From Johns Hopkins Bloomberg School of Public Health, Baltimore, Maryland; Warwick Medical School, University of Warwick, Coventry, England, United Kingdom; Annals of Internal Medicine, American College of Physicians. Negative Rates Nail Savers . What you are about to read could give you serious heartburn, especially if you are an economist or a central banker. Or a retiree or just someone who has lived life playing by the rules, and now you find yourself getting no return on your savings, forcing you to save even more and work even longer. Let me be careful to point out that I am not including all economists in my rather sweeping indictments. But I think the topic requires a whole- cloth approach rather than yet another two- or three- part series. Before we jump in, I want to note that economic chaos is not my only concern. We face a whole different kind of chaos on the geopolitical front. To a considerable degree it overlaps with the economic problems I’ll discuss today. George Friedman has been calling the Eurasian landmass a “cradle of disorder.” It’s home to 5 billion people, and it’s floundering in a sea of accelerating crises. Regular readers know that George doesn’t exaggerate. The Curse of Cash argues that we should get rid of the $100 bill because it hampers the Federal Reserve’s control over the money supply and makes it more difficult for the Fed to employ negative interest rates. Over $2 Billion raised for personal causes! GoFundMe is the #1 do-it-yourself fundraising website to raise money online. Get your crowdfunding website FREE! Walmart helps people around the world save money and live better - anytime and anywhere - in retail stores, online and through their mobile devices. He may be the most fact- driven person I’ve ever worked with. He looks at good evidence and draws sound conclusions. And right now he sees evidence in Eurasia that looks chillingly similar to what happened in the years leading up to World War II. I know that’s a strong statement. George doesn’t issue it lightly. He is genuinely concerned – and I am, too. We decided the best way to share George’s conclusions with you was visually. So, we’re making a short documentary film titled Crisis & Chaos: Are We Moving Toward World War III? George and a film crew are in New York right now, putting it together. I hope you’ll join me on September 2. PM EDT for the online premiere of this provocative documentary. You can reserve your free, online seat by clicking here. I devoted my last two newsletters to the Fed’s seemingly unstoppable momentum toward a negative interest rate policy. Here are links in case you missed them: Those letters brought a lot of responses but one in particular from my friend Newt Gingrich, who forwarded a column from John Crudele with the provocative headline “You’re not imagining things, the economy really is rigged against you.”Newt asked me a question that was characteristically short and simple: “Where are you on the rigged economy theme and the Fed–big bank alliance against normal people?”And, as his short questions tend to do, it required a long answer. Martin Lewis's free site saves you money. Beat the system on credit cards, shopping, special offers, mortgages, council tax, interest rate payments, freebies, loans, loopholes, best buys. Compare, read, discuss and be a Money.
I sat and thought about it for several days. Crudele has a point, I told Newt when I wrote back, but the issue he addresses is nuanced and the solution far from obvious. And the more I thought about it, the more it seemed that the best way to answer Newt’s question was to write this week’s letter. Yes, the system is rigged, just not in the way that 9. Greed is not the reason for the rigging, nor are any of the other usual “follow the money” reasons. We cannot make a convenient demon out of Wall Street or the big banks and investment banking houses. The real culprits are far less sinister and are actually sincere in their motives, so you won’t see an Oliver Stone movie about the conspiracy to defraud the middle class and strip them of their hard- earned retirement savings. No, the “bad guys” in the story are just Nobel laureates, tenured professors, and other honorable members of the economic academic establishment, what Ken Rogoff calls the “policy community.” The Occupy Wall Street crowd had a right to be angry, but they should have been demonstrating in front of the economics schools at Harvard, MIT, Princeton, Yale, etc. You know, the schools that many of those Occupy Wall Street protesters themselves attend. The economy has been rigged through a process that may have seemed innocent enough at any given point but that quickly put us on a slippery slope as ideological forces captured the ramparts of academic economic science. A brief history will bring us up to date. The Creature from Jekyll Island. In 1. 91. 3, the Federal Reserve was created by the major banks as a way to protect them from crashes. And there is no doubt that the Fed was designed so that the big banks retained as much control as they could convince a skeptical Congress to grant them, while giving in on a few minor points. But sometime in the ’9. The servant became the master; and while it is certainly true that Wall Street and large banks and investors currently benefit from the policies of the Federal Reserve, they really are not in control anymore. In the 1. 93. 