjected to about six hours of NPR news and analysis on Wednesday and Thursday as we drove from Jamestown to Syracuse and back, for a granddaughter’s birthday. And my long-suffering spouse was subjected to my frequent bouts of me screaming at the radio and beating on the dashboard.

    Under discussion were: the opioid and suicide crises and Uber. Plus an interview with the head of the Dallas Fed about the current monetary policy, including the long-term negative rates and the 100 year bonds.

    Per NPR, the the high rates of drug addiction and suicide were due to mental health issues. We need more mental health facilities and counselors. No discussion … or even a hint … that communities where these problems are rampant were in any way economically, and thus socially, stressed.

    The Uber interview was classic. (Thanks to Hubert Horan and NC, I was pretty well versed in the Uber story.) Billions of dollars thrown at Uber by investors. But no hint at all of why said investors had this much cash lying around and why they were flinging at a company that was breaking all records for quarterly losses. But, quiet encomiums for the way in which Uber had changed the urban scene .. internationally. Money has been diverted to the mis-named ‘ride-sharing’ services which makes it easier for well-off people to get around. So pressure for improved public transportation evaporates. Smug comparisons to Bezos and the early money-losing days of Amazon: the business model of ‘you have to spend money to make money.’ No one heard of the ‘gig economy’ until Uber invented it. (Pause while I give a mental scream.) No mention of the increasing precarity economy inhabited by the Uber and Lyft drivers. Or of the disappeared local businesses and their former owners and employees. And, certainly, no link to any opioid crisis or to any increases in the suicide rates, as workers spend their lives teetering on the cliff edge of insolvency and despair.

    The interview with the head of the Dallas Fed was classic. They have got to appoint these guys based on how long they can talk, sound impressive, but say nothing. Negative rates .. blah blah blah. 100 year bonds … blah blah blah. Tariffs!!! All will be well ….. snore.

    Thank you NC and Marshall Auerback.

    Reply
    1. Stadist

      Billions of dollars thrown at Uber by investors. But no hint at all of why said investors had this much cash lying around and why they were flinging at a company that was breaking all records for quarterly losses. But, quiet encomiums for the way in which Uber had changed the urban scene .. internationally. Money has been diverted to the mis-named ‘ride-sharing’ services which makes it easier for well-off people to get around. So pressure for improved public transportation evaporates.

      Funnily enough if we forget the names and conditions and just look at the facts, the Uber tactics could be classified as dumping or predatory pricing in the market place.

      Reply
      1. jsn

        What we are living through is a breakdown in the rule of law.

        All kinds of laws still on the books are no longer enforced because the political marketplace the Roberts Court has institutionalized has in essence allowed the Mob to purchase the legal environment it chooses.

        So the economically week must adhere to every rule requiring the expenditure of whatever money they can put their hands on while the economically powerful can buy whatever law makes their exploitation easier

        Reply
    2. readerOfTeaLeaves

      On your next drive, I’d suggest a Michael Lewis podcast. He’s doing some phenomenal reporting.
      I completely agree with your point about the need to look at the social context in which opiod issues flourish. NC has done terrific work offering up links on this topic, and NC is also where I learned about ‘The Spirit Level’

      Also for your traveling podcast list: Pitchfork Economics
      http://www.pitchforkeconomics.com

      (Both are available at iTunes podcasts, and The Spirit Level is also on audiobook ;^)

      Reply
      1. Eclair

        Thanks for the hint on podcasts and the links. Our grandson had been discussing how he listens to podcasts and I mentioned that I have not mastered the intricacies of podcasting. He promises a tutorial on our next visit!

        Reply
    3. Laughingsong

      “The hesitation in embracing fiscal policy . . . is largely the product of a number of myths . . .”

      Okay, so maybe I’ve become overly jaundiced, cynical, what have you . . . but I no longer think that the PTB truly believes in these cr*p premises either, and maybe never did. These are the stories they tell out loud to us mopes and themselves to make the idea that we can’t have nice things fly (and of course, with enough thrust even pigs fly just fine). The real reason is that they truly believe deep in their bones that they own everything, or at least they should, including all the wealth at the command of all governments, and they are not willing to part with it for any reason except their own discretion.

      I think it was Greg Palast that published a quote from the late, unlamented David Koch when a Native American tribe sued the Koch’s for slant-drilling into their land: “We just want our fair share, and that’s all of it.”

