Free Money is Bad Money
Politics is sexy, but it is money that makes the world go round. While most people today will focus on the latest pearl of wisdom from President Obama, or if they live in Illinois the Greek tragedy that is Rod Blagojevich, many will blow by the fact that today is the day that money became free.
The Fed lowered its rate to 0% as part of the government’s continued plan to bastardize Friedman and Keynes to sacrifice long-term stability for short-term gains, and come up with a whole new way to screw up the economy. The market, with its scared and biased traders, rose 396 points today because that is what you do when the interest rates drop.
This allows us to arrive at the first lesson that I have gleaned from these few months. It has long been held that no one party, no one person can control a market. The information is diffused and individuals too concentrated to actually control. This was what the failure of socialism taught us. However, the market can be swayed and controlled through ideas, specific ideas that permeate the market. When they are good ideas, this is a good thing. When they are bad ideas, as the current market has shown us, it is catastrophic.
Free money means more money, and more money means inflation. A lot of inflation. The market may go up, but the market is denominated in dollars, so any “growth” that we will see will be effectively nothing. We are essentially adopting the Chinese model, which is premised on throw money at everything that the government feels is important, and hope that enough “stick” to make up for the incredible waste of government resources. This is a process that I have criticized in the past, but at the least the Chinese have a populace that are net savers and have a hard time spending due to their peg. For the United States, with their debtor citizenry, this is an even worse idea.
I was disheartened, although not surprised, to see President Elect’s choices for economic advisors. The Agent of Change picked the Stalwarts of the Status Quo and the Architects of the Bailout that Wasn’t. Being condemned to follow what has been done is no surer way to kill the economy, both here and abroad.
This is not a political question; it is a generational one. The progeny of the Greatest Generation may be condemned to being the worst. The turning points of our recent history will not be the election of Obama, as much as certain parties want it to be. It corresponds to the rise and fall of the interest rate the Dow Jones. The great events of history do not begin with a leader, it begins with poverty. These events are going to cause a hell of a lot of poverty.
Tom has foresworn, at least temporarily, his tendency to make dire predictions. I will pick up where he left off. The inflation that will result from this will more than offset any market gains created by the lower interest rates. All the political stuff that is enrapturing the general public will not be as important as they think. The credit market will not improve until the fundamental flaws are corrected, because even free money is not enough to clear the fear in the markets. And finally, there is going to be a drastic reorganization of the American workplace that will be painful and expensive. And delaying the obvious adjustment that will have to be made is just going to make it worse in the long run.
Comment by Billy Joe Mills on 16 December 2008 at 9:54 pm:
Great post. Great topic. I especially agree with, “Politics is sexy, but it is money that makes the world go round.” That sentiment is the reason I studied finance and economics in undergrad and continue to do so in law school.
Comment by Tom Trumpinski on 16 December 2008 at 10:05 pm:
I can’t add much to the commentary on this particular piece of government insanity, but I do have a question.
One of the big dangers in a depression is the “deflationary” feedback loop: Goods can’t be sold at a given price because people are out of work, therefore, the prices are lowered, lowering profits which cause more people to be out of work as businesses cut costs. This has a tendency to make the value of each dollar to be worth more, which in turn, makes them harder to earn.
Prescott, could the inflationary tendency caused by free money act as negative feedback on the deflationary loop and be beneficial or would it tend toward causing “stagflation” like we had in the late 70s, where there is inflation and unemployment both?
BTW, the light industry in CU is starting to feel the impact of the depression–Humko, a major employer, announced layoffs this past week. I wouldn’t be surprised if a few other non-tech firms did so pretty soon, also.
The only dire prediction I’ve got offhand is that if the powers that be don’t start using an Austrian model instead of a Keynsian one, we’re totally fucked. I think that’ll do for now.
I’m going to find it really amusing to watch as Americans realize they don’t really need 75% of what they currently told they should own, that businesses can operate with 70% of their current personnel since everyone spent a whole lotta time surfing the ‘Net, and that my friend Allie’s decision to study chicken farming was a lot more intelligent than my other friends’ decisions to go to law school and/or go into politics. See what happens when you listen to me?
Can’t eat law briefs, folks, and last hired, first fired….
Back to writing fiction, which is a lot more fun than seeing one’s nightmares coming true…..
Comment by Joshua on 16 December 2008 at 11:33 pm:
Can you give me some nuts and bolts info, what does this mean for me? Can I get a loan at a really really low rate?
Comment by Tom Trumpinski on 16 December 2008 at 11:43 pm:
No,you’d be lucky to get any kind of loan at all, Josh. This is the rate at which the government loans money to banks.
