By Jeff Deist
Do central bankers really think negative interest rates are rational?
Calculation Error,” which Bloomberg terminals sometimes display(1), is an apt metaphor for the current state of central bank policy. Both Europe and Asia are now awash in $13 trillion worth of negative-yielding sovereign and corporate bonds, and Alan Greenspan suggests negative interest rates soon will arrive in the US. Despite claims by both Mr. Trump and Fed Chair Jerome Powell concerning the health of the American economy, the Fed’s Open Market Committee moved closer to negative territory today — with another quarter-point cut in the Fed Funds rate, below even a measly 2%.
Negative interest rates are just the latest front in the post-2008 era of “extraordinary” monetary policy. They represent a Hail Mary pass from central bankers to stimulate more borrowing and more debt, though there is far more global debt today than in 2007. Stimulus is the assumed goal of all economic policy, both fiscal and monetary. Demand-side stimulus is the mania bequeathed to us by Keynes, or more accurately by his followers. It is the absurd idea, that an economy prospers by consuming and borrowing instead of producing and saving. Negative interest rates turn everything we know about economics upside down.
Under what scenario would anyone lend $1,000 to receive $900 in return at some point in the future? Only when the alternative is to receive $800 back instead, due to the predicted interventions of central banks and governments. Only then would locking in a set rate of capital loss make sense. By “capital loss” I mean just that; when there is no positive interest paid, the principal itself must be consumed. There is no “market” for negative rates. The future is uncertain, and there is always counterparty risk. The borrower might abscond, or default, or declare bankruptcy. Market conditions might change during the course of the loan, driving interest rates higher to the lender’s detriment. Inflation could rise higher and faster than the agreed-upon nominal interest rate. The lender might even die prior to repayment.
Positive interest rates compensate lenders for all of this risk and uncertainty. Interest, like all economics, ultimately can be explained by human nature and human action.
If in fact negative interest rates can occur naturally, without central bank or state interventions, then economics textbooks need to be revised on the quick. Every theory of interest contemplates positive interest paid on borrowed capital. Classical economists and their “Real” theory say interest represents a “return” on capital, not a penalty. Capital available for lending, like any other good, is subject to real forces of supply and demand. But nobody would “sell” their capital by giving the buyer interest payments as well, they would simply hold onto it and avoid the risk of lending.
Marxists think interest payments represent exploitation by capital owners lending to needful workers. The amount of interest paid in addition to the capital returned was stolen from the debtor, because the lender did not work for it (ignoring, of course, the capitalist lender’s risk). But how could a borrower be exploited by receiving interest payments for borrowing, i.e., repaying less than they borrowed? I suppose Marxists may in fact cheer the development of negative rates, and perversely see them as a transfer of wealth from lenders to borrowers (when, in fact, we know cheap money and credit overwhelmingly benefit wealthy elites, per the Cantillon Effect). So negative rates require Marxists to drastically rethink their theory of interest.
Austrians stress the time element of interest rates, comparing the lender’s willingness to forego present consumption against the borrower’s desire to pay a premium for present consumption. In Austrian theory interest rates represent the price at which the relative time preferences of lenders and borrowers meet. But once again, negative interest rates cannot explain how or why anyone would ever defer consumption without payment — or in fact pay to do so!
It should be noted that rational purchasers of negative-yield bonds hope to sell them before maturity, i.e., they hope bond prices rise as interest rates drop even lower. They hope to sell their bonds to a greater fool and generate a capital gain. They are not “buying” the obligation to pay interest, but the chance of reselling for a profit. So purchasing a negative-yield bond might make sense as an investment (vs.institutional and central bank bond buyers, which frequently hold bonds to maturity and thereby literally pay to lend money). But if and when interest rates rise, the losses to those left holding those $13 trillion of bonds could be staggering.
In the meantime, a huge artificial market for at least nominally positive US Treasury debt grows, strengthening the dollar and suppressing interest rates here at home. Once again, the dollar represents the least dirty shirt in the laundry. Congress loves this, of course, because even 5% rates would blow the federal budget to smithereens. Rising rates would cause debt service to be the largest annual line item in that budget, ahead of Social Security, Medicare, and defense. So we might say Congress and the Fed are in a symbiotic relationship at this point. The rest of the world might call it America’s “exorbitant privilege.”