      That’s our fearless billionaire class in a nutshell. And I don’t believe a group of good billionaires will ever save us from the bad billionaires. I guess we’ll just have to eat ‘em. Sigh.

      Reply
  4. Summer

    “Borrowers get paid, savers get charged.”

    Why do you think that’s “BIZARRO” when banks count loans as assets. What did you think would happen?

    Reply
    1. Mel

      Yeah, but among the general public there are more borrowers than savers, so I naively thought the banks would want it the other way ’round, assuming they weren’t allowed to just charge everybody.

      Actually, take that line “Price of comics have dropped …”, substitute “houses” for “comics”, see how it all fits together. We’ve been BIZARRO for a long time now.

      Reply
  5. flora

    Loans are assets of the bank -you owe them interest as well as the borrowed amount. That interest owed is the asset. Saving are a liability of the bank. They owe you interest. At least that’s how it’s supposed to work in a normal world. Now it looks like banks are trying to turn their liability (your savings) into their asset (you pay them).

    Apparently, no matter what the “stress tests” reported, the TBTF banks are so insolvent they have to charge savers for the “privilege” saving. I imagine the confidence fairy getting real a boost from this ploy. /s

    Reply
    1. Summer

      And if the loans and the savings are their assets, the savings is no longer an asset for you.
      Harder for you live that way? That is the point and no one wants to believe it.

      Reply
  6. The Rev Kev

    I tend to blame the consumer society here. Once upon a time we were once citizens who had both rights and responsibilities. Now we are consumers and the reason for this is that we live in a consumer economy. We consume material goods and resources to the point that consumption habits have outstripped the ability of the planet to supply what is needed. The crash of ’08 could have been a great chance to evolve beyond a consumer society as it was true that demand went down significantly – as witness the businesses and malls that closed. But instead we picked up the pace and went for online ordering for our consumption goods.
    The connection between this line of thought and Marshall’s article? It is this. The move to negative interest rates is, I believe, at heart an attempt to punish savers and force them to pull their money out of banks and to spend it into the consumer economy thus stimulating it. We are still going with the old model economy. If there is enough of this ‘stimulation’ then perhaps the consumer economy would fire up full throttle again. The UK lowered interest rates several years ago with this specific aim in mind and they were not shy about talking about it in public. Having interest rates go negative is bad enough but cranking in the inflation number you get hit by a double whammy. I think here that long term it will encourage a ‘chacun pour soi’ mentality.

    Reply
    1. /lasse

      In the mid-20th century there was a marvel about the fantastic productivity increase. “If it continues like this ‘we’ have to work very little in 50 years.
      Productivity did continue but ‘we’ didn’t collect it as leisure time. Someone didn’t want that, a lot of ordinary people with plenty of time to reflect on what world and society they live in and get ‘ideas’ about making it better.

      We got a growing commercial entertainment industry with meaningless gadgets and services. That need workers and occupy them in their spare time.

      The only real economic growth is if it will be easier to produce what we need, not the amount that are produced. If there are productivity increase people should need less and less money to spend on consumption. If it cannot be filled with production that satisfy humans necessary wants and needs.

      But with booming food production with the so-called Green Revolution global population since 1950 have tripled from 2.5 bn to 7.5 bn. So, it has been every time agricultural revolutions have increased production. Ireland more than tripled it population in less than 100 years when the easy grown potato was introduced.
      Increased agricultural production haven’t saved us from starvation, it has created population explosion, now probably to the point of unsustainability.
      Humans despite its big brain are in this respect not smarter than rabbits.

      Reply
  7. Susan the other`

    The story of money is a farce. It became a source of power as it became a popular, widespread currency. It has been such a useful convenience everyone wanted it. It was in demand. And it was supplied. Money actually became a commodity. Yes, that’s bizarro. And even more so because “financial time moves faster than real time.” So money exponentiated itself right out to the celestial. Electronic trading wasn’t enough. Everyone began speculating about quantum trading. But alas, the Achilles heel of finance is that money, it’s blue chip commodity, has no intrinsic value. It’s only value is in it’s use. Like some ancient riddle.

    Reply
  8. Summer

    Even before this panic over bonds, people were told save for the future, meanwhile every economic theory and accounting process has the banks treating savers as liabilities. And now you say this is “bizarro capitalism”?