Comment by Brandon on 17 December 2008 at 7:50 am:
Actually Josh, now’s the time to buy that first house if you have amazing credit and job security. Low Fed rates tend to translate into lower mortgage interest rates. In markets in freefall like in California, business still blows because people are in foreclosure, but in more stable markets like out in C-U refinance business is healthy and sales aren’t as stagnant as they are in most places.
Comment by Tom Trumpinski on 17 December 2008 at 11:27 am:
Brandon, unless you own your own farm and have the money for taxes, there will be no such thing as job security. Vox thinks we may see 17% unemployment before the trend reverses. Josh, if you have any money at all, hold on to it so tightly it squeaks–you may need it later to relocate to somewhere where there’s work.
By the way, didn’t a law firm in NYC just fall apart due to the immmorality and arrest of one of its partners? About time karma started catching up with all these folks who figure the “ends justify the means.” Forget its name, but it starts with a “D”.
I’m really learning the meaning of schadenfreude this winter.
Merry Christmas to you, too.
Comment by James Prescott on 17 December 2008 at 12:15 pm:
In response to Tom’s question, I can only provide the highly unsatisfactory response of “it depends.” Economics is not a pure science, despite what other people might claim. The predictive value is suspect, especially when underlying assumptions are challenged. It is well established that the basic assumptions of “pure” economics are not true. Humans are not rational as the economic theory needs them to be. The theory does hold some predictive value as the assumptions can be relaxed and provide some insight, but when we act in this type of situation where what the actors will do, any prediction will be highly suspect. In this case, we have two possibilities as to how the market actors will react.
If Tom is right, and people truly stop buying as much stuff, and by stuff I mean manufactured products, then this credit drop will do nothing. Lets be clear…the Fed is not actually going out to the street and handing out money…they are loaning it at absurdly low rates. Low rates encourage investment based on lending, and debt based investment flows to certain types of purchases and development. Heavy machinery and pre-existing manufacturing and “established” sectors will get the money. Now, if you believe that the American economy needs to evolve, this doesn’t help; R&D and other elements don’t get the love and funds they need to go, while the government is incentivizing the old and consistent. I mean look at what they are doing with the Big 3; instead of letting the dinosaurs die, the Government is making the United States Jurassic Park. If that is the case, we will see stagflation because a) people aren’t buying products that we produce domestically and b) money is cheap and worth less.
Now, Tom’s assumption is based on recent activity. My personal theory about generational purchasing habits is that it is shaped by youth. This is unsubstantiated by empirical proof, but there is some support. The most recent is in China; the purchasing habits of those that came up during the Great Leap Forward and the like are more conservative. The younger generation is much more loose with their money. So the question is, is this event enough of a shock and does the younger generation have enough “buying power” to amount to a shift in economic activity.
So something that is possible is that the individuals don’t wake up, and when the money rolls in they start spending it again. The lower interest rates will encourage growth for products that people would be buying, which would lead to more jobs. No stagflation. Is it possible that it would act as negative feedback? Maybe. But again, I am so jaded by the point drop that I just can’t believe that this won’t have negative inflationary effects. But we shall see, I guess.
Comment by Tom Trumpinski on 17 December 2008 at 8:41 pm:
Wow, dollar plummeted today versus the Euro. The immediate feedback sure seems to be in the direction you figure.
I’m going to try to work out an economic advice column for early next week. Good thing we haven’t all died out yet, Brian–your generation has no survival skills for an economy where a college education is worthless.
I still remember long talks with the folks two and three generations back who lived through the last depression. Pretty sure I can adapt their concepts for a world with a larger safety net. It ought to be possible to survive with style, even if you don’t have the luxury granted by being a polygamist.
Comment by chrism on 18 December 2008 at 8:07 am:
“your generation has no survival skills for an economy where a college education is worthless”
Please please please don’t label Brian as indicative of our generation. I’m sure there are many of us who would surprise you.
Comment by Tom Trumpinski on 18 December 2008 at 9:10 am:
Chris, I don’t in general, I just resent it when he implies that the world will be heaven as soon as ignorant Baby-boomers like myself all die out. I understand that Millenials are going to save us from whatever great crisis is coming, just like the way their last mirror-cohort, the Greatest Generation did (nothing particularly unique about them except for the wired-group-mind thing). I get tired of hearing about it, that’s all.
Comment by JayBandit on 18 December 2008 at 8:16 pm:
I know one industry that isn’t being affected negatively one iota by the depression: Nuclear Power. We are hiring more and more people each day, and we’re still too busy. Sometimes you wake up in the morning and think to yourself, “damn, I feel like a gangsta for making such a genius decision on going into the nuclear industry…” Or is that just me?