Negative interest rates are the price we pay for central banks. The destruction of capital, economic and otherwise, is contrary to every human impulse. Civilization requires accumulation and production; de-civilization happens when too many people in a society borrow, spend, and consume more than they produce. No society in human history previously entertained the idea of negative interest rates, so like central bankers we are all in uncharted territory now.
Our job, among many, is to bring the insights of Austrian economics on money and banking to widespread attention before something truly calamitous happens.
(1)An earlier version of this article indicated that Bloomberg terminals were unable to calculate negative interest rates for callable bonds. This was not correct.
This article was originally published at The Mises Institute.
By Ron Paul
President Trump deserves credit for resisting the war cries from neocons like Sen. Lindsey Graham and Secretary of State Mike Pompeo after last week’s attack on two Saudi oil facilities. Pompeo was eager to blame Iran because he wants war with Iran and anything that can trigger such a war is fine with him. So he put the president in a difficult spot by declaring Iran the culprit: suddenly the president’s options in the media and in Washington were limited to “how to punish Iran.”
A week has now passed since the attack and Pompeo’s rush to judgement has been shown for what it was: war propaganda. That is because there has still been no determination of who launched the attack. Yemen’s Houthis took responsibility right away and Iran denied any involvement. We have seen nothing to this point that contradicts this.
President Trump likely understands that a US war on Iran will be his undoing as president. Who knows, maybe that’s what his closest advisors want. But according to a Gallup poll just last month, only 18 percent of Americans were in favor of military action against Iran. Seventy-eight percent of Americans – including 72 percent of Republicans – want the president to pursue diplomatic efforts over war. Iran has made clear that any attack on its territory will trigger a total war. The Middle East would be engulfed in flames and the US economy would be in the tank. Suddenly we’d see Democrat challengers pretending to be antiwar!
The message to Trump is pretty clear – war with Iran would be deeply unpopular - and it seems clear he understands the message. Just hours after his Secretary of State put the US on war footing with Iran, President Trump was forced to walk back Pompeo’s aggression. When asked about going to war with Iran, President Trump said, "Do I want war? I don't want war with anybody."
Unfortunately, with pressure on President Trump to “do something” even as Iran has not been found to have been behind the attack, the president has settled on two measures - one pointless and the other dangerous. On Friday Trump announced yet even more sanctions on Iran, leaving many of us to wonder what is possibly left to sanction. He also announced a deployment of US military forces to Saudi Arabia of a “defensive nature.” Why should the military be sent to “defend” one of the wealthiest and most repressive countries on earth? It is hard to see how putting US servicemembers into harm’s way – into a war zone – to defend Saudi Arabia can in any way make America great again. I believe most Americans would agree.
President Trump should immediately cancel the order to send US troops to Saudi Arabia and should immediately remove what troops are already on Saudi soil. Then the Saudis would understand that they must end their aggression against Yemen.
Attempting to placate the neocons is a fool’s errand, because they are never satisfied even up to and including war. The tide is turning in America – and even in Washington – against Saudi Arabia. After the murder of journalist Jamal Khashoggi and a catastrophic four-year Saudi war on Yemen, no American politician is any longer in the mood to stick his or her neck out to defend Saudi Arabia. President Trump would be wise to use caution: it’s always dangerous sticking one’s neck out when the Saudi government is around.
President Trump's decision to deploy more US troops (and more failed Patriot Missile batteries) signals the US Administration's continuing determination to back Saudi Arabia in its aggressive war against Yemen. The US tide of public opinion is turning against granting Saudi Arabia a blank check to destroy Yemen. Trump may find himself alone in his continued Saudi backstopping.
Central Planning is always destined to fail, and central planners (at everyone else's expense) always do whatever they can to delay the inevitable. Negative interest rates (that is, getting paid to borrow money) would never occur in a free market monetary system. Such a ludicrous idea will only further exacerbate the end of central banking. Debt continues to skyrocket, and the interest payments will only get more unbearable. It's time to audit and then End The Fed.
By Gregory Bresiger
Governments can and do try to fix prices, but history tells us it never works.
From the price-control dikats of the Roman Empire’s Diocletian, to the wage and price controls of President Richard Nixon, governments have tried and failed.
The historian Edward Gibbon said the Roman Empire imploded owing to economic disasters and less to barbarians at the gate. More recently, President Nixon imposed wage and price controls before the 1972 elections. He was re-elected when they seemed to be working. However, owing to the Watergate scandal, he wasn’t around when his price control scheme failed and dragged down millions of Americans in the disastrous decade-long horror show called stagflation.
