E pur si muove

Back in early 2011, I argued that the adoption of abnormally low short-term interest rates (in real terms) always leads to a collapse in productivity, followed by a decline in the economy’s structural growth rate. Since late 2010 marked the transition from the acute phase of the financial crisis, when extraordinary easing measures were justified, to something approaching normality, at least in the United States, it is worth examining the US experience in the ensuing period.

To do this, I will revisit the chart introduced in that piece six years ago (see below). It divides the last 60 years into periods when the real rate of 3-month treasury bills was positive (shaded green) and periods when it was negative (shaded red). Those blocks of time were then nudged 12 months to the right, as it takes at least a year for such low rates to have a deleterious impact on economic performance. To complete the picture, the structural growth rate of US productivity has been added to the chart.

To my no great surprise, the results confirm that that an excessively low cost of money leads to plunging productivity, and from there to a collapse in economic activity. It is fairly clear that cheap money destroys growth, especially as the same results are seen in Japan, the UK and France.

My goal here is not to re-litigate this point, as that was done in the paper cited above and many times since, but to ask a different question: why on earth do most “economists” still push the idea that low rates are good for growth when the evidence clearly suggests otherwise? Or to put it more simply, why do they continue to push the idea that the earth is flat?

I must admit that while I am perplexed, I can offer two explanations, neither of which paints the “profession” in an especially flattering light.

The first point is that most economists are reluctant to run against the dominant doxa, which rules that weak growth is always and everywhere the result of excess savings. Thus the solution is to proceed to the “euthanasia of the rentier” — or attack holders of interest bearing savings — through the adoption of negative real rates. The fact that the policy does not work is incidental compared to the career damage that would result from too many economists admitting that the emperor lacks clothing.

The second point is even more disturbing. Negative real interest rates allow those who can borrow against existing assets, or cash flows, to leverage-up and secure ownership of even more assets. If a central bank keeps short-rates at zero — when the prevailing level of savings and investment would balance at 3% — those in the loop can borrow for free and scoop up positive yielding assets. In effect, they secure access to a riskless return.

The corollary is that the price of existing assets gets hugely inflated on the back of increased leverage. Since the owners of said assets are “the rich”, the effect is for the rich to get richer (for a while) while “the poor”, who get no return on their savings, just get poorer. So let us be clear: the big winners in a world characterised by negative real rates are the rich.

It should be noted that economists typically work for governments, big financial institutions, central banks, supranational bodies and large corporations. Such entities tend to be the domain of today’s “rich”. My simple conclusion is that most economists are paid by the entities which benefit most from these policies and, hence, it is unsurprising that they add intellectual gloss to what their (pay) masters want. would be surprised.

If

it were any

different, then

(and yet it moves).

I

really