In response to an FT article by Professor Lawrence Summers on 6th March 2016, entitled 'A world stumped by stubbornly low inflation'
The common fallacy that has underpinned the failure of the so-called 'great moderation' of the nineties and early noughties, and the deflation of the teenies is the idea that the economy can be dialled up and down to achieve a mythical 'equilibrium'; a myth propagated by a group of intellectually in-bred academics - people who believe they can control a dynamic complex system by fiddling around with the most important price in capitalism - the interest rate.
The result of this hubris has been a massive credit expansion. It has manifested itself in a number of financial bubbles, which of course, sooner or later burst. We have now arrived at the 'big one'. The last two crises of 2000 and 2008 were delayed, not averted, by a reduction in interest rates to 1% after the bursting of the tech bubble, and then zero after the bursting of the real-estate bubble, the latter accompanied by some $9 trillion of QE issued globally.
And now we have arrived at the crowning glory of this idiocy - NIRP. Negative interest rates are a perversion of capitalism - a virus. A free market would never produce negative rates in a million years. They will achieve nothing but further economic sickness. They will not create demand. Why not? Because banks do not want to lend and people do not want to borrow:
a) Individuals are not interested in buying stuff they don't need with money they haven't got
b) People approaching retirement realise that rather than providing them with an income, their savings may buy them a cappuccino once a week
c) Businesses are reluctant to make long-term plans in an environment that everyone except Central Bankers, neo-Keynesian economists and financial journalists can see, or at least are beginning to suspect, is a disaster waiting to happen
These policies are wrecking the economy; creating fear not confidence, encouraging financial engineering not entrepreneurial activity, boosting saving not spending. This isn't news to people who live and work in the real world, people who run businesses, or to people who can put themselves in another's shoes and imagine what it must be like for them. But take a group of academics and bureaucrats, few of whom have ever run a business, made a payroll, managed money or even had a job outside an institution, and it doesn't seem to register.
In short, NIRP is an attempt to solve a credit problem with more credit. Some figures:
1. In the twenty years from 1994 to 2014, global debt rose from $40 trillion to $225 trillion; an increase of over 5.5 times; twice the rate of GDP, which rose from $28 trillion to $78 trillion. Debt has been rising at a compound rate of 9.0% whilst GDP has been rising at 5.3%.
2. Since 1994 US debt outstanding is up by $45 trillion compared to an $11 trillion gain in GDP
3. The latest forecast from the Congressional Budget Office is that the budget deficit will rise from 2.5 percent of GDP in 2015 to 3.7 percent by 2020. The bulk of the budget deficit increases will be consumed by increased costs of servicing the U.S. federal debt. Debt servicing costs are expected to rise from 1.3 percent of GDP in 2015 to 2.3 percent in 2020. This is even worse than it sounds when you consider that excluding spending on the entitlement programs (Medicaid, Medicare and Social Security) discretionary spend is already slated to go down - from 6.5 percent of GDP in 2015 to 5.7 percent of GDP by 2020.
4. Fast forward another twenty years from now, incorporate the demographic changes and the entitlements currently hidden off balance sheet…and do the math – this is utterly unsustainable
In other words Professor Summers, you can call it 'secular stagnation'; you can call it 'chronic demand deficiency syndrome'; you can call it a 'savings glut'; you can call it 'Burt' for all I care. What you will never call it, because you clearly don't get it...is an utterly unsustainable mountain of debt. One that is suffocating the real economy by diverting time, energy, and resources away from wealth generating activities towards propping up the corrupt edifice that you and your fellow policy makers have spent the last two decades erecting.
You have no plan to address this Professor Summers. Neither have Professors Krugman or Rogoff; neither have Doctors Yellen or Bernanke; neither have Messrs Draghi or Carney. And any one of them who claims that they do, is either hiding his light under a bushel, or is a shameless liar.
A fellow reader asked: "I am curious to know what you think is the correct policy response":
I am increasingly convinced that it is too late to avert the massive transition that is coming. The people with power to effect change don't want to go there - because the clear out that needs to happen, and will happen, threatens their grip on that power.
To use a forest analogy - decades of central planners putting out every little fire with liquidity has left the real economy in a sickly state - littered with dead wood - zombie organisations that a free market would have put out of their misery years ago, with a group of crony parasites living off the rot. There will be a liquidation.
The people closest to the free money spigot will resist this with all their efforts (which is what got us here in the first place), but the system is unsustainable.
I think we are headed for a sovereign debt crisis and a loss of faith in government. Eventually there will be a global reset of the monetary system - a new Bretton Woods if you will.
Sorry I can not be more uplifting. This system is fiscally, morally and intellectually bankrupt. Articles like this one, written by Teflon coated architects of cronyism, are a symptom of the rot.