In response to an FT article by Martin Wolf on 13th September 2016, entitled ‘Monetary policy in a low rate world’
Note: Mr. Wolf’s article follows-on from the column by Larry Summers last Sunday, which I responded to in my blog piece: ‘Fiscal policy is not the magic pill – there is a bigger picture’. Politely: Mr. Wolf’s article echoes and promotes Professor Summers and his suggestions. Less politely: it’s a ‘tag-team’ effort to distance themselves from increasingly discredited monetary policy, an attempt to solve a debt problem with more debt, and a sales job on behalf of a Teflon coated academic. Some of the points I make here are common to both pieces – those are in the middle and are in italic. The introduction and the final points are unique to this piece and are in normal type.
Monetary policy has been the only game in town for the past 8 years; books have been written by chaps about how they courageously 'saved the world' with it; proclamations of ‘believe me it will be enough’ have brought praise in abundance from these pink pages…and now we get a cartoon that shows the FT’s favorite PhD wrestling for control of the magic money stick with the woman who got the job he wanted…and we hear this:
‘But monetary policy cannot set the real interest rates over the long run. Indeed, monetary policy actions may not have much impact on these even in the short run. Powerful real factors are at work’ – Martin Wolf
I’m glad you got round to the realization that it isn’t working Mr. Wolf, but unfortunately you’re only half way there: it’s making things worse…much worse.
As I mentioned in my response to Professor Summers in his Sunday column…Central Banks are conjuring $180 billion monthly in order to buy government, mortgage, and corporate debt...and now stocks. The BOJ owns 50% of the ETF market and is a 10% stakeholder in 90% of the Nikkei. The ECB is running out of bonds to buy because yields are now below the threshold of its rules. The policymakers responsible for these measures, Mario Draghi and Haruhiko Kuroda, have pushed interest rates into negative territory, but in neither case have their actions achieved their stated goals. Meanwhile their claims that these policies ‘work’ make them look increasingly ridiculous, and whilst they have yet to reach the pinnacle of absurdity & denial achieved by Comical Ali, they’ve definitely arrived at base camp.
This is being done in pursuit of the ‘holy grail’ of 2% inflation (they’d prefer 3%-4% but such an admission would be politically incorrect). Putting the ‘real’ target to one side for a moment, 2% is claimed to represent ‘price stability’. You could be forgiven for thinking ‘That doesn’t sound stable’, but you’d be wrong - the CB version of ‘stability’ isn’t applicable in the real world, so have no fear - your summer trousers will not shrink over the winter. On the downside, reluctant dieters will be disappointed that they can’t inflate their portions and expect to achieve a ‘stable’ waistline. Food doesn’t lose its calorific value when inflated – that only applies to ‘money’ in a ‘stable’ system.
There is, however, another reason why CBs want money to lose its value, albeit one they don’t mention for fear of besmirching the noble image they seek to project…it’s because governments need old debt to shrink so that that present and future debt can grow without anyone noticing they are increasingly ‘insolvent’. Since raising taxes would require honesty, which is anathema to politicians, and since they can’t shrink debt the old fashioned way by paying it back…inflation is the chosen solution. This ‘sleight of hand‘ is a tax that few know is being levied…‘economists’ largely overlook it, particularly those of the governmental and/or tenured variety. In the case of the media, undisturbed access and invitations to ‘insider gatherings’ incentivize the complicity.
There is however, a big flaw in the 2% inflation plan…the policies being pursued in its name are having the opposite effect - they are deflationary not inflationary. This is because people refuse to behave as they are supposed to. In the real world something distinctly human happens below zero that doesn’t happen on a spread-sheet - instead of rushing to buy more stuff they don’t need with money they haven’t got…people get worried about their future, so they save more. Business people, most of whom have a more intimate relationship with ‘consequences’ than central planners will ever understand, realize that it is crazy to allocate long-term capital in a market that is devoid of meaningful price signals, so they invest less.
Easy money policies do not stimulate, they warp; central planning does not create, it redistributes. The central banks are in the business of picking winners and losers. The winners are the ultra rich, the speculators, and the front-runners. The losers are those remote from the monetary spigot. There are also ‘zombies’ kept afloat only because creative destruction has been temporarily neutered. This system does not remotely represent a free market, or a capitalist economy - it is oligarchy.
Finally, there is another crucial factor that these guys don’t seem to ‘get’ – it is that failure is an essential feature of capitalism, perhaps the most important feature of capitalism. Why? Because it sends a message to the rest of the market that says ‘this doesn’t work’. The market learns, capital is deployed elsewhere, and in different ways…until something that works spectacularly well is created…then more capital flows into ‘me too’ products, then someone else improves on the original design, prices start to come down, a wider group of consumers benefit, the new knowledge creates other spin-offs, some of which also fail…and the process repeats.
Take away failure, remove price signals, and the market stops ‘learning’ - you get ‘more of the same’, or to use a term that seems to confuse some mainstream economists - ‘misallocation of capital.’
The Fed’s policies have taken away price signals and propped up ‘zombies’ for the past decade. Creative destruction has been put into hibernation and the net result is mediocrity. The biggest example of mediocrity is the Fed itself, which seems to learn nothing. Despite the market sending it the message – ‘the marginal productivity of debt is now zero’ - the Fed keeps doing the same thing over and over,…despite the market sending it the message ‘negative interest rates are deflationary’ – the Fed keeps doing the same thing over and over….
Eventually, these daft people who think they can reduce a complex natural system of human interaction into a crude machine…who seem to learn nothing from failure…who show no responsibility or remorse for their actions…will be replaced by the same creative destruction that they have tried so hard to suppress. They may be very nice people, but as policymakers they are vandals. It’s time for them to be over – they need to be audited and reformed…along with the entire corrupt monetary system they have been part of.