We recall not too long ago when extraordinary monetary policies were reserved for recessions or financial panics. Lead editorial, Wall Street Journal
Whenever I pull out the long knives for our friends at Fedecbboj, some of my gentle readers inevitably send me notes reading more or less as follows: “Come on, Humble Blogger, cut the central bankers some slack! Even if they’re misguided, they are well-meaning and trying to do their best.”
To which I am tempted to reply, except that I would never put such a thought in writing, “One could say the same thing about the Three Stooges of Modern Nationhood: Castro, Chavez, and Whoever Is Ruining North Korea At the Moment. Well-meaning fellows all, just trying to do their best.”
In fact, I am the very picture of temperance compared to what others are saying. Here, for example, is former Budget Director David Stockman, speaking on TV after the July Fed rate cut:
“This rate cut was an act of colossal stupidity and cowardice. It was a capitulation to the bully in the Oval Office and the crybabies and gamblers on Wall Street…There was no economic case for it whatsoever. *** This is not an economy that needs stimulus 121 months into an expansion. *** [W]hat we do need is honest financial asset prices and interest rates that make sense. [Instead, the Fed] is marching right back into … sub-zero insanity.”
At the risk of repeating myself, let’s quickly survey a few of the reasons why people like Stockman and Your Humble Blogger are using words like “insanity” to describe the policies inflicted on us by Fedecbboj.
Hello, Fedecbboj, interest rates are the price of money. Or, to be precise, the price of borrowing money that someone else has but you want. You walk into a bank and say, “I want to borrow $100,000 from you for five years.” The banker says, “You’ve come to the right place, my friend! I will lend you that money and charge you $25,000, which you can pay me at the rate of $5,000/year.” All is well and the economy powers forward.
But suppose that neither you, nor the banker, nor anyone else knows the price of (borrowing) money? How could that be? It could be because Fedecbboj has been artificially manipulating interest rates for a decade and now even Fedecbboj has no clue what the price of money is. As a result, you can’t make a sensible decision about whether or how much to borrow and the bank can‘t make a sensible decision about whether or how much to lend.
Distorted decisions get made across the board. Households save too much or spend too much. Corporations make too many or too few capital expenditures and load up on cheap debt. Governments borrow too much. The economy turns into Rip Van Winkle and goes into a twenty-year snooze.
Doesn’t everybody (except Fedecbboj) know that central banker policy is a confidence game? Suppose I’m the manager of a movie theater and I’ve decided to rehearse a safety drill with my customers. In the middle of the film I stop the reel, raise the house lights and shout, “Fire in the theater! Everyone remain calm and… ARRGH!”
That’s right, I’m trampled by the panicked crowd.
I think there is a problem with cutting rates because it shows a sense of alarm … it spooks people into thinking another massive market crash is imminent. Nobel Laureate Robert Shiller
As with the movie-theater manager, the same thing happens when, right in the middle of the longest economic expansion in American history, the Fed reduces interest rates. People who thought the economy was doing just fine now think, “Holy crap! The world must be coming to an end! Fedecbboj must know something I don’t know! I better stop spending and pull in my horns!”
The economy swoons.
The “glut of savings,” which is keeping inflation low, exists only in Fedecbboj’s mind. Fedecbboj blames a global glut of savings for low inflation, rather than their own policies, but they are clearly not living in the real world. In the largest economy in the world savings rates have fallen for many decades and for obvious reasons: the social safety net is much stronger now than in the past. What economic actors have done isn’t to save, but to borrow: households, corporations and governments have gone on a drunken borrowing binge. Since the Financial Crisis total US debt has risen 40%. Globally, debt now sits at $247 trillion, up 50% since the Crisis. Notice one key factoid that gives the lie to the supposed savings glut. With debt at this level Fedecbboj has no choice but to keep interest rates very low or all the world’s governments would go bankrupt at the same time.
And don’t even get me started on the Cloud Cuckoo Land of negative interest rates. If you are a central banker at Fedecbboj, your mind works in only one rut: Reduce interest rates! Reduce interest rates! Reduce interest rates! But eventually you bump up against one particular interest rate: zero.
I’ve already vented about NIRP (negative interest rate policy) way back in 2015 (beginning here: https://gregorycurtis.wpengine.com/on-nirp1/), but let’s just quickly summarize by pointing out that if the price of (borrowing) money is negative, nothing about the world’s free economies works. Negative interest rates are death for pension plans (there goes your retirement), insurance companies (there goes your home, auto and life), and people who prudently save their money (you’ll now have to pay for the privilege).
NIRP is especially deadly for working families who can only try to build up a modest net worth by saving part of their income. They can’t take the risk of gambling on the stock market. In other words, NIRP drives inequality and hence political instability.
Finally, NIRP is death for banks. What bank is going to pay you to borrow money from them? They simply won’t lend. And since credit is the lifeblood of the economy, NIRP is death for the economy.
I could go on and on, but the fact is that bashing Fedecbboj gives me way too much joy. Writing blogs is supposed to be hard work, not fun. So I’ll stop (until next week).
Next up: The Worst of All Possible Worlds, Part 3
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