    Reply
  9. Stadist

    Central banks will drive negative interest rates to normal bank accounts and as result they will drive the generally small income people to invest their meager savings to the stock market while rich people are gradually trying to divest from the stocks at the end of this boom/bubble. So low income people essentially end up buying the presumably bad stocks from the rich people.

    End result: Poor working people lose their meager savings and essentially bail out the rich before the bust. Next target to swindle will be the governments.

    Of course it’s not exactly as black and white as I hypothesize above. The rich people are trying to swindle each other at the same time. But usually the actors who have the least information/connections end up losing the most, so that means the small-time investors.
    Withdrawing money from the bank may be the solution, but then again even the Euro area could collapse in surprisingly unexpected and fast manner. People might end up having stuffed their couches with paper.

    Reply
    1. notabanktoadie

      Central banks will drive negative interest rates to normal bank accounts … Stadist

      Why is it considered normal that citizens be forced to have private bank accounts or else be limited to grubby, unsafe, totally useless for electronic commerce physical fiat, aka “cash”, in the first place?

      Where is the citizen’s right to use fiat in safe, convenient account form at the Central Bank or National Treasury itself?

      Reply
      1. Stadist

        >Why is it considered normal that citizens be forced to have private bank accounts or else be limited to grubby, unsafe, totally useless for electronic commerce physical fiat, aka “cash”, in the first place?

        We still have it good as we still have the fiat cash. Imagine if societies had gone cashless and the central banks were contemplating going to negative interest rates. Currently the only reason seemingly holding them back is the possibility for people to take out their money from banks.

        Fiat cash is pretty much useless for normal people, I admit that. But then again as western hemisphere is moving further into the chokehold of neoliberal elites the drive for cashless society enables our pseudo-independent central bankers to impose total control on the normal account holders. Money itself, being fiat, is not property like land, buildings, real estate or shares are. Naturally the small state neoliberals are not too concerned about protecting the fiat savings and are instead very eager to force this fiat to transact = consume. But then if low income person is forced to consume with his meager savings, he is not moving forward, he is moving backward.

        Reply
        1. Lambert Strether Post author

          > Fiat cash is pretty much useless for normal people

          Fiat cash is extremely useful for normal people (granted, for some definition of normal).

          1) If I have cash buried in a coffee can in the back yard, the bank can’t just “bail me in” by sucking it out of my account. Nor can anyone else. (Here we remember the number of people in debt, especially medical debt. Eliminating fiat cash is a debt collector’s wet dream.)

          2) Cash is not trackable. I object in principle to having my ability to make private transactions removed. So should anyone who doesn’t want a dystopian surveillance state.

          3) Cash is faster, which you will know if you’ve ever stood in line behind somebody fumbling a cell phone out of their pocket, booting it, then then fiddling with the QR code until they get a beep. I bet all those inefficient transactions have a measureable effect on the economy if you add them up.

          Reply
        2. notabanktoadie

          Negative interest can, in theory, be applied to physical fiat too by using the date stamp and discounting the cash according to its age.

          Otoh, individual citizens could and should be shielded from negative interest and even bank fees up to reasonable limits on account size and transactions per month via accounts of their own at the Central Bank or Treasury.

          Reply
    2. Summer

      I’m seeing that need to find suckers to dump on in this too…and a search for a faster move to cashless where they can really make your balances disppear.
      They’re going to a move where they force you to have you pay more to access money earned.

      That’s the service economy. Rentier service.

      You have to kill it with fire.

      Reply
  10. TMoney

    Psst. Zero Coupon Bearer Bonds = Cash ! –> Hey that’s a good solid 0% rate.
    No wonder there is a war on cash.
    It’s now a store of value compared to digital numbers on a computer.

    Reply
  11. jcazador

    The Bank of Hawaii started charging me to have a checking account, which had been free if one holds a significant balance. So I went to main office to close my account.
    They took 25 minutes – made me wait all that time – even tried to charge me for a cashiers check, so i told them “just give me cash”.
    Finally some manager guy showed up and closed my account.
    Something is wrong with banking and usa economy.

    Reply
    1. Summer

      I’m going to be closing one savings account next week for cash too. Get ahrad of this BS.
      And not buying a damn thing this holiday season.

