I have tried hard to NOT cross-post, but this commentary just nailed it so… More specifically, he nailed the terrifying over-reliance on central banks and inexcusable, indefensible, incorrigible, and incoherent inertness of fiscal policy. The idea of stimulus (e.g. borrowing at near-zero rates to replace our crumbling bridges, airports, and schools) isn’t even on the agenda. It is perplexing, sad, and yes – terrifying.
Although its hard to get too worked up about it listening to free-form jazz at a reliably high quality open mic night at Bobby G’s in Berkeley CA. At least we’re better equipped to grow our own food when society collapses. Although the local ability to defend vs marauding bands is seriously in question…. 🙂
QUOTE: Central banks are terrified of raising interest rates, because it might cause bankruptcies on Main Street and crashes on Wall Street. They look at below-target inflation, flat wage growth and awful productivity, and think “there is no reason whatsoever for raising interest rates”. I never thought I would find myself writing this, but – yes, there is. Purchasing power in today’s fiat money economies is created by bank lending, and very low interest rates are deadly for banks. They can’t make money when yield curves are flat and the slightly-below-zero bound is binding. The longer very low interest rates remain, the more difficult it is for banks to survive. They could improve their profitability by doing riskier things, but we don’t like that either: prudential regulation is making it ever more expensive to take risk. Then we wonder why M4 lending is persistently negative (see table A2.2.3). Meh.
But even worse is the fiscal terror that prevents governments acting to restore their economies, or even forces them to do lasting damage in the name of “setting fiscal finances on a sustainable path”. We know that trying to eliminate a fiscal deficit when the private sector is highly indebted and the external sector is in deficit depresses growth. We know that fiscal surpluses are contractionary. We know that spending cuts hurt the poorest most, and tax cuts all too often benefit the well-off most. We know that high unemployment among the young scars them for life. We know that high adult unemployment is associated withincreased suicide risk, particularly among men.
We know that programmes of public works restore depressed economies, fast and effectively. Dammit, even Hitler knew this. Why don’t we do them? Because we are scared.
We won’t let our governments borrow for long-term public investment because “OMG Greece!”, even though interest rates are on the floor and investors are crying out for safe long-duration assets. We won’t let our governments print money for long-term public investment either, because “OMG Weimar!”, even though public investment would raise production whereas Weimar’s problem was that production had been trashed. We talk about the “burden of debt service for the next generation”, while refusing to invest in the tangible and intangible assets that would help ensure the next generation actually has a future.
I fear for my children. But not because of public debt. No, I fear for them because of unemployment, underemployment, low wages, debt, poverty. And war. OMG, war. Can’t we see that the path we are on now has in the past always led to war?
There is no justification for this. The obstacles are entirely political. We need Help.
So, here are my Helpful suggestions:
- Stop proposing new bank reforms. We’ve heard it all before. Get capital buffers up to 20%, then leave banks alone. Particularly, stop attacking investment banks. They have a job to do.
- Stop trying to restrict what central banks can do. Liquidity is lifeblood to the financial system. Trying to restrict it causes gangrene. Let central banks provide it freely.
- Stop expecting central banks to restore growth. They can’t.
- Stop worrying about public debt. Borrow to invest for the future. Then central banks will be able to raise interest rates, since increased borrowing would tend to push them upwards anyway.
- Stop trying to balance budgets. They will balance themselves in due course.
- Stop worrying about inflation. There isn’t any. If it appears, cheer.
And on a personal level – stop worrying and enjoy life. Even if you are flat broke and out of a job. Like me.