site banner

"What if your entire worldview was just because of near-zero interest rates?"

novum.substack.com

Since the Great Recession, the Fed has transformed itself into an entity more and more responsible for asset prices. This was the stated goal since 2009 as the Fed adopted a new philosophy called the "Wealth Effect." The thinking behind it was simple: growth in asset prices would translate to an increase in consumer spending and hence demand itself. It was a 'trickle down' economic philosophy an increasingly financialized economy.

This backdrop has defined our post-2009 era which stirred certain pathologies that were reflected in the greater culture and politics. It was the time when 'finance became a culture' and actual-productivity plummeted across most developed economies, especially the United States. But somehow in spite of the accumulating dysfunction across most key areas, everything kept trudging along, partly thanks to investors being satiated with record returns.

While the near-zero interest rate regime may now be ending, it is worth considering how much of the water we were all swimming in excused poor state capacity, distorted economic fundamentals, and how it even kept a lid on the dysfunction potentially blowing up in our faces. Now that we have to reckon with these realities, it may be wise to ask how many worldviews were simply products of the the cheap money regime - which is now, in a shock to many, coming to a close. Whether or not it will easily be let go, however, is another matter.

11
Jump in the discussion.

No email address required.

A good way to reduce inflation is to lower energy prices. Energy prices are included in just about everything else.

If only we could go back ~30 years and build some nuke plants. But you hit on the issue:

the real world is chock full of regulations that make it too complicated to build anything. Want to build apartments, factories, railways, gas wells? You need permission, you need to consult stakeholders, you need to get environmental assessments, consult indigenous peoples, protect 'vulnerable' species, pass endless legal checks.

Another economic concept kicks in here.

https://en.wikipedia.org/wiki/Rent-seeking

A lot of players rose to dominant/monopolist status and wedge themselves in place so firmly that it's easier to play by their rules and pay them rather than attempt to circumvent or fight them directly. Even groups who manage to oust rent-seekers (Uber did it to the taxi cartels, for instance) really only end up attempting to re-create that rent-seeking behavior for their own benefit, to varying success.

Perhaps there's an analysis of this situation that looks at the low-interest-rate environment as one where groups attempted to use the 'free' cash to seize such a dominant position for themselves in hopes of being the primary rent-seeker once the music stops.

Actually that probably wouldn’t effect inflation. It would boost real growth. But the fed would likely still target 2% inflation so it would just cause them to ease more while trying to hit 2%.