Nor, apparently
do they understand that when someone’s income rises, so too does their
spending.
Blanchard (for
some bizarre reason) is the IMF’s chief economist. And the “terrifyingly
brilliant Lawrence Summers” as Brad DeLong
calls him, is a Harvard economics prof.
Anyway, Summers
in a speech at the IMF at the end of last year put the argument that if an
economy does not escape a recession despite zero interest rates, it might be
necessary to stoke inflation so as to make the real interest rate negative. And
Blanchard more or less agrees. As Blanchard
puts it, “We should not dismiss the possibility, raised by Larry Summers that
we may need negative real rates for a long time. Countries could in principle achieve negative
real rates through low nominal rates and moderate inflation.”
Now excessive
inflation and negative real interest rates are an absolute stroke of genius, as
the following illustration will show.
Suppose
inflation is 10%pa, and interest rates are zero. That means I make minus 10% by
leaving money in the bank. But all is not lost: I can invest my money with
someone who promises to do better than that: they offer me let’s say minus 5%.
And they do that by buying up houses and knocking down 5% of them every year.
Whoever thought
up this negative real interest rate idea clearly deserves a Nobel Prize in
economics.
Of course no one
is going to engage in such a blatant form of wealth destruction as deliberately
knocking down houses. But that doesn’t detract from the idiocy of the negative
real interest rate idea because in most businesses it’s not obvious simply from
turning up at the factory or whatever, and seeing what raw materials go in and
what finished products come out, whether the business creates or destroys
wealth. That is, gauging the amount of wealth creation/destruction can only be
done by adding up the value of the output and subtracting the value of inputs.
And if at the end of that bit of maths, the business makes a negative 5% return
on capital, then in the bizarre world of negative 10% real interest rates, the
business is viable.
And to add
insult to injury, it’s not even clear how much of a relationship there is
between interest rates and investment, as this recent Fed study
demonstrated.
A better solution.
A better solution.
However, there’s
a better solution to this nonsense than Blanchard and Summers’s wealth
destoying stroke of genius. It’s thus.
Fidding with
interest rates is not the only way to influence demand. Another way is for the
government / central bank machine to simply to print money and spend it (and/or
cut taxes).
In that government
goes for the tax cutting option, household incomes rise. And staggering as this
may seem, when household incomes rise, their spending tends to rise.
And to the
extent that households DON’T raise their weekly spending, they are ipso facto
SAVING. But they won’t save for ever. That is, as their stock of money rises,
the point is bound to come where they start spending some of it.
Amateur
economists better than professionals?
Luckily for us,
so called “professional” economists like Blanchard and Summers are not the only
ones with influence on economic policy. That is, there are at least two groups
of economists (composed of amateurs as much as professionals) who have tumbled
to the blindingly obvious fact that if the government / central bank machine
prints money and spends it and/or cuts taxes, the aggregate demand will rise.
The two groups are first, advocates of Modern Monetary Theory. Second there are
the authors of this publication,
namely Positive Money, The New Economics Foundation and Prof. Richard Werner.
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