0s and into the early ’4. The questions were magnified by the Great Depression. I have written about this debate at length in reviewing a 1. GDP: A Brief but Affectionate History, by Diane Coyle. The book can be read in a pleasant Sunday afternoon, and I highly recommend it. I am going to quote a paragraph and summarize the rest below. Coyle: There is no such entity out there as GDP in the real world, waiting to be measured by economists. It is an abstract idea. I also ask whether GDP alone is still a good enough measure of economic performance – and conclude not. It is a measure designed for the twentieth- century economy of physical mass production, not for the modern economy of rapid innovation and intangible, increasingly digital, services. So how did this nonsensical measure we call GDP come about? Fact is, you actually do have to try to measure an economy if you are going to be a government and especially a wartime government. Without such a measure, how do you know how much can you actually tax and produce for the war effort, let alone for welfare and other services? The argument boiled down to debates between followers of John Maynard Keynes and more conservative economists, either the disciples of Friedrich Hayek and Ludwig von Mises or followers of the classical school of economics. Conservative voices argued that the government’s taxing and spending simply took money from the citizens/taxpayers and put it to work somewhere else, so that it was not really contributing to the true productive economy. From the point of view of politicians who wanted the government to spend more on goods and services (and yes, war), including government spending in GDP made total sense, because you want to be able to tell the citizens the economy is growing. Politicians have been spinning data and news for ages. Whether we’re talking about the results of reading sheep entrails or of dicing modern economic data, the information is spun to make the politician look good. The controversial decision to include government spending in GDP was a political move made by President Roosevelt and the Democrats, who were in charge during the Great Depression. Within a short time, the inclusion of government spending in GDP was accepted as economic dogma by all major economic institutions. This of course made it easier to argue for and act on Keynes’s assertion that government should spend during recessions, stimulating the animal spirits of consumers and driving up consumption. Who could even question such an assumption? Only troglodytes, the less- educated along, and other sorts of deplorables. In the ’5. 0s and ’6. They wanted their less- than- precise discipline to be considered a hard science, too. Theirs was a far cry from the approach of Adam Smith and the classicists. As economics became more and more concerned with data and data analysis, with statistics and statistical analysis, it seemed to academic economists that with enough research they could actually develop models that would tell us how the economy really works. In the ’7. 0s and ’8. MITs, Harvards, Columbias, and Princetons of this world. The University of Chicago and its “freshwater” economists (as opposed to the “saltwater” economists on the East and West Coasts) held sway for a time, too, but that time has sadly passed. Keynesian and then neo- Keynesian economics became the driving force in academia. Politicians and bureaucrats courted them because Keynesian economists basically gave them permission to spend money. See for easy reference any of Paul Krugman’s New York Times columns advocating ever more fiscal spending and ever easier monetary policy. The neo- Keynesian philosophy now dominates the thinking of central bankers worldwide; but before we explore that point further, I want to quote from a brilliant book review by my friend James Grant of Interest Rate Observer fame of Prof. Ken Rogoff’s latest book, The Curse of Cash. I have found this book and the reviews of it disturbing, because Rogoff was one of my heroes for his earlier book This Time Is Different, which is a brilliant tour de force on the problems of debt. Having met Rogoff, I can assure you he is a very pleasant, easy- going man. But his argument in The Curse of Cash is not quite so benign or pleasant. The Curse of Cash argues that we should get rid of the $1. Federal Reserve’s control over the money supply and makes it more difficult for the Fed to employ negative interest rates. Let me quote one paragraph from Grant’s review (emphasis mine): In a deep recession, Mr. Rogoff proposes, the Fed ought not to stop cutting rates when it comes to zero. It should plunge right ahead, to minus 1%, minus 2%, minus 3% and so forth. At one negative rate or another, the theory goes, despoiled bank depositors will stop saving and start spending. According to the worldview of the people who constitute what Mr. Rogoff fraternally calls the “policy community” (who elected them?), the spending will buttress “aggregate demand,” and thus restore prosperity. You may doubt this. Rogoff himself sees difficulties. For him, the problem is cash. The ungrateful objects of the policy community’s statecraft will stockpile it. I have a problem with Mr. Rogoff’s proposing negative rates, but the problem I want to focus on in this part of the letter is the makeup of what he refers to as the “policy community.” What he means by that is the leaders of the economic community, a kind of self- defining non- organization in which very few non- Keynesians are included. And now we get to the root of the issue. Economics has been divided into religious camps.
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