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The Price of Time: The Real Story of Interest by Edward Chancellor

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Borio referred to an ‘interest rate–productivity nexus’, with the causality running from low interest rates to low investment and falling productivity. Ultra-low interest rates, he said, explained both the zombie phenomenon and the fact that once zombified, a company remained for longer among the living dead. The BIS found a close relationship between the share of zombie companies and the decline in policy rates. Low rates begot zombies, and zombies begot lower rates.fn9 The rate of interest both reflects and determines the return on capital, according to this view. Ultra-low interest rates lowered the hurdle rate for investment. As more capital was trapped in low-return businesses, whether zombies or unicorns, the marginal rate of return on capital declined.

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This book is about the role of interest in a modern economy. It was inspired by a Bastiat-like conviction that ultra-low interest rates were contributing to many of our current woes, whether the collapse of productivity growth, unaffordable housing, rising inequality, the loss of market competition or financial fragility. Ultra-low rates also seemed to play some role in the resurgence of populism as Sumner’s Forgotten Man started to lose patience. Part Two of this book (How Low Rates Begot Lower Rates) examines the unintended consequences of ultra-low interest rates (chapters 7 to 16). Part One (Of Historical Interest) sets the scene. We trace the origins of interest to the Ancient Near East (Chapter 1) and follow its story through the Middle Ages to the birth of capitalism in Europe (Chapter 2).

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In Part Three (The Game of Marbles) we examine the impact of ultra-low interest rates on emerging markets. The initial effect of reducing rates to zero on the world’s reserve currency, the US dollar, was to drive capital flows into emerging markets. Commodity prices took off. Rising food prices helped to spur the 2011 popular uprising in the Middle East known as the Arab Spring. After the Federal Reserve started to tighten policy a couple of years later, commodity prices collapsed and emerging markets entered the doldrums. Two of the largest of these economies, Brazil and Turkey, suffered severe downturns. In China, low interest rates fuelled an extraordinary credit boom, accompanied by the greatest investment binge in history and an epic real-estate bubble.

A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression by Richard A. Posner

Alan Greenspan, Andrei Shleifer, banking crisis, Bear Stearns, Bernie Madoff, business cycle, collateralized debt obligation, collective bargaining, compensation consultant, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, diversified portfolio, equity premium, financial deregulation, financial intermediation, Glass-Steagall Act, Home mortgage interest deduction, illegal immigration, laissez-faire capitalism, Long Term Capital Management, low interest rates, market bubble, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, oil shock, Ponzi scheme, price stability, profit maximization, proprietary trading, race to the bottom, reserve currency, risk tolerance, risk/return, Robert Shiller, savings glut, shareholder value, short selling, statistical model, subprime mortgage crisis, too big to fail, transaction costs, very high income

Because houses are extremely durable goods, the stock of housing grows only slowly; and when the supply of a good is inelastic, an increase in demand can cause a large increase in price because supply cannot quickly be increased to the level of the new demand. When it seemed that we could have low interest rates without unacceptable inflation, worries about recession receded, since low interest rates encourage economic activity and thus reduce the danger of recession. It is when low interest rates create inflation that a threat of recession looms, because the Federal Reserve will be motivated to raise interest rates in order to break the inflation; that was the cause of the severe 1980—1982 recession. That low interest rates might cause a credit binge that would cause a recession and even a depression was off the policy radar screen, in part because the synergistic effect of cheap credit and financial deregulation was missed.

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It is the product of a financial crisis that resulted from the confluence of two dangerous developments: low interest rates in the early 2000s and the deregulation movement, which began in the 1970s. Low interest rates make borrowing cheap and make safe saving (as by purchasing certificates of deposit or other very safe interest-bearing securities) unattractive, so personal debt rises and the personal savings rate declines. Because houses are bought mainly with debt (a long-term mortgage), low interest rates encourage the purchase of houses, and because the stock of housing expands only slowly, an increase in the demand for houses leads to an increase in their prices. Low interest rates, by stimulating economic activity (people borrow to spend), tend to increase stock values, so people tend to buy common stock in lieu of safe securities.

