Our Financial Future

Interest rates should be the rental cost of money. The greater the opportunities to make profits, the more people will be willing to pay for the available money to invest in further profitable ventures and the interest rates go up. That is reinforced in that if more people are trying to borrow the same limited supply of money the rental price of it must increase, to shake out the less determined borrowers. However, it does not quite work like that. If an economic boom comes along, who wants to kill good times when you can print more money? However, eventually interest rates begin to rise, and then spike to restrict credit and suppress speculation. Recessions tend to follow this spike, and interest rates fall. Ideally, the interest rate reflects what the investor expects future value to be relative to present value. All of this assumes no external economic forces.

An obvious current problem is that we have too many objectives as central banks start to enter the domain of policy. Quantitative easing involved greatly increasing the supply of money so that there was plenty for profitable investment. Unfortunately, what has mainly happened, at least where I live, is that most of it has gone into pre-existing assets, especially housing. Had it gone into building new ones, that would be fine, but it hasn’t; it has simply led to an exasperating increase in prices.

In the last half of the twentieth century, interest rates positively correlated strongly with inflation. Investors add in their expectation of inflation into their demand for bonds, for example. Interest rates and equity values tend to increase during a boom and fall during a recession. Now we find the value of equities and the interest rates on US Treasuries are both increasing, but arguably there is no boom going on. One explanation is that inflation is increasing. However, the Head of the US Federal Reserve has apparently stated that the US economy is a long way from employment and inflation goals, and there will be no increase in interest rates in the immediate future. Perhaps this assumes inflation will not take off until unemployment falls, but the evidence of stagflation, particularly in Japan, says you can have bad unemployment and high inflation, and consequently a poorly performing economy. One of the problems with inflation is that expectations of it tend to be self-fulfilling. 

As a consequence of low inflation, and of central banks printing money, governments tend to be spending vigorously. They could invest in new technology or infrastructure to stimulate the economy, and well-chosen investment will generate a lot of employment, with the consequent benefits in economic growth and that growth and profitability will eventually pay for the cost of the money. However, that does not seem to be happening. There are two other destinations: banks, which lend at low interest, and “helicopter money” to relieve those under strain because of the virus. The former, here at least, has ended up mainly in fixed and existing assets, which inflates their price. The latter has saved many small companies, at least for a while, but there is a price.

The US has spent $5.3 trillion dollars. The National Review looked at what would be needed to pay this back. If you assume the current pattern of taxation depending on income holds, Americans with incomes (in thousand dollars) between $30 – 40 k would pay ~$5,000; between $40 – 50 k would pay ~$9,000; between $50 – 75 k would pay ~$16,000; between $75 – 100 k would pay ~$27,000; between $100 – 200 k would pay ~$51,000. For those on higher incomes the numbers get out of hand. If you roll it over and pay interest, the average American family will get $350 less in government services, which is multiplied by however much interest rates rise. If we assume that the cost of a dollar raised in tax is $1.50 to allow for the depressed effects on the economy, the average American owes $40,000 thanks to the stimulus. Other countries will have their own numbers.I know I seem to be on this issue perhaps too frequently, but those numbers scare me. The question I ask is, do those responsible for printing all this money have any idea what the downstream consequences will be? If they do, they seem to be very reluctant to tell us.

2 thoughts on “Our Financial Future

  1. “The US has spent $5.3 trillion dollars. The National Review looked at what would be needed to pay this back.”
    Who said so? Paying back to whom? The eagle who has landed? Where? On the moon? The US government has created trillions of dollars. God has created the universe (allegedly). Who does God need to pay it back to?
    How does the US create trillions of dollars?
    The essence of what I call “governmentalism” is that the government creates the economy. For example Themistocles decided to create 200 state of the art warships in 483 BCE, using the new sem of silver found at Laurium. He had been elected on that program. All forests were cut, etc (that in turn would force Athens to import wheat from the Black Sea, etc.) Since the Tang empire, money is what the government prints, and decides it’s “legal”.

    Rep. Rashida Tlaib, a Democrat representing Michigan’s 13th district (and eminent member of the self-proclaimed “Squad”), brandished the old idea of having the U.S. Treasury strike two $1 trillion coins. They would fund a stimulus package designed to provide economic relief from the devastation of the coronavirus pandemic. This is basically how the “Greenback” was created during the Secession War.

    The Treasury would mint the two $1 trillion coins, then deposit them at the US Federal Reserve. Forced by law to recognize the coins as legal tender, the Fed would add $2 trillion to the Treasury’s account. The Treasury would then use this money, under Congress’s direction, for stimulus. Those who disagree would be shot. Well, basically this is how the “stimulus” money creation worked, without bothering with the coins. And Trump did it before Biden.
    Total government debt is around 40 trillion dollars. Some of it is pure accounting, as when the current spending “borrows” from social security (not so secure after all…). That’s more than 6 trillions, just there.

    So what is money? Legal tender, as decided by military force. “Fiat” money, as in “Fiat Lux”. Any inflation, or deflation problem is a military problem. Or, more generally, a force problem: strong country, strong currency. The US is strong because its military and technology expertise, in combination with its allies, is overwhelming.

    Take Argentina: it has inflation because it produces nothing important and thus needs to buy everything important from outside, while, as it used to be the second wealthiest country in the world or so (from beef), it keeps on borrowing in dollars to sustain its means it can’t afford anymore. To still sell stuff (like beef), it needs to devalue, boosting its debt. Then more money is lent to it (by the IMF and the like), and it sinks further…
    How did Argentina get there? By doing the opposite of what China has been doing in the last few decades. China, expanding on the Japanese method, itself an imitation of Britain, Stalin and FDR’s militarization of their economies, just practices governmentalism: the government just decides to do important things, and creates markets that way.

    Two things China (or Japan, or Korea, or the USA, or of course in the past, European powers) decided to create and Argentina did not: a maximal worth industrialization, and a maximal worth educational system to make the former possible.

    Trump created trillions of dollars of stimulus, Biden has now teo to his name, and wants three more (~ GDP of Germany). And you know what? It did not even have to create the money by Fiat. Instead the Federal Reserve is just selling US Treasury bonds. Trillions of dollars of Treasury bond sale siphons money away from other essential lending markets, including blue-chip corporate bonds — making it more expensive for all kinds of companies and local governments to borrow. So the ten year treasury has been going up in yield for nine month, augmenting (the yield) by 70% (causing a severe NASDAQ correction).

    But there are plenty of investors who park their money with the Fed. Why? Hiroshima. And obviously more to come, if contradictors act up too much.

    • The Federal Reserve creates money, but it gets issued in return for the creation of bonds which have an interest charge. So in answer to, “Paying back to whom?” it is to whoever owns the bonds. Governments have historically created money, but as the Roman imperialists found, you can issue money a lot cheaper (coating copper coin with silver to hide the root) but eventually it catches up.

      Correct that countries that do not produce anything find their currency becomes worthless because nobody wants it. It is sort of supply and demand. It is true the US military is strong, but I have never heard a suggestion that they would shoot anyone who allowed the currency to degrade. The reason the US economy is so strong is in part because a whole lot of people want USD, and a huge number of coorporates have deposited so much in the Caymans, thus taking it out of circulation so the money supply has not been flooded.

      The economic principle is, “There is no free lunch.” If you are fully correct, you have got the free lunch. Maybe you have shown economics is a worthless exercise?

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