As the US stock markets reach new record highs, gold corrects to below $1500/Oz and the year gets closer to its end, I am left wondering why we have yet to see the next crisis happen. There are flashing red signs everywhere: gold’s rise, QE4 in the US, geopolitical triggers, worrying economic data and widespread complacency. But the main reason I am sure that there will be a crisis soon is not necessarily any particular sign of stress, but by the seeds that have already been sown a decade ago.
You see the crisis is only one half of a phenomenon. It is the second half. The first half that precedes every bust is a boom. And since the '08 crisis, we have had a big boom. This boom is a direct result of the Keynesian stimulus and unprecedented monetary easing under which we have been living since the last crisis. The main instigation of the boom is a suppression of interest rates, which are price-fixed much like a Soviet Politburo fixed the price of bread in the old USSR.
Interest rates are the price of borrowing money. Prices are essential at conveying critical information to business actors. An increase in the demand for pencils increases their price, which sends a signal to the pencil makes to make more pencils. Increased pencil production in turn increases demand for lower order goods and resources like wood and graphite, which send further price signals throughout the economy.
What information does the interest rate price convey? In a free market, interest rates increase with an increased demand for borrowing, they decrease with an increased supply of savings. So the interest rate should be informing businessmen how much they ought to save and how much they ought to borrow. Let us imagine a successful restaurant that has accumulated some excess capital. If interest rates are high, the owner might decide to save the money (i.e. put it into a bank to be lent out to urgent and low-risk ventures) and enjoy the appreciation that comes with higher rates. Should interest rates be low, indicating a large pool of savings in the economy, the restaurateur might decide to borrow even more money and open another branch, or build an extra floor or otherwise expand the business.
But what happens when the central bank price-fixes this crucial rate below its free-market level? The restaurateur believes it to be a good time to expand when in fact it is not. The underlying economy has not produced an excess of savings, which means that the underlying increase in productivity that would support the expansion has not taken place. The investment is in fact malinvestment. The period of malinvestment is the boom. Businesses expand, assets are bid up, people are hired, wages increase and times are good. Everyone gets greedy at the same time. Saving money is disincentivised and debt balloons.
As the debt gets bigger and bigger, the central bank has to be ever more accommodative to keep the party going. If they stop or hesitate and lose control over the long end of interest rates, the malinvestments are exposed. The bust is in. The bust is good. It is the only cure for the artificial boom. The restaurant has to close that extra branch, fire some workers, sub-let some space or otherwise retrench. The recession is not pleasant for those living through it, but time and dislocation is necessary for the malinvestments to be liquidated. Once done, the economy can resume its general gradual growth tempered by the real availability of accumulated capital (savings).
So that is why it is obvious that a crisis is coming. The extent of the bust is always proportional to the extent of the boom. The decade of below-inflation interest rates and QE has inflated assets, commodities, created unicorns and zombies. The central banks are discovering that they cannot stop easing and that they are caught between two hard choices: letting the bust happen or destroying the currencies they have a mandate to defend.
Unfortunately for us in the Eurozone, the new central bank chairwoman Christine Lagarde showed off her incredibly asinine cluelessness and devotion to the defunct Keynsian school when she committed to doing whatever it takes to keep this bubble going and even chastised Germany and the Netherlands for allowing an accumulation of savings. Germany and the Netherlands are possibly the only two reasons the Euro isn't completely worthless at this point. We would be far better off encouraging all the Eurozone members to emulate their success rather than the profligate disasters in Greece and Italy. Indeed we should fire Lagarde and make her wear a dunce's hat and move to a free market in interest rates.
Unfortunately, this would be a very painful and politically difficult transition. This disastrous business cycle created by central bank intervention is often cited by the critics of capitalism as one of the problems with capitalism. Yes capitalism will again get the blame for socialist intervention and the next crisis, which will be worse than the last (since the boom has been bigger) will fuel renewed interest in defunct idiotic Marxist and Fascist ideas.
Mosta, November 14th 2019
TLDR: Keysian stimulus is reaching breaking point
You see the crisis is only one half of a phenomenon. It is the second half. The first half that precedes every bust is a boom. And since the '08 crisis, we have had a big boom. This boom is a direct result of the Keynesian stimulus and unprecedented monetary easing under which we have been living since the last crisis. The main instigation of the boom is a suppression of interest rates, which are price-fixed much like a Soviet Politburo fixed the price of bread in the old USSR.
Interest rates are the price of borrowing money. Prices are essential at conveying critical information to business actors. An increase in the demand for pencils increases their price, which sends a signal to the pencil makes to make more pencils. Increased pencil production in turn increases demand for lower order goods and resources like wood and graphite, which send further price signals throughout the economy.
What information does the interest rate price convey? In a free market, interest rates increase with an increased demand for borrowing, they decrease with an increased supply of savings. So the interest rate should be informing businessmen how much they ought to save and how much they ought to borrow. Let us imagine a successful restaurant that has accumulated some excess capital. If interest rates are high, the owner might decide to save the money (i.e. put it into a bank to be lent out to urgent and low-risk ventures) and enjoy the appreciation that comes with higher rates. Should interest rates be low, indicating a large pool of savings in the economy, the restaurateur might decide to borrow even more money and open another branch, or build an extra floor or otherwise expand the business.
But what happens when the central bank price-fixes this crucial rate below its free-market level? The restaurateur believes it to be a good time to expand when in fact it is not. The underlying economy has not produced an excess of savings, which means that the underlying increase in productivity that would support the expansion has not taken place. The investment is in fact malinvestment. The period of malinvestment is the boom. Businesses expand, assets are bid up, people are hired, wages increase and times are good. Everyone gets greedy at the same time. Saving money is disincentivised and debt balloons.
As the debt gets bigger and bigger, the central bank has to be ever more accommodative to keep the party going. If they stop or hesitate and lose control over the long end of interest rates, the malinvestments are exposed. The bust is in. The bust is good. It is the only cure for the artificial boom. The restaurant has to close that extra branch, fire some workers, sub-let some space or otherwise retrench. The recession is not pleasant for those living through it, but time and dislocation is necessary for the malinvestments to be liquidated. Once done, the economy can resume its general gradual growth tempered by the real availability of accumulated capital (savings).
So that is why it is obvious that a crisis is coming. The extent of the bust is always proportional to the extent of the boom. The decade of below-inflation interest rates and QE has inflated assets, commodities, created unicorns and zombies. The central banks are discovering that they cannot stop easing and that they are caught between two hard choices: letting the bust happen or destroying the currencies they have a mandate to defend.
Unfortunately for us in the Eurozone, the new central bank chairwoman Christine Lagarde showed off her incredibly asinine cluelessness and devotion to the defunct Keynsian school when she committed to doing whatever it takes to keep this bubble going and even chastised Germany and the Netherlands for allowing an accumulation of savings. Germany and the Netherlands are possibly the only two reasons the Euro isn't completely worthless at this point. We would be far better off encouraging all the Eurozone members to emulate their success rather than the profligate disasters in Greece and Italy. Indeed we should fire Lagarde and make her wear a dunce's hat and move to a free market in interest rates.
Unfortunately, this would be a very painful and politically difficult transition. This disastrous business cycle created by central bank intervention is often cited by the critics of capitalism as one of the problems with capitalism. Yes capitalism will again get the blame for socialist intervention and the next crisis, which will be worse than the last (since the boom has been bigger) will fuel renewed interest in defunct idiotic Marxist and Fascist ideas.
Mosta, November 14th 2019
TLDR: Keysian stimulus is reaching breaking point