      Reply
  12. readerOfTeaLeaves

    It seems as if we are in an epic conflict between Finance Capitalism and democracy. This was brilliant:

    The hesitation in embracing fiscal policy further (despite the anomalous presence of negative rates that could be arbitraged away by fiscally generated economic growth) is largely the product of a number of myths that have governed policy-making during the 40-year period of neoliberal ascendancy. Among them: the misconception that excessive government spending “crowds out” private sector investment; the belief that “responsible” fiscal policy and reduced budget deficits in and of themselves create the conditions for sustained economic growth; the questionable notion that “quantitative easing” actually does anything to benefit the real economy (as opposed to merely inciting financial speculation); and, lastly, the very idea that independent central bank technocrats are better suited than democratically elected officials to solve our current problems when the record shows the opposite. Far from being disinterested umpires, the monetary authorities have consistently prioritized financial interests and, in so doing, have acted more like arsonists adding to a major fire. The irony today is that central banks have historically been the traditional agent of deliverance for the financial sector. But in the current environment of negative rates, they are becoming its angel of death.

    Each and every one of these myths needs to be exposed as fraudulent.

    Part of what I find especially intriguing is that if you polled the entire Senate Finance Committee, along with many bankers, economists, and House Finance Members, most of them would probably assume that each of these myths are ‘true’.

    It’s important to recognize that these people are not evil in any way, but we are entering a new phase — a difficult transition, but look at how AOC has boggled the minds of the Old Guard. And she’s a vanguard of sorts.

    The fact that we are laying out, and discussing these outdated ideas as the myths they are is tremendously encouraging. Onward.

    Reply
  13. Samuel Conner

    I agree with the author, but in the present environment it seems very hard to envision fiscal-policy-for-the-common-good getting much traction in the national legislature. One hopes for the best, and exerts oneself in that direction, but it is hard to be optimistic.

    IIRC a few years ago Yanis Varoufakis was proposing a European infrastructure bank which would fund investments in public goods. I don’t recall the funding mechanism, but it may have included ECB purchases of infrastructure bonds that would be issued by the proposed internal development bank.

    Along these lines, it seems to me that Central Banks could conduct a form of “unconventional fiscal policy” through either direct or secondary market purchases of bonds issued to fund new infrastructure projects. That’s a large parameter space, with plenty of opportunity for mis-spending, but one can imagine things within this parameter space that could be public goods, and goods that address present urgent problems. An example might be State- (as in “the several States”) owned renewable power generation utilities.

    I wonder how large a credit line the Bank of North Dakota has with the Fed.

    Reply
  14. Tim

    “Markets today discount totally the risk of national bankruptcy in the mad grasp for yield and additional income.”

    Are we really in the realm of possibility of a run on debt (similar to a run on a bank)? People always blame that MMT will eventually do that, but perhaps the negative interest rates will be what actually does it.

    I think I need to transition to a significantly larger position in gold and gold related equities over the next 1-2 years.

    Reply
    1. Summer

      The same institutions telling you the value of gold are the same ones telling you the value of other currencies.

      Reply
  15. Tom Pfotzer

    As I recall, the reason Japan reduced interest rates on savings was to force the Japanese public to spend. The Japanese tend to be savers; the Japanese export economy is now facing great competition from S. Korea, Taiwan in the 70s and 80s, and lately from China and Viet Nam.

    When central banks reduce interest rates they are attempting to stimulate consumer spending, and thereby increase monetary velocity (number of times per year a given dollar gets spent).

    Note that one measure of GDP is (size of money supply in $) times (num times each dollar gets spent in a year).

    When one is running an economy (e.g. if you are Fed Res Chairman), you are going to break some eggs while making the souffle. If your job is to maximize everyone’s welfare, you’re going to need demand (spending of dollars). If you have to “cheat” savers some (a lot) in order to induce spending – and thereby avoid a depression – you do it.

    Recall also that automation and globalization is squashing the value of an hour’s labor, so the worker is getting less and less income to play with each month. This also (hugely) reduces the propensity to spend.

    On the subject of “fiscal stimulus”, everyone seems to forget that the government is typically the worst at picking investment opportunities. Remember Obama’s “shovel-ready projects”? Farce and bollix.

    The only new thing afoot is that the private sector has become even worse than government at allocating capital; much of the capital in the hands of corporations now is being returned to investors in the form of stock buy-backs. This means “corporations can’t figure out where to invest”.

    Why can’t they figure out where to invest? Because there’s already too much capacity, world-wide, and not enough demand to use that capacity, and drive up wages and prices.

