Friday, September 23, 2011

Paul Volker says low interest rates cause asset bubbles. No kidding?

Congratulations to Paul Volker for his statement of the bleed’n obvious, namely that “if money is too easy for too long, we’ll have more asset bubbles”

First we have a credit crunch caused by excessive and irresponsible borrowing. And the solution the world adopts is . . . . wait for it . . . . . to cut interest rates so as to encourage more borrowing.

But seriously, we have a conundrum: the economy needs boosting, but if we boost it via low interest rates, that is liable to cause bubbles. So what’s the solution? Well I’ve spelled out the solution several times already on this blog. But there is no harm in repeating it.

Indeed, Australian economist Bill Mitchell on his blog repeats the same points over and over and over and over and over and over and over and over. That is not because he is stupid. It’s because the bulk of the human race is stupid. I.e. to get a point across to the bulk of the human race, it’s no use explaining a point in any sort of intelligent or logical or concise fashion. The only way of getting a point across is to repeat it over and over and over and over and over.

Harold MacMillan, former British premier once said that his speeches consisted of nothing more than repeating the same point over and over – with slight variations of course so as to avoid blatantly insulting the audience.

Anyway, there is a method of boosting economies which does not involve low interest rates, and that is, as advocated by MMT, to simply create new money and spend it into the economy: in particular, channel the money into the pockets of middle and low income groups because they are more likely to spend such money quickly than the wealthy. As to interest rates – to hell with them. Let them look after themselves. Let them find their own level.

It is a generally accepted principle in economics that the price of anything should be the market price, unless market failure can be demonstrated. So unless anyone can demonstrate market failure in the case of interest rates, rates of interest should be determined by market forces.

Moreover, why boost an economy just via a narrow range of activities or assets: the ones most influenced by interest rate changes. You might as well boost an economy via firms and households whose names begin with the letters A-M and ignore the “L-Zs”.

But the elite can’t bear to see money being wasted on the less well off. Given a recession and the availability of some extra money to deal with the recession, the elite would rather use the money to tinker with the various levers and knobs at their disposal: interest rates, investment incentives, job creation schemes, infrastructure projects, bridges to nowhere, green projects, special measures for “small and mediums size enterprises”. Very touchy feely, that last one. Moreover, if you are a politician, being seen to back SPECIFIC projects which allegedly “create jobs” is probably a better vote winner than boring old tax cuts, or an all round increase in public spending.

And finally, the basic purpose of an economy is to produce what PEOPLE – that is the consumer – want. If there is insufficient demand, then the PEOPLE should be given more spending power. Market forces can then sort out how much of that extra spending is diverted to investment, small and medium size enterprises, and so on.


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