Policymakers and Fed watchers are now giving more attention to a new line of argument, that central banks need to take account of what their actions mean for the supply side of the economy.
A little classical wisdom for our broad-minded readers…
If you possess a firm grasp of these tenets, you will see
That nature, rid of harsh taskmasters, all at once is free
And everything she does, she does on her own, so that gods play no part
~ De Rerum Natura, Lucretius
On the shelves at Jefferson’s library at Monticello were five dog-eared copies of an amazing book written more than 2,000 years ago. Not the Bible…not the Iliad…nor the Odyssey.
It is a book that has fascinated and inspired thinking people for 70 generations…Copernicus, Galileo, Spinoza, Newton, Locke, Montesquieu, Voltaire, Diderot, Hume, Franklin, Wallace…and many others.
Directly or indirectly, Adam Smith drew on it for his ‘Wealth of Nations’…and even more in his ‘The Theory of Moral Sentiments.’ Charles Darwin’s grandfather, Erasmus Darwin, used it as a model for his own poetry, passing along the insight that changed intellectual life in the Western world. Everything nature does, we paraphrase from above, she does on her own. This is what Darwin tried to demonstrate in his ‘Origin of the Species.’ More recently, Steven Pinker relied heavily on the idea in his popular ‘The Better Angels of our Nature.’
And, importantly for us, it helps us understand why the Fed cannot really control inflation.
Money, Money, Money
This is, after all, a money-oriented ‘blog.’ While our thoughts and inquiries range far and wide, we also try to keep our eye on what is happening in the money world…and connect the dots, between current trends and events, and the deeper, longer-term tides of human society.
Dan made the point on Friday: if you follow only the mainstream press, you will have a very distorted idea of what is really going on. Case in point, this article appeared at Markets Insider on the weekend:
5 common misconceptions about the US’s $32 trillion debt mountain
We read quickly, not wanting to waste time, but curious; the financial press is more likely to peddle misconceptions than to dispose of them. Sure enough, the article is a pot-pourri of error: the debt is not too high…it doesn’t need to be paid off…it’s not bad for the economy…there’s no crisis coming…and everybody does it.
Here’s the gist of it:
The US’s $32 trillion debt mountain may not be as bad as it seems.
They’re right! It’s much worse than it seems.
First, the author tells us that paying the interest on the debt is a piece of cake:
It cost the US just $395 billion to service its debt last year, according to the Office of Management and Budget. That’s around 1% of last year’s GDP.
A Borrowing Binge
Well…yeah…with the lowest interest rates in 5,000 years. The key to understanding the debt is to realise that the ultra-low rates (courtesy of the Fed) lured borrowers to take on more debt than they can carry. When interest rates return to more normal levels…which they surely will…there will be trouble.
That is already happening. Two years ago, the feds could finance trillions of debt at the remarkably low 2-year treasury rate of only 0.22%. The rate went over 5% last week — 20 times more. And the Treasury needs to refinance $7.6 trillion of old debt, plus an estimated $2 trillion of new debt, in the next 12 months.
This borrowing binge by the government is almost guaranteed to keep interest rates up…even if inflation were to fall. It also assures us that investment capital will go to the government, rather than to private, wealth creating businesses.
There is only so much time, so much labour, so much energy…and so much capital…available. If it is used to build factories and add services, it increases our wealth. But if it is consumed or wasted on dead-end ‘investments,’ it is simply lost.
‘Dead-end investments’ is what the feds do better than anyone. Wars…weapons…spying…fighting poverty and drugs…encouraging people not to work…agencies for this…departments for that — resources are squandered, growth rates fall…there are fewer products and services to buy, while the demand for them increases. Result: inflation.
Here’s Bloomberg, on the case:
Fed’s Policy Paradox: Too-Slow Growth Threatens Inflation Fight
…policymakers and Fed watchers are now giving more attention to a new line of argument, that central banks need to take account of what their actions mean for the supply side of the economy. The implication: Too-high rates could actually undermine the inflation fight, by squelching the benefits of increasing supply — which are just now coming on stream.
Yes, dear reader, you can get price increases from either side: rising demand or falling supply. The feds give us both.
So…we move on…back to the book we were telling you about…
It did not come out of nowhere. It had its antecedents…its forerunners and scouting parties. It was foreshadowed by two famous Greek philosophers, Epicurus and Democritus. The latter introduced an early form of atomic theory; none of Epicurus’s works survived, but he emphasised the ‘here and now’ and how to enjoy it..
The book we refer to was written by a Roman, not a Greek. And it came about at a unique period. Rome conquered Greece after the battle of Corinth in 146 BC. This book was written 100 years later, a special window in history, thought Flaubert, ‘when gods had ceased to be, and Christ had not yet come…a unique moment…between Cicero and Marcus Aurelius, when man stood alone.’
Alone? On our own? No Fed to save us?
More to come…
For The Daily Reckoning Australia