Larry Summers is a pretentious Keynesian fool, but I refer to him as the Great Thinker’s Vicar on Earth for a reason. To wit, every time the latest experiment in Keynesian intervention fails – – as 84 months of ZIRP and massive QE clearly have – – he can be counted on to trot out a new angle on why still another interventionist experiment or state sponsored financial fraud is just the ticket.
Right now he is leading the charge for the greatest stroke of foolishness yet conceived. Namely, negative interest rates based on the rubbish theory that the ‘natural’ money market rate of interest is at an extraordinarily low point. Accordingly, the central bank should drive the ‘policy rate’ to sub-zero levels in order to achieve the appropriate level of ‘accommodation’ in an economy that refuses to attain ‘escape velocity’.
As can’t be pointed out often enough, however, there is no such economic ether as ‘accommodation’. It’s just a blanket cover story for what Keynesian central bankers believe they are accomplishing by pegging interest rates below market clearing levels and by bending and mangling the yield curve to cause more investment.
But after 86 months it is evident that all of this putative monetary ‘accommodation’ has failed. Falsifying the cost of money and capital can only work if it causes households and businesses to borrow more than they would otherwise; and to then lay credit based spending for consumption and investment goods on top of what can be funded out of current production and income. Another name for that is leveraging private balance sheets and thereby stealing production and income from the future.
With $62 trillion of public and private debt outstanding, however, the US economy has hit a economic barrier called Peak Debt. For all practical purposes, it can be measured as the macroeconomy’s aggregate leverage ratio, which now stands at 3.5X national income. That represents fully two extra turns of debt on the economy relative to the stable 1.50X ratio that prevailed during periods of war and peace and boom and bust during the century before 1970.
This post was published at David Stockmans Contra Corner on February 17, 2016.
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