New York's Economic Madness
Yet governments continue to try various kinds of price controls, even though most people with even the barest acquaintance with economic history or basic economics understand they’re the equivalent of economic crack. However, most New York pols, for instance, are economic illiterates.
They support continued rent controls because they are politically popular, at least in the short run. In the case of rent controls, the New York political classes recently extended them. They believe, almost uniformly, that they provide better housing at decent prices. But history and many economists say otherwise.
I believe some pols are privately convinced that they are witchcraft but they are not going to say so because they might then no longer be on the public payroll.
The politics are why New York’s state and city lawmakers have consistently backed rent control laws. That’s even though most economists, both left and right, agree they lead to housing shortages; that they’re a good deal for the minority of people who get coverage while the rest of New Yorker pay excessive rents.
Why Don’t They Work?
Supply dries up. Builders spooked by controls won’t build new units. The minority of those who get cheap rents won’t leave their units no matter what. Turnover rates decline. Most New Yorkers paying free market rents pay through the nose.
If you have a rent-controlled apartment: stay forever. You have cheap rent. If not, be prepared to pay very high housing prices as the housing stock can’t keep pace with demand. The quality of life in the city declines as more and more people pay a high percentage of their income for housing.
“In many cases, rent control appears to be the most efficient technique presently known to destroy a city — except for bombing,” wrote Swedish economist Assar Lindbeck, a Social Democrat.
This comment is part of a historical arsenal of rent control/stabilization critiques. They’re a piece of a federal lawsuit challenging the recent extension of New York rent controls, which are supported by most elected officials.
“The passage of these historic bills is a victory for housing justice and for hardworking tenants across New York,” New York City Comptroller Scott Stringer wrote in a press release. Stringer declined repeated requests for comment on a story I recently did for the New York Post Business section about the economic aspects of controls.
The extension immortalizes rent control rules for some one million New York City units. And yet no one disagrees with that, after generations of rent controls in New York, that the average New Yorkers pay huge housing bills, despite these laws.
They come at a time many New Yorkers “pay half or more of their income for housing,” says State Comptroller DiNapoli. There are about 3.2 million units in New York City.
A Helping Hand for the Big Apple’s Rich
Rent control critics warn these new laws will raise rents on most people except those New Yorkers living in rent-controlled apartments, who are sometimes well heeled.
“In 2017 upper-income households occupied 12 percent of pre-1974 rent stabilized units, or 98,780 units,” according to a report by the Citizens Budget Commission (CBC) report “Reconsidering Rent Regulation Reforms.”
CBC wrote that “Of these upper income stabilized households, 28,377 earn more than $200,000 a year.” The CBC report also finds that rent-controlled/rent stabilized tenants have a greater chance of having apartment problems than unregulated units.
This rent stabilization law (RSL) often helping the rich theme is cited in the lawsuit.
“The RSL does not in any way target its relief to low income populations. There is no financial qualification or standard at all for retaining or obtaining a rent stabilized unit,” the complaint says.
Due Process of Law
The lawsuit charges rent regulations violate the property and Fourteenth Amendment due-process rights of property owners forced to rent at below market prices. The laws, the suit continues, are a violation of the United States Constitution’s Takings Clause. That bars “forcing some people alone to bear public burdens.”
About 45 percent of rental units in New York City are rent regulated, according to a New York University Furman Center report.
Rent control applies only to buildings built before February 1947 and to units occupied by a tenant who has lived in the unit continuously since before July 1, 1971, Furman said. Rent stabilization generally applies to buildings of six or more units built between February 1, 1947 and December 31, 1973.
Despite the popularity of rent control laws with politicians, the majority of people who have studied the issue are critics.
Economists Do Agree
Blair Jenkins, the editor of a compilation of rent research entitled, “Rent Controls: Do Economists Agree?” says most economists condemn them.
In the book, economist Peter Navarro wrote “the economics profession has reached a rare consensus: Rent control creates more problems than it solves.”
Pace University professor Joseph Salerno argues New York’s laws have made housing problems worse.
“If rent controls are imposed that are lower than rents dictated by market forces, an excess demand for apartments almost immediately appears,” he says “Over time, if the demand for apartments increases, the shortage grows worse leading to long waiting lists.”
