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[Gilder's Daily Prophecy]
September 5, 2019
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[Reader Mailbag:] The Cost of Monetary Floating and Manipulation
[George Gilder]Dear Daily Prophecy Reader,
From time to time, various of my learned readers challenge some of my ideas and I respond.
Below youâll find a few questions or comments from Prophecy readers and my responses to them.
To my view that the middle class has thrived, according to time-prices measuring how long they have to work to buy desired commodities, a reader replied:
âWe now have billionaires who have made precious little contribution to productivity or progress but use that wealth [funded by negative or zero interest rates, currency floats, and bank bailouts] to extend the asynchronous nature of the economy in the name of evermore Green Goo.
My Response: I agree with everything but the zero or negative rates, which I accepted in Scandal of Money, but which actually conflict with the time-theory of money that I introduced there.
It seems to me that if inflation has been negative, with sharp benign deflation or rising "abundance," interest rates have been normal when adjusted for plummeting time prices and expected collateral and principal appreciation.
We have simply failed the measure the actual GDP gains, consumer surplus, productivity rises and radical new value created by pervasive high technology â learning curves everywhere.
Thus we have allowed the veil of manipulated money to create the illusion that people are paying banks to take their money in expectation of minus growth in the future.Â
Green suppression of manufacturing and chemicals would still have crashed the economy except for the providential rise of Chinese fabs and factories. I believe we were bailed out by China and its 50% coal-based and mostly male-engineer-focused economy, almost utterly incorrect politically and academically. China took over the manufacturing that we willfully and resolutely suppressed.
Now, in a continuing siege of economically suicidal policies, we are strangely attacking our leading technology companies for everything from anti-trust to sex-discrimination. Google, Apple, Amazon, Microsoft, and Facebook are the most valuable companies in the world, but they are not monopolies. They are meritocracies. With women at the highest levels, they do not discriminate against qualified applicants of any ilk. And all these companies face devastating competition from Chinese rivals.
China is at least as capitalist as our economy under the continuing administrative state, with mercantilist trade controls and nationalized banking and pseudo-private health insurance.
China has a wild entrepreneurial scene, with frenzied competition among pullulating startups and ever-expanding stock exchanges, and it even boasts better (because more politically incorrect) capitalist big companies such as TenCent, BABA, An Ping, and Huawei, plus hundreds of advanced AI ventures and continuing waves of IPOs.
We cannot have a Luddite Academy overladen with Green goo and dominated by gender games and expect to compete with China. It is true that Xi from time to time threatens to go communist again (Trump does not help here). If China attempts to restore a communist economy in practice rather than merely in rhetoric, all bets will be off. But it hasn't happened yet except in the realm of anti-government speech.
So you see the conflict. I say we're doing much better than the economic data shows. Yet we're all sickled o'er with a pale cast of green goo. Maybe the green goo is just a cosmetic sheen, skin deep, like a snowflake's tattoo. I don't believe it, but the time prices have yet to show a luddite collapse. How should I sort out these dissonant themes?
Mike K. â my âMan on the Marginâ blogger, answered: Start with Jim Grant's observation that this is the first time in 5000 years that negative interest rates have existed.
âCentral banks are treading in uncharted waters. Sidney Homer and Richard Sylla, the authors of A History of Interest Rates found no instance of negative rates in 5,000 years. Now there are $11.7 trillion invested in negative-yield sovereign debt, including $7.9 trillion in Japanese government bonds and over $1 trillion in both French and German sovereign debts.â âJim GrantÂ
Grant wrote this three years ago. Negative yielding debt has increased. The idea of negative interest rates is counterintuitive and frankly, idiotic. That capital invested today will be of less value in the future. Who invests based on the promise of a guaranteed less return in the future? Or that one will pay a bank to hold their money, while a bank will pay you to take their money?
To get to negative interest rates as normal you have to completely ignore what global CBs have been doing for the last 11 years. Negative interest rates are 100% the result of global CB monetary policy. CBs figured out how to create money out of thin air to purchase assets without the newly created money acting as cash or reserves. CBs pay interest on reserves. This allows virtually unlimited interest rate sensitive asset purchases without the corresponding inflation. It distorts everything else and centrally commands the most important metric for a market economy, the price of credit.
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Another reader wrote:
I would only add that while the "Everyman" may still be better off than his parents on a time-priced standard of living basis, contracts are based on nominal rates. Focusing on the supply side, though, what happens to normal commercial trade - and cash flow - for normal goods when nominal rates go negative?
My Response:Â When nominal rates go negative, it signifies expected deflation, whether benign or malignant to be determined by the appreciation or depreciation of principal and collateral.
The history of time-prices suggests that most of the deflation in free economies is a benign reflection of learning curves and entrepreneurial inventions: the growth of knowledge.
Theoretically any diminution of cash flow should be abated by more valuable cash, more remunerative opportunities, and appreciating assets that enable rollover loans at lower rates.
However, I recall von Mises's reflections on the "veil of money." False monies and spurious rates veil reality and inveigle the entrepreneur to make mistakes.
I recall the 36% deflation of the dollar against gold in the late 1990s that brought down roughly a thousand telecom companies and suppliers along with other debtor enterprises such as Target. These companies had contracted loans with nominal rates based on expected inflation that did not occur. The loans became suddenly unsustainable when the anticipated monetary devaluation failed to happen.
My conclusion is that monetary floating and manipulation can wreak havoc even in good times (as measured by time-prices).Â
Monetary policy and stability matter because the veils of money are not transparent. Their fluttering movements and seductive undulations can deceive the ogling spectators and delusional speculators that the dancers will be available after the show.
Feel free to leave a question, comment or your just your thoughts on something Iâve written by [clicking here](mailto:feedback@gilderpress.com?subject=SLhere). Perhaps Iâll address it in next weekâs dive into the reader mail bag.
Regards,
[George Gilder]
George Gilder
Editor, Gilder's Daily Prophecy
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