. 2022. Edward Chancellor. Atlantic Monthly Press.
Few areas of macroeconomic policy are as vital and generate as much excitement as monetary policy.
If a freshman economics major were inquiring in regards to the topic, I’d advise them to begin with the splendidly entertaining video titled “Fear the Boom and the Bust: The Original Rap Battle between Keynes and Hayek.“I’d then give the scholar a duplicate of it Edward Chancellor‘S.
It’s no secret that global productivity growth is slowing. In the United States, for instance, it fell from 2.8% per yr between 1947 and 1973 to 1.2% after 2010. Things are even worse in Europe and Japan, where productivity grew at lower than 1% per yr for a generation .
Most famously, Robert Gordon of Northwestern University blames the slowdown in technological innovation. Professor Gordon and I need to confront different versions of the scientific literature, which, from my reading, is bursting on the seams with evidence of technological progress. An unsexy, inconspicuous, but still significant example: the Bosch-Haber process supplies many of the world’s fertilizer. This high-temperature chemical response consumes enormous amounts of fossil fuels, however the last decade has seen enormous advances in low-temperature catalysis, which promise to each increase agricultural productivity and reduce greenhouse gas emissions.
However, Larry Summers (and Alvin Hansen before him) blames “secular stagnation,” which attributes declining productivity to an aging and subsequently less capable and intellectually nimble workforce. The problem with this explanation is that it doesn’t fit the demographics. Anecdotally, for instance, the Roaring Twenties followed a protracted period of slowing population growth, and more systemic data shows no connection between population growth and the economic diversity of growth.
The Chancellor offers a special, more convincing and frightening explanation for the world’s slowing economy: central banks’ now decades-long love affair with artificially low rates of interest.
He begins by discussing Swedish economist Knut Wicksell’s concept of the natural rate of interest r* (r-star), below which inflation occurs and above which deflation occurs. While a skeptic might indicate that r* is unobservable, it has been abundantly clear over the past 20 years that we’re in monetary policy and prevailing rates of interest are well below r*.
The Chancellor’s central thesis, supported by extensive academic research, notably by Claudi Borio of the Bank for International Settlements, is that rates of interest below r* encourage a variety of macroeconomic ills. Call them the “Four Horsemen of Cheap Money.”
The first rider is bad investment. Interest rates below r* drive capital into projects with lower than normal expected returns; In other words, low-cost money lowers the natural “barrier” to investment. Consider the billions of investor dollars that taught a complete generation of Millennials that a ride across town should cost about $10, or, more broadly, the overinvestment in real estate, one in all the least productive sectors of the economy .
The second big advantage is inflated asset prices. Think particularly of the socially corrosive effects of unaffordable housing or, more generally, of the increasing concentration of monetary assets within the upper percentiles of wealth, whose relatively low marginal propensity to devour further depresses economic growth. Because should you give income to poor people, they are going to only waste it on food and shelter.
The third rider, the financialization of developed world economies, is probably probably the most insidious of all. The Chancellor points out that within the United States, until 2008, “the output of the finance, insurance and real estate (FIRE) sector was 50 percent larger than that of the manufacturing sector.” The country owned more [real estate] Agents as an alternative of farmers.”
This financialization led to corporations taking up low-cost debt, which had disastrous unintended consequences. This primarily included buybacks that paralyzed ongoing operations, capital investments and research and development. Additionally, debt-financed takeovers increase industry concentration, which in turn hurts consumers. Furthermore, the natural response to low-cost debt is to tackle more of it, which ultimately results in conflagration.
The fourth rider of low-cost money is the “zombification” of corporations that might have gone bankrupt in a traditional rate of interest environment. One of probably the most entertaining and edifying sections of the book compares properly functioning Schumpeterian creative destruction to a healthy forest. When forests are left to their very own devices, fires kill the least healthy trees and permit resilient young trees to thrive, whose growth would otherwise be stunted by larger but diseased older trees. For many a long time, the U.S. Forest Service fought fires aggressively, but found that this ultimately led to very large wildfires in areas that would grow to be ecologically senile. The Chancellor convincingly argues that something similar has happened to monetary policy and that much of the blame for today’s low-productivity global economy lies with the overgrown forest of unhealthy zombie corporations kept afloat on low-interest life support.
