At the end of last month, the Mighty Oz’s and Grand Panjandrums of central banking descended upon the rural splendours of Wyoming in order to engage in a very public display of navel gazing and to enact a ritual, group reinforcement of confirmation bias.
There, we heard much nonsense talked about low – even negative -‘natural interest rates’ and of the seeming impossibility of triggering an alchemically meaningful dose of price inflation with which to restore the balance of the humours in the global economy.
It was most timely, then, for the ever-mischievous BIS to publish a paper first presented last year by Charles Goodhart & Manoj Pradhan which challenged much of the received wisdom of our monetary overlords and which broadly affirmed arguments I, too, have long been offering against their approach.
Millennial pessimism being a common affliction of thinkers throughout the ages, we should perhaps not be too surprised that we moderns, too, are prone to stroll along in its strangely seductive shadowlands of the mind.
As we have laid out in some detail in our professional work, it is clear that Chinese banks have entirely lost their inhibitions about creating money these past twelve months. It is equally clear that once such money is called into existence, someone must be caught in the act of holding it when a balance sheet snapshot is taken, however eager their desire to ‘pass the bad or depreciating half-crown to the other fellow’ may be and thus regardless of what the fate of that money will be an instant after the shutter has closed on the statistical camera. Continue reading …
So, one last time, let us lay out the argument developed above in the hope of eliminating all obscurity, for it is a pivotal one and therefore one which must be well understood if we are to challenge the very substance of the perilous theorizing of our Lords and Masters.
With positive real rates – which, we must again emphasize, simply imply that the instantaneous price ratio between goods today and goods tomorrow is greater than unity – the primal temptation is for the consumer to eat as much as he can, even including his seed corn, and so to yield to the pleasures of the moment in disregard of the needs of the morrow.
But the sort of reasoning we developed in the last of this series is alien to much of today’s mainstream, many of whose members succumb to the long-dispelled, circular fallacies of the productivity argument. Yet more of them adhere to what Dennis Robertson wickedly derided as Keynes’ Cheshire Cat theory of ‘liquidity preference’ (‘The rate of interest is what it is because it is expected to be other than it is. But if it is not expected to be other than it is, there is nothing to tell us why it is what it is… [it is] a grin without a cat’).
Now, the foregoing may be all well and good, but it is also the case that any such consignment of goods is open to a multitude of what economists call ‘rivalrous’ uses. If this is not true for that rare, individual batch of highly purpose-specific goods which we may have under consideration in some particular instance it will nonetheless still hold for the earlier, typically less use-constrained goods of which that batch is partially comprised, as well as for the later, more shop-ready goods to which it will in turn give rise and whose own market valuation, as we have seen, will help determine the price of their antecedents
An Austrian rebuttal of Summers et al, in four parts
THE TIME IS OUT OF JOINT
Over the years, any number of psychological experiments have been conducted in order to validate – or at least to give a veneer of academic corroboration to – a truth already well established by practical experience; namely, that we humans must continually struggle to overcome our basic animal instinct to seek instant gratification of our wants.