“In the long run, as taxes, utilities, maintenance and other costs of operating an apartment building continue to rise, the supply of apartments actually decreases, as landlords convert their apartments into co-ops or condos or abandon them altogether,” Salerno adds, noting higher costs lead to reduced maintenance.
The Left and Right in Accord
Salerno is a libertarian economist. He is an opponent of the liberal Keynesian school. However, economist Paul Samuelson, who was a prominent Keynesian and Nobel Prize winner, agreed.
“New York City rent controls,” Samuelson wrote in his economics textbook, “do favor those lucky enough to find a cheap apartment; but they inhibit new private building of low-cost housing.”
This article was originally published at The Mises Institute.
The approach of negative interest rates in the US will transport us into a truly bizarro world where up is down and spending is saving. But it's not only an economic issue - there is a moral and political corrosion of our society that comes with negative interest rates. Mises Institute President Jeff Deist joins today's Liberty Report.
By Chris Rossini
"Social Engineers," with their delusions of of total information awareness and total control, are nothing new. We humans are free to think whatever we want. We have imaginations, so naturally there will always be those who imagine they are here (not just to run their lives) but to run the world and organize everything in it to their own liking.
It's an all-too-common error in thinking, and the consequences that these individuals have produced once they get a hold of the reins of power have been beyond horrific.
These individuals destroy not only themselves, but those who believe them, and the unfortunate innocents who happen to be in the wrong place at the wrong time. A great example would be the Polish people when Hitler and Stalin invaded Poland from both sides. Poland was not the place to be when the Socialist 'engineers' were on the march from every angle.
So the power-hungry engineers and tyrants are not to be dismissed, of course. Their futile quests definitely create enormous destruction. It's quite rational to want to avoid them and even fear being in their path.
But what should not be feared is the social engineers ever succeeding in creating their utopias or dystopias. This will not happen. They have been chasing their delusions for thousands of years, and will surely continue to do so for thousands more.
You can chase after 2+2=5 for as long as you want. But 2+2 will never equal 5.
Social Engineers do not understand the human nature that they wish to re-create. They see people like inanimate physical objects that they can just manipulate, or like mixing two chemicals in a test tube to get their result.
But while there may be constants in the physical sciences, there are no such constants with conscious individual human beings.
Human beings are not like stones, or electricity, or chemicals in a test tube. We are conscious. We choose what to think. We choose what to believe. We choose our own purposes and goals. We choose the means that we will use in striving to achieve our goals.
Every single second of human life is different and unique from every second that was or will be. No two seconds of human existence are ever exactly alike.
Social Engineers sentence themselves to a life of never-ending frustration. They perpetually try to stamp out human choice with their prohibitions and mandates, yet it's no different than trying to nail JELL-O to a wall.
The JELL-O merely slides away from the nail, and moves on.
"Ban XYZ!" the Social Engineers pronounce.
Well, people will just find a workaround, a loophole, or even get XYZ on the black (i.e., free) market.
People have imagination. You cannot box in imagination, or put a fence around it.
You cannot see imagination.
You can't touch it.
But it is.
This is a major reason why every single military empire fails, and every scheme of trying to 'perfect' humanity with violent force (or threat of violent force) always collapses onto itself.
Humans are not meant to be perfect.
Errors are a necessary and unavoidable part of life.
It's not necessary to fear technocratic dystopias, or socialist utopias ever actually succeeding.
It's always just a chase for the impossible.
Instead, it's much better to celebrate and honor that innate and ever-present ability to choose.
Liberty can't help but succeed.
Liberty just is.
President Trump has named Robert O'Brien, who served as foreign affairs advisor to Mitt Romney's presidential campaign, as his replacement for fired National Security Advisor John Bolton. O'Brien is cut from the exact same neoconservative cloth as Bolton and represents, at most, change in style and physical appearance. With pressure mounting on Trump to attack Iran after unproven accusations that it was involved in an attack on Saudi oil facilities, the President's national security team may find itself without allies in the effort. Will O'Brien put the brakes on Trump's neocons...or will he hit the accelerator?
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By Liberty Report Staff
Jeff Deist, President of The Mises Institute explains:
Secretary of State Mike Pompeo was sure of who was responsible for the attack on Saudi oil facilities shortly after the attack. Neocons followed suit, one by one blaming Iran and calling for the war they've been drooling over for years. But not only are Washington's European partners skeptical of the claims - even Gulf allies are not outright blaming Iran. Lies grease the wheels of the war machine and with the latest attack the grease is flowing freely. What will Trump do?