Perhaps the book’s most profound statement about low rates of interest is that while their salutary effects on asset prices are clearly visible, the brand new wealthy are far slower to acknowledge that the identical has happened to the current value of their liabilities. Another fascinating statement: Low tariffs encourage the lengthening of worldwide supply chains, which may include multiple intercontinental trips, by allowing manufacturers to push the production process further into the long run. If rates of interest rise, globalization is certain to suffer a severe setback.
Chancellor, who’s aware that Schumpeter’s creative destruction requires a powerful social system, is just not a libertarian jumper. He approvingly cites Tyler Cowen’s statement that “over the past few decades we have been conducting a large-scale social experiment with extremely low savings rates, without a strong safety net behind the tightrope.”
Chancellor follows Cowen’s statement with that of Michael Burry, celebrated in Michael Lewis’: “Zero interest rate policies have broken the social contract for generations of hard-working Americans who saved for retirement only to find their savings fell far short.”
Chancellor himself then notes that “more and more Americans have been forced to work beyond traditional retirement age.” For younger employees, the dream of a snug old age would remain a dream – one other illusion of wealth. Pensioners were liable to running out of their nest egg.”
One of the fun of this book is its relevance to each political policy and private finance, and if I were to criticize Chancellor’s wonderful volume for anything, it could be that it doesn’t explore these areas further. For example, he devotes only a couple of paragraphs to the apparent connection between the rise in inequality attributable to financialization and the worldwide rise of authoritarian populism. In the words of 1 observer: “The pitchforks are coming.”
The Chancellor could even have spent more time discussing who the demographic winners and losers are in a financial landscape of general wealth inflation. He only briefly alludes to the undeniable fact that older retirees can finance their consumption generously through sales so long as their wealth stays inflated, while young savers cannot finance their golden years with low-return portfolios. Worse, pension systems, particularly outside the United States, may very well be caught in a “situation.”Free spiralThey reply to low expected returns by increasing financing, which in turn drives up valuations further and lowers expected returns even further.
Perhaps the book’s most serious omission is its neglect of the absence of a U.S. central bank between 1837 and 1914, a period wherein devastating financial crises occurred continuously. (For example, the magisterial by Charles P. Kindleberger and Robert Z. Alibe lists 17 panics within the nineteenth century, but only 11 within the Twentieth.) One wonders what lessons the writer learned from the disruption of central bank supervision.
The above omissions are minute quibbles; Chancellor’s encyclopedic understanding of economic history comes through on almost every page, sometimes with a playful whimsy. Why, for instance, does he tell the story of an obscure early Twentieth-century troublemaker named Silvio Gesell who, to extend spending throughout the Depression, proposed a brand new currency that required a stamp each week that reduced its value by 5% ? So that a couple of pages later he could link it to Kenneth Rogoff’s serious proposal to ban money to offer central banks the chance to realize the identical thing.
Chancellor is just not only a first-class economic historian, but in addition a master wordsmith; Almost unique amongst serious financial books, it is right as bedtime reading. The book is peppered with amusing anecdotes, equivalent to Bagehot’s mention of a “shipping company” founded around 1800. [ice] Skates to the Torrid Zone” and retired Paul Volcker, who loudly blew his nose in disapproval when Janet Yellen declared her support for low rates of interest. The Chancellor is eyeing the buying of bonds with zero and negative rates of interest in anticipation of further falls in yields, noting: “One might say (with a roughly serious face) that investors should purchase bonds with negative rates of interest for capital gains and stocks for Income.”
More than 20 years ago Edward Chancellors gave readers one of the vital compelling and succinct descriptions of monetary mania ever written. It was hard to follow but it surely lives as much as expectations thoroughly. It is a serious work of political economy that is an element comprehensive guide to the best danger to the world economic system and part literary chocolate cake.
If you enjoyed this post, remember to subscribe.