    Automation and the attendant wealth concentration have conspired to break the well-spring of demand (workers with wages to spend). No central bank can fix that. “Fiscal policy” can only provide a temporary fix, and then only if it’s well-directed. And its not well-directed. This is one big difference between China and the U.S. China’s fiscal spending is usually pretty good, and occasionally brilliant. The U.S…..not so much.

    We need:
    a. Some new industries that pay workers well. Used to be Silicon Valley provided those industries, but lately it’s been Uber and Electric Cars and Facebook time-wasters

    b. A means to allocate capital to those new industries. Clearly Wall Street ain’t that means

    c. Industries that fix the planet while we make our living, instead of wrecking it while we go into debt (impoverish ourselves)

    Reply
    1. Summer

      People won’t be avoiding a depression being forced to spend a safety net (when there are no others) and not enough jobs to go around that pay well.

      Kill some people to save the system is what you are talking about…flat out.

      Reply
      1. Tom Pfotzer

        No killing required.

        Let me be more direct:

        We “little people” need to invest in ourselves.
        We need to devise then operate little businesses or trades / vocations that earn money while we fix the planet.
        We need to build ourselves the tools (technologies) that the mass market/top-down entities flatly refuse to provide (because it renders them irrlevant)

        Bottom-up redesign of the economy. The “design objective” is to provide a living while fixing our busted planet.

        All this talk about banksters and such-like sociopaths needing to be squashed is a distraction. The best possible squashing is to ignore them, not need them, move beyond them. Nothing will enrage them more than that, and nothing will benefit you/us more than that.

        Best move is to forget the revenge thing. It saps energy.

        Get eyes on ball, and start doing what needs to be done before it can no longer be done.

        Reply
    2. Summer

      I’ll bet you find that increased consumer spending and the profits from it are not going to be re-invested for the betterment any more than tax cuts, zero interest rates, or trade wars.

      All of it will be pocketed by the very few.

      Reply
    3. Summer

      They want anyone that has money to save to prop up the over priced stock market and housing market.

      That crap has stagnated and they are scared of it falling as much as the financiers say ups and downs are part of it. To dump, you need a buyer.
      They especially don’t want another 2008 with people running around these days talking about “socialism” and “fascism.”

      Reply
    4. eg

      You need fiscal stimulus (run deficits to match the private sector’s propensity to save), capital controls and credit guidance.

      Reply
  16. Andy Raushner

    No, its called the post-WWII generation withdrawal. They pretty much powered the latter half of the post-stagflation era central bank policies due to their strong spending clout. Without that clout, you simply will have slower growth and lower potential unemployment rates.

    Its a hangover.

    Reply
  17. rtah100

    Devil’s advocate: What is wrong with negative bond yields for pension fund managers? It forces them to hold a real economy asset (well a complex derivative-like claim on some real assets), equity. I see companies are still paying dividends (and for that matter interest on corporate debt). Negative interest rates are financial morphine and will bring about Keynes’s euthanasia of the rentier…

    Reply
  18. Summer

    No way anyone can tell you with a straight face the 2008 bailouts fixed a damn thing.

    Banks – a mess still
    Housing – homelessness shooting thru the roof.

    Reply
  19. Sound of the Suburbs

    Everyone assumes our current knowledge has built up over time as we learn from past mistakes.

    With economics and the monetary the system there was too much to lose from allowing knowledge to develop in the normal way.

    Our knowledge of privately created money has been going backwards since 1856.

    Credit creation theory -> fractional reserve theory -> financial intermediation theory

    “A lost century in economics: Three theories of banking and the conclusive evidence” Richard A. Werner
    http://www.sciencedirect.com/science/article/pii/S1057521915001477

    Financial stability is much easier than our central bankers make it look when you understand the monetary system.

    Economics, the time line:

    Classical economics – observations and deductions from the world of small state, unregulated capitalism around them

    Neoclassical economics – Where did that come from?

    Keynesian economics – observations, deductions and fixes for the problems of neoclassical economics

    Neoclassical economics – Why is that back?

    We thought small state, unregulated capitalism was something that it wasn’t as our ideas came from neoclassical economics, which has little connection with classical economics.

    On bringing it back again, we had lost everything that had been learned in the 1930s and 1940s, by which time it had already demonstrated its flaws.

    What will happen with economic liberalism?
    People will go for the easy money of “unearned” income

    In 1984, income from rent, dividends and interest over-took earned income in the US.

    What could be finer than a BTL portfolio and riding on the back of generation rents hard work?

    What will happen with financial liberalisation?
    We will get a lot of financial crises.

