I’m going to start with the boring and over-analysed topic of money, especially fiat money. Well trodden ground for sure, but most of the tracks go off in the wrong direction or go round in circles. I warn you now I am going to float some ideas some or all of which will almost certainly repel you the reader regardless of whether you lean left or right or towards keynes or hayek or whatever. So if you feel your hackles rise as you read this blog, do bear in mind that all will be explained in due course.
Lets begin.
The Fiat Solution
My essential claim is that an economy using fiat money can only find a stable equilibrium at short term rates at or near zero, and that the last 40 or so years have been the period during which the economy, led by the markets – not the monetary authorities – has moved itself in that direction from the unstable starting point (a fiat regime with significantly high nominal interest rates). I call this hypothetical zero interest rate equilibrium for fiat money economies the fiat solution.
Bubbles
The common wisdom is that central bankers have been blowing bubbles and deliberately inflating asset prices by lowering interest rates.
In contrast, my view is that a monetary asset that is costlessly and instantly created in any quantity and which the issuing authority ensures will never become scarce cannot by definition attract a yield or rate of interest in any equilibrium situation.
Contrast this with a gold standard money which is a natural restriction of the amount money relative to everything else – providing a clear case for a rate of interest on money to exist. Although attempts have been made by the monetary authorities over the last 40 years to restrain the natural movement toward a zero interest fiat solution I’m going to show how these measures have essentially attempted to impose a fiat arbitrage, e.g. ‘let there be yield’ and how markets have systematically acted to remove these arbitrages, lowering long term rates thus forcing the monetary authorities to lower short term rates to avoid recession and therefore move the whole economy in the direction of the only solution (e.g. equilibrium attractor) that exists for the fiat money economy.
Cause and Effect
The way the economy as a whole achieved the fiat solution was to move quickly to a situation of maximum leverage (e.g. peak debt) at which the zero rate of interest is more or less the correct rate of interest, which is of course more or less where we are today. I’ll go over the mechanisms by which this has occured as a free market process in due course.
A Balloon, not a Bubble
So to summarise the basic narrative here, consider bernanke et al as the bear of little brain:
“Isn’t that fine?” shouted Winnie the Pooh down to you. “What do I look like?”
“You look like a bear holding on to a balloon,” you said.
“Not,” said Pooh anxiously, “not like a small black cloud in a blue sky?”
“Not very much.”
OK, site bookmarked. Bamboozle me.
welcome, shtove.
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As the first post was so short, I thought I would get ahead of myself and read post 2 (I’m trying to read an average of one a day).
My wife would argue my brains are in my trousers. I would argue they are too often in my eyes these days.
Anyway – I’ll try not to show off and make you to be a fool
. But I do have a couple of observations to make already – although I do understand you cover/argue your stuff through the blog.
I would say that the rate represents the scarcity of money to the borrower and the scarcity of the real world goods the borrower deals in with regard to fellow humans. This brings in two concepts – that of liquidity driving yields to the floor – but also the counterpoint to this – humans and their capacity to produce/consume in the real world.
The point we are currently at is an almost limitless capacity to produce as more people join the modern world economy and before ‘things’ have run out. Driving the price of things down leads the driving of interest rates down and a surge in liquidity to (over) invest, to consume and latterly to ‘speculate’ in assets as yields fail.
Whether this is the natural condition of fiat is arguable. It all depends on what we want it to be. From Wiki “The term derives from the Latin fiat, meaning “let it be done”, as the money is established by government decree.” So, if we as a community want to set our money at a specific level, or to relate it to the size of the economy or population, it is up to us as humans. It is whatever we want it to be. It is just that ‘we’ have decided that we will use a certain basket of prices to drive interest rates and thereby the demand and quantity of money. We may find that this is what is ‘at fault’ and decide to change it – rather than saying that the natural state for fiat is for yields to tend to zero.
“Whether this is the natural condition of fiat is arguable. It all depends on what we want it to be.”
It’s more a case of what it isn’t than what it is.
What it isn’t is a resource that is fixed in quantity, like gold is or like oil is, because its just a made up number. What it is, is a viable means of exchange.
Once can try to make it scarce to some arbitrary degree by implementing rules but they fail in all cases in the long run, and these failures lead to the equilibrium case. Note that zero yield doesn’t mean that it is not scarce, since gold held in the hand has zero yield, and gold is scarce.
Plus, humans will never agree on what fiat is and isn’t to be, therefore all it can be is a lowest common denominator.
Read on to ‘Sublimation’, by which time the whole thesis is pretty much laid out, at least as far as money goes (this blog is about much more than money).