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Saturday Reads: Easy Money


With most of the major powers now availing themselves of loose monetary policies, it’s as good a time as any to have a look at how easy money has changed the world since 2008. Here are two good pieces worth looking at this Saturday:

1) Last week, the Economist ran a special report titled “A World of Cheap Money“. Here’s the lede:

Never in recent economic history have interest rates been so low for so many for so long. It is a safe bet that central banks in America, Britain, the euro zone, Japan and Switzerland will not be increasing short-term interest rates this year. Haruhiko Kuroda began his tenure at the Bank of Japan with a dramatic easing of policy on April 4th. Mark Carney, the new boss at the Bank of England, has licence to ease, too. It would be hardly surprising if rates stayed at the low levels of the past four years throughout 2014. When rates were first cut to their current levels in 2008-2009, it looked like a temporary expedient; now it looks like normality.

It then goes on to show how these policy choices are affecting (some might say distorting) economic activity around the world. Important stuff to digest.

2) Via ZeroHedgeDer Spiegel interviewed Harvard economist Carmen Reinhart, one of the authors of the very useful history of financial crises, This Time It’s Different. The interview is excellent, and excerpting a part of it doesn’t do service to the whole. Nevertheless, here’s a bit on pensions which ought to get VM readers’ ears perked up:

Reinhart: The best way of dealing with a debt overhang is to never get into one. Once you have one, what can you do? You can pray for higher growth, but good luck! Historically it doesn’t happen — you seldom just grow yourself out of debt. You need a combination of austerity, so that you don’t add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation …

SPIEGEL: … with the consequence that people are going to lose their savings?

Reinhart: No doubt, pensions are screwed. Governments have a lot of leverage on what kinds of assets pension funds hold. In France, for example, public pension funds have shifted money from shares (on the stock market) to government bonds. Not because their returns are great, but because it is more expedient for the government. Pension funds, domestic banks and insurance companies are the most captive audiences, because governments can just change the rules of the game.

At VM we tend to focus on the reckless and unscrupulous politicians and policymakers who have promised impossible pension packages to retirees across the country. And while their irresponsibility is real enough, it’s important to remember the effect that the larger macro backdrop is having on everything.

David Petraeus reportedly said of Iraq in 2003: “Tell me how this ends.” When it comes to this unprecedented era of easy money, no one has all the answers. Readers, care to speculate in the comments?

[Photo of stacks of Benjamins courtesy of Shutterstock]

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  • Andrew Allison

    We know how this ends! I’m more interested in what happens next.

  • Joe Eagar

    It ends in a dramatic rise in consumption in high-saving Asian economies, especially China.

    • Jim Luebke

      Good for them. And how do we ensure that we get a piece of that, rather than China’s domestic labor fulfilling that demand?

  • Jim Luebke

    Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew

    And the hearts of the meanest were humbled and began to believe it was true

    That All is not Gold that Glitters, and Two and Two make Four

    And the Gods of the Copybook Headings limped up to explain it once more.

    As it will be in the future, it was at the birth of Man

    There are only four things certain since Social Progress began.

    That the Dog returns to his Vomit and the Sow returns to her Mire,

    And the burnt Fool’s bandaged finger goes wabbling back to the Fire;

    And that after this is accomplished, and the brave new world begins

    When all men are paid for existing and no man must pay for his sins,

    As surely as Water will wet us, as surely as Fire will burn,

    The Gods of the Copybook Headings with terror and slaughter return!

  • JT

    I remember when working in the food industry, often mentioned was that often 75% of a foods companies profits came from a “new” product. I would guess the success that world Fed authorities are looking for depends in good part on the ability of new goods, new bubbles, to be created. Much as has been written here about how high tech is changing the world, in journalism, health care, law, auto industry, university education, and elsewhere, making those established areas less expensive or setting the stage for that to happen – possibly moving us slowly from a consumer society to something new, broad inflation might be more difficult to achieve. Hard to say though.

  • Anthony

    “The effect the larger macro backdrop is having on everything” appears to be retrenchment. How does it end, your guess is as good as any; but one thing for sure, inflation, hair cuts, and write-offs will definitely be a part of ending. Financial repression (economist phrase) will hurt retirees, savers, and Bond investors. High debt levels are economic impediment and corollary of 2008 crisis – loosened monetary and fiscal policy.

  • Fat_Man

    It is not that they are bad men, and that if we could find good men our problems would be at an end. Our currency is managed by the smartest men in the world, and, as far as I can tell, their intentions are as benevolent as they could possibly be — and I say that with all sincerity.

    Our problem is that our currencies are managed by men through human institutions. All men are partial. All of them are creatures of their time and place. Their eyes and hearts are inside their own heads and chests. Their minds cannot compass the the thoughts of billions of others, cannot know of all the phenomena human and natural that they must know of to do their jobs. Japanese Tsunami? Syrian Civil War? Greek Unrest? Cyprus Banks? Who knew? How could they?

    What will the Ayatollah Kahmeni do? Or will he die tomorrow? Or be overthrown in a coup d’etat, or a revolution from the streets. And how will Israel and the US respond. Their plans are a matter of state secret. Yet all of these are matters of the greatest economic consequence.

    The project is hopeless. A managed currency is doomed.

  • Lorenz Gude

    As a retiree I expect it will involve growing vegetables in my back yard. I was born in the early 40s, so I remember a time when that was what everyone had to do.

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