    Reply
    1. Sound of the Suburbs

      What was the problem with Classical Economics?

      The Classical Economists soon noticed those at the top don’t do anything economically productive, but maintained themselves in luxury and leisure through the hard work of everyone else.

      They couldn’t miss it as the European aristocracy never did a stroke of real work.

      “The labour and time of the poor is in civilised countries sacrificed to the maintaining of the rich in ease and luxury. The Landlord is maintained in idleness and luxury by the labour of his tenants. The moneyed man is supported by his extractions from the industrious merchant and the needy who are obliged to support him in ease by a return for the use of his money. But every savage has the full fruits of his own labours; there are no landlords, no usurers and no tax gatherers.” Adam Smith

      Economics was a big problem for the powerful vested interests of the 19th century and was always far too dangerous to be allowed to reveal the truth about the economy.

      How can we protect those powerful vested interests at the top of society?

      The early neoclassical economists hid the problems of rentier activity in the economy by removing the difference between “earned” and “unearned” income and they conflated “land” with “capital”.

      They took the focus off the cost of living that had been so important to the Classical Economists to hide the effects of rentier activity in the economy.

      The landowners, landlords and usurers were now just productive members of society again.

      William White (BIS, OECD) talks about how economics really changed over one hundred years ago as classical economics was replaced by neoclassical economics.

      https://www.youtube.com/watch?v=g6iXBQ33pBo&t=2485s

      He thinks we have been on the wrong path for one hundred years.

      This is the old switcheroo.

      Reply
  20. Sound of the Suburbs

    “At this stage, in fact, ineffective monetary policy is making things worse.”

    After 2008, we saved the banks, but left the debt in place.

    The banks were ready to lend, but there were not enough borrowers.

    Richard Koo shows the ridiculous levels of bank reserves built up by the FED, BoE, ECB and BoJ that can’t get into the real economy due to a lack of borrowers.

    https://www.youtube.com/watch?v=8YTyJzmiHGk

    QE couldn’t get into the real economy as there were not enough borrowers.

    QE could get into the markets inflating them, and the US stock market is now at 1929 levels.

    QE just widened the gap between the markets and economic fundamentals.

    Davos 2018 – A Chinese regulator has noted the US stock market is already at 1929 levels.
    The West’s experts can’t change the subject fast enough (49 mins.).

    https://www.youtube.com/watch?v=1WOs6S0VrlA

    Reply
    1. Sound of the Suburbs

      The broad brush of monetary policy strikes again.

      Many years ago when Alan Greenspan first proposed using monetary policy to control economies, the critics said this was far too broad a brush.

      After the dot.com crash Alan Greenspan loosened monetary policy to get the economy going again. The broad brush effect stoked a housing boom.

      When he tightened interest rates everything came crashing down.

      http://newsimg.bbc.co.uk/media/images/45089000/gif/_45089770_us_rates_oct08_226gr.gif

      There were delays while the teaser rate mortgages reset; the new mortgage repayments became unpayable; the defaults and other losses accumulated within the system until everything came crashing down in 2008.

      The broad brush of monetary policy always seems to have unwanted side effects in asset prices.

      Reply
  21. /lasse

    How much of this interest rate rally could be attributed to the desire to depress the currency? To support the idiotic neoliberal idea of export led growth. That also are an absolute necessity to sustain the likewise idiotic idea of balanced or surplus public budgets.
    In Japan they don’t care about the later but in EU it’s the mandated economic model. In EU they neither hesitate to flagellate its citizens in the name of the economic religion to stop them from import stuff so it can be export led “growth”.
    The same folks are very upset when Trump try to stop import with tolls. If he just used the EU model of austerity everything would be just fine?
    But someone has to deliver the deficit if someone else should have a surplus.

    Reply
  22. FKorning

    “Could not get enough borrowers” – reads could not get enough suckers. I don’t think it’s so much the markets looking for liquidity as it’s the banks chasing collateral. Negative rates might imply the entire industry knows its assets are mispriced and are due for a slashing, and that there is no safe refuge in terms of investments, as equities and treasuries are all likely to take a haircut too. So the banks are in fire-sale mode, scrambling to offload bad risk from their books into their customer’s hands, preferably in exchange of worthless paper for a lien on real estate and tangible long-term stores of value. That way the customers will be on the hooks and the squeeze will be on the customer’s property. Nice guys by the way.

    Reply

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