Monetary Montgolfiers

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“There are men regarded today as brilliant economists, who deprecate saving and recommend squandering on a national scale as the way of economic salvation”

– Henry Hazlitt

Look at this from the Federal Reserve Bank of Dallas “Higher incomes and household wealth boost spending. Higher, real (inflation-adjusted) interest rates—which encourage consumers to save—reduce current spending”

So if what you want is more spending (higher aggregate demand) then higher incomes and household wealth is good, and higher real interest rates are bad.

Well, they can’t do much about incomes – the public and private sectors can’t easily be forced to pay higher wages by central bankers, but they can engineer one HELL of a Wealth Effect by lowering rates and pouring lots of money into the hands of the wealthy (The Cantillon Effect)

And they have.

By driving interest rates down they screwed savers, who (it was hoped) would then choose (or be forced by circumstance) to spend their savings.

And then they hoovered up all the government bonds (and poured money into equity markets), forcing investors into the equity markets in the famous “reach for yield” – these combined forces drove stock markets to dizzying heights (and deepened the inequality in our societies as those already rich enough to own stocks, found themselves made yet richer)

So savers were going to be made to spend, and the wealthy would be made wealthier so they spent more – got that?

It has failed………spectacularly.

Like their friends in the political world, they have engineered the exact opposite outcome they intended (no doubt they will soon react in the same manner as politicians and claim that the failure of their efforts was only due to having insufficient power and demand more?) – consumer demand has collapsed, a retail apocalypse is underway, and it turns out that savers don’t save LESS when you pay them less interest – they save more. To ensure the same income from their capital despite the lower rate of interest being paid on it.

So savers are saving more, and the wealthy already have all the stuff they need – the attempt to goose aggregate demand and get our economy moving by financially engineering consumer spending has failed utterly.

But at what cost?

Those who warned this was insane have seemed to be wrong for a long time. They warned that inflating the money supply would drive up consumer prices – it didn’t (although Mars bars seem a lot smaller these days?)

They said that once it became obvious QE was not working the central bankers would stop and reverse course, and the process of reversing would cause the stock market and economy to correct. They were wrong there too.

Because they underestimated the degree of central banking insanity and self-delusion – they did not anticipate that central bankers were so deluded and oblivious, that they would be willing to destroy our economies in an attempt to prove their economic modelling.

And that’s what they have done – instead of carefully goosing markets higher and then letting the air out gently to give us a soft landing (QE1 followed by gentle QT1 later), they let the engines rip and have taken us to the edge of space (QE1 + QE2 + Operation Twist + QE3)

And now they propose QT1 – far far too late.

So now the engines are sputtering not at an altitude of 100ft, but 100,000ft – the Monetary Montgolfiers have no fuel left in the tank and so our balloon ride is over – we are not about to drift gently to the ground, but plummet to earth from the upper atmosphere.

No economy has ever survived such an impact.

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