Actually, as I have suggested in several earlier articles, 'serial cutting of interest rates' is a misnomer. The correct phrase is 'serial halving of interest rates'. The nuance is important. Serial cutting comes to an end when you have cut it to the bare bones: all the way back to zero. Not so serial halving that can be fine-tuned like water-torture. It can continue indefinitely, while each halving causes the same devastation in the economic landscape as it doubles the liquidation value of total debt.
Why should we worry about a monetary policy that depends on risk-free profits offered to speculators betting on higher bond values? Because it reflects the utter corruption of the profit-and-loss system on which capitalist production is based. It makes the businessman appear foolish who takes risks in the producing sector while trying to satisfy the needs of the consumers - when risk-free profits are available in the financial sector. As a matter of fact, the risk-free profits of the bond bulls do not come out of nowhere. They come right out of the capital accounts of the producers. These gains are the flipside of the capital losses suffered by the real risk-takers, the sitting ducks in this shoot-out.
I have been in a minority of one in my quest to inform the public about the single cause of the present economic disaster. In fact I have been predicting it for the past eight years. The single cause is the Fed's deliberate policy to drive down interest rates through serial halving. This policy is animated by the economic theories of John Maynard Keynes, according to which interest ought to be abolished so that the stone can be turned into bread and water into wine. The miracle is worked by a central bank well-equipped with printing presses and a factory to produce green cheese in unlimited quantities, to shove it down the throats of savers who are trying to provide for their twilight years, or for the education of their offspring, or just for a rainy day.
Continuing or even accelerating that disastrous monetary policy of unlimited green cheese production will not alleviate the crisis. It will make it worse. Much worse.
Look at it this way. The present contraction of the world economy is not due to a glut in global savings for which businessmen can find no good use, and which consequently has to be mopped up through expanding the balance sheet of the central banks all over the world, as "explained" by Paul Krugman and his friend, mentor, and former boss Ben Bernanke. The contraction is due to the lethargy of businessmen who see their past investments turn sour one after another at each interest-rate cut. Businessmen will not make new investments, no matter how badly central bankers want to force-feed them at the trough of newly created money, as long as the mad driving-down of interest rates continues. Would you buy a car today if you were told that its price will be cut tomorrow? Of course you wouldn't. Well, it is the same with businessmen. They would not make an investment today if they were told that tomorrow they could finance it at a cheaper rate and, the day after tomorrow at a rate cheaper still. It is as simple as that.
[Note: Another factor. Businesses are in fierce competition. This driving down of interest rates creates a situation where the guy who made a major capital investment in years past at higher rates is placed at a competitive disadvantage with the guy making the same investment this year at lower rates. In effect, the first movers, the real innovators, are punished by this artificial manipulation of rates. The best and brightest become the chumps and losers. Great way to grow the wealth.]
Now the Fed is saying that it has got a new toy-grenade to try on the economy: the T-bond purchase plan. Businessmen conclude that this is time to go into hibernation-mode. They just want to survive with their remaining capital intact until this madness runs its full course. They will come back and start investing again in saner times, when interest rates are stabilized at their natural level. Those who listen to the siren song from the Fed and other central banks, and invest at today's teaser-rate will get massacred at the next halving, when even lower teaser rates will be offered.
Sunday, March 22, 2009
Killing Productive Investment