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"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.

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All across economics there's way too much interest in the demand side, not nearly enough in supply-side economics.

In Australia, there's a proposal to put a price cap on domestically sold natural gas, which we are a major producer and exporter of. Because the Europeans don't want to buy Russian gas (and someone influential is blowing up pipelines in pursuit of this agenda), they've been sucking out the gas from the rest of the world. The Australian gas industry is unhappy with the pipe caps and threatens to withdraw investment. 'Greedy companies making super-profits' on one side and 'Soviet style planned economy, Venezuela' on the other.

But nobody, gas companies excepted, is thinking about how to produce more gas! No matter how we or anyone manipulates the prices or export control orders, we cannot legislate gas out of the ground. We should've been producing more gas from the get-go, approving projects for export and domestic consumption. That directly alleviates the core problem, which is a shortage of supply. We could have a simple, quick regulatory system for gas production. Instead we have a very slow, expensive system where various interest groups get to wage lawfare against development. And so we get less gas. House prices are similar, that's the NIMBY issue in a nutshell. Power prices are another issue, nobody wants to build any new coal plants due to climate targets and so the price of power rises continually. There are costs to producing gas, issues with basins getting contaminated and so on. But there are also costs to having a giant legal mess of regulation constraining development for 6 years on a single project. It doesn't take that long to drill gas wells. There's plenty of gas in the ground.

A good way to reduce inflation is to lower energy prices. Energy prices are included in just about everything else. Yet instead everyone is just focusing on reducing demand by raising mortgage repayments. It wasn't macro-economic reform that produced the industrial revolution, it wasn't central banks making steam engines and industry. It was actual technical development and the efficient allocation of capital that made people richer, something governments don't seem to appreciate. If they want to make the economy better, they need to do micro-economic reform to make it easier to generate wealth.

I think one cause of excessive amounts of capital rushing into financial schemes, apps and crypto is that 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. If you want to make something in crypto, you can just get going, release your white paper, airdrop your tokens, get the software working. Now the cost of this is that there are a bunch of scams and shitcoins. But there is certainly no shortage of innovation, things happen quickly.

Near zero interest rates could have encouraged broad development across the whole of society. The US at least managed a fracking boom that is paying off nicely now. I think regulations channeled too much of this money into 'tech' and housing. Finance is a culture because much of industry has been crippled.

We should've been producing more gas from the get-go, approving projects for export and domestic consumption.

Is this feasible within a relevant time-window? Production today is not based on yesterday's decisions, but instead those decisions made 3, 5, and 10 years ago regarding regulatory, investment, and infrastructural resource allocation. Thus, decisions being made today about production infrastructure and investment shouldn't be based on today's needs for more/less gas, but on estimations of the need for gas in 3, 5, and 10 years. The price, on the other hand, reflects demand today, irrespective of future or past projections or investments. Thus, the two are far less related than one might ordinarily suppose. Insofar as they reflect a broad-based general trend in demand, yes, prices are a good spur to investment and future build-out. However, when there is a lag in build-out's ability to ramp up production in the short term, and the price spike is caused by a short-term or otherwise exceptionally unpredictable event like a natural disaster or war, then the price is likely not a good guide to what the future may require.

This is why it's reasonable to discuss price caps for this kind of black swan event; it's not the kind of thing that could reasonably have been anticipated within the timescales necessary to ramp production, and no action taken today is able to reduce the price through increasing supply within a reasonable timeframe (or even one that reasonably guarantees the black swan effect's will still be applicable at the end of the preparatory period). Thus, it's proper to take into account the societal effects of a sudden and unearned windfall profit vs the costs to the citizenry who see prices spike uncontrollably.

Black swan? Inflation was entirely predictable - right wing economists and even just common sense lay people were screaming warnings about the trillions of money printing that was going on for years. What was the response? Memes about “heh money printer go brrrr”.

Yeah, the administration has no excuse for forgetting basic rules about money and inflation. This could have been entirely avoided

As many have said before me in other contexts, if someone has predicted inflation for years, then they haven't predicted anything. It's like Marxists constantly predicting that revolution is coming.

And, by "black swan" event, I take OP to be referring to the developments -- COVID, etc, that led policymakers to take steps to increase the money supply. Note that M2 steadily increased for years without causing inflation, so those who for years said that those increases would cause inflation appear to have been wrong. OTOH the increase in M2 during COVID was much sharper than in the past but even that did not cause inflation until after personal consumption recovered. Given that drop in consumption and the concomitant risk of recession, anti-recessionary money policy was the correct move. The hard part was, as it always is, figuring out when and how quickly to reverse course, but those who warned of inflation "for years" have nothing to say about that.

As many have said before me in other contexts, if someone has predicted inflation for years, then they haven't predicted anything. It's like Marxists constantly predicting that revolution is coming.

They were only predicting it for the last couple of years, and to be fair it was eminently predictable - you print money recklessly and you cut supply then you get inflation. It’s pretty basic stuff.

Given that drop in consumption and the concomitant risk of recession, anti-recessionary money policy was the correct move.

Aren’t we now in a recession? One we can’t print our way out of due to aforementioned inflation? Seems it wasn’t the right move after all.

  1. The claim was not that they were only predicting it for the last couple of years, and in fact they have been predicting it forever.

  2. No, we are not in a recession, not by the measure used by the popular press nor by unemployment nor by other measures used by the NBER.

  3. As an aside, I never know whether people who say "printing money" (rather than "increasing the money supply") mean that literally or figuratively. Those who mean it literally are, of course, not to be taken seriously, given how little of the money supply is composed of currency.

The claim was not that they were only predicting it for the last couple of years, and in fact they have been predicting it forever.

I disagree. Inflation fears were never a major concern until recently. This is obvious to anyone paying attention.

not by the measure used by the popular press

You mean the leftist media? The one who edited the Wikipedia definition on what counts as a “recession”. Sorry I don’t take this view seriously, I take the conventional view on what counts as recession, no matter how damaging this might be for Biden

  1. They have been a major concern for the "right wing economists" that you referred to in your original post, "for years." (Your emphasis)

  2. No, not the "leftist media," which you would know if you had bothered to click on the link, which was to real GDP, which is precisely "the conventional view on what counts as a recession" to which you refer, and to which I was referring.

Honestly, your references to the "leftist media" and failure to engage with the evidence I presented in response to your query causes me to infer that you are only interested in waging the culture war, which does not interest me. You asked a question, and I answered it, with evidence. If the answer is inconvenient for you, I'm sorry.

I disagree. Inflation fears were never a major concern until recently

To be fair, Austrian Economists have been harping on it for decades.