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.

Do You Feel Lucky, Punk?

One line from a Clint Eastwood movie, but somehow appropriate as the world faces a sequence of crises, so much so that Physics World thought of it and I have followed suit and report some of the more distressing thoughts as the season for jollity approaches. When I was young, the biggest threat to civilization was considered to be nuclear war. We have avoided that, and it seemed as if that was under control, yet the most powerful country in the world has pulled out of treaties and appears to be developing new weapons. Not encouraging.

The biggest problem this year, the SARS-CoV-2 virus, looks like it is being dealt with as vaccines are now coming available. That was a record production of a vaccine, which shows we can respond to crises in a most rapid fashion. Or does it? Actually, these vaccines did not start from scratch. There have been previous potential outbreaks of dangerous coronaviruses that did not spread, and the pharmaceutical companies had been doing vaccine research for coronaviruses for some time. Yes, this was a new virus, so some new work was required, but the general methodology was established, and the companies would have had good expectations of what would work safely. The companies were prepared. The question now is, how well prepared are we for other disasters?

The most spectacular crisis, from a visual point of view, might be an equivalent to the Carrington event. This occurred in 1859, and corresponded to the sun throwing something like 100 million tonne of hydrogen plasma at us. This was spectacular visually; the northern lights were seen as far south as Colombia. Unfortunately, fast moving charged particles cause huge magnetic pulses that in turn induce serious current in electrical conductors. Back then, telegraph lines took on a life of their own. Now, think of all the conductors in our electrical distribution systems? Electric grids would be in real trouble as transformers burn out. Satellites would have their circuits fried, although the rubbish factor may be eased since the atmosphere would swell up and hopefully bring them down. So, how well prepared are we for this? How many spare transformers, etc, are there where we could get the electric systems going again? If the electric supplies ceased, what would be the effect? In short, we don’t know, we are unprepared, and one day we shall find out, but what are the politicians doing about it? How many politicians even care about what is not immediately in front of them?

We have made some preparation for a potential asteroid collision, in that we are studying and cataloguing asteroid trajectories. For any extinction events we shall have plenty of warning, and time to avoid the collision. Further, our space technology has been developed to the extent that avoiding this collision is plausible.

Politicians are now making noises about climate change, and are putting in place some things that will slow the production of greenhouse gases, but to what extent? Have they done the numbers? I have posted previously that the switch to electric vehicles may not be the long-term saviour some think when you integrate the gases over enough time, and include the gases emitted in making the vehicles, the batteries and the electricity. Nevertheless, it could be a step in the right direction if we worked out how to recycle and rebuild the batteries, and were prepared to pay the price of doing so. The problem is, recycling the batteries per vehicle will produce materials worth a few hundred dollars and probably cost thousands to do it. The obvious way around this is to put the appropriate cost of recovery on the batteries when sold, but that would make the electric vehicle so expensive nobody would buy them. As it is, how many realize they will have to replace the batteries in, say, eight years? How much research is being done into replacements? Take biofuels. Most research has been done by companies, and they have opted for the easiest research, and not that which is most likely to produce the largest supply of fuel. By focusing on ethanol from corn, which even blind Fred can see is not a good idea, it fouls the concept for authorities. How much research has been done into geoengineering? Not a lot. How much preparation has been made to ameliorate the effects of increased temperatures? Again, not a lot. The politicians make many speeches about how things will be OK by 2050, but seem remarkably unwilling to do the hard work now.