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But what has brought us to this pass? Low interest rates do not appear from nowhere, nor movements to deregulate the financial sector. The low interest rates of the early 2000s were a product of a deliberate decision by the Federal Reserve. The deregulation movement was the response to justified criticism of common-carrier and public-utility regulation. But the economists who pushed deregulation, as I said, were not macroeconomists sensitive to the role of banking regulation in preventing risk-taking that could bring on a depression, while the macroeconomists viewed low interest rates with complacence because they thought that a depression could easily be prevented, precisely by keeping interest rates low and thus stimulating economic activity.

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril by Satyajit Das

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Many corporations borrowed at home to fund their spending, taking advantage of low interest rates and avoiding paying taxes on repatriated overseas profits. Inflation requires imbalances between demand and supply. Many developed economies had a significant output gap—the amount by which the economy's potential to produce exceeds total demand—reflecting lower demand and excess capacity, though the extent was uncertain due to lower labor participation, which reduced the theoretical output. Low demand and lower costs also reduced price pressures. Corporations took advantage of record low interest rates, substituting machinery for labor to improve output.

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The policy justification was that higher profits improved the bank's capital and reserves, enabling increased lending and bad loans to be written off. In fact, banks paid higher bonuses to staff, increased dividends, or returned surplus capital to shareholders through share buybacks. Low interest rates and QE policies also weaken a currency. The US, UK, Japan, Europe, China, and Switzerland have used direct intervention, by way of artificially low interest rates and QE, to try to devalue their currency. Devaluation makes exports more competitive and assists individual countries to capture a greater share of global trade, boosting growth. It also reduces real debt levels, decreasing the purchasing power of foreign investors holding a nation's debt.

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Citizens were accepting of the sacrifices necessitated by the economic problems. Savers accepted the net transfer of wealth to borrowers through low interest rates. The social structure of many troubled economies may not accommodate the measures required to manage the crisis without significant breakdowns in order. Japan highlights the difficulty of engineering a recovery from the collapse of a debt-fueled asset bubble. It reveals the limitations of traditional policy options—fiscal stimulus, low interest rates, and debt monetization. The lesson from Japan's experience may be that the only safe option is to avoid debt-fueled bubbles and the subsequent buildup of public borrowing in the first place.

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, backtesting, bank run, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, currency risk, debt deflation, disinformation, distributed ledger, diversification, financial engineering, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, junk bonds, labor-force participation, Long Term Capital Management, low interest rates, Lyft, margin call, market bubble, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, proprietary trading, public intellectual, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk free rate, risk/return, sharing economy, short selling, short squeeze, sovereign wealth fund, stock buybacks, tail risk, TikTok, Uber and Lyft, uber lyft, yield curve

Indeed, in much financial commentary the term “carry trade” is synonymous with “currency carry trade.” If a speculator were to implement a simple currency carry trade, he would borrow in a low interest rate currency and invest the funds borrowed in a high interest rate currency. He collects the difference in the two interest rates, or the interest rate spread, which is his income from the trade. The risk is that the high interest rate currency depreciates in value against the low interest rate currency, and the capital loss on the currency depreciation ends up being greater than the income the speculator earns from the interest rate spread.

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This risk can be understood in terms of the volatility of the exchange rate. If the exchange rate for the currency that he invests in against that which he borrows in is volatile, the chance will be greater that a 9 10 THE RISE OF CARRY loss in value of the high interest rate currency in terms of the low interest rate currency outweighs his net interest gain. The world of currency markets can be broken down into low interest rate currencies that tend to be “funding currencies”—that is, currencies that are attractive to borrow in to finance carry trades—and high interest rate currencies that are “recipient currencies”—that is, currencies that seem attractive to invest in to benefit from their high interest rates.

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In a theoretical classical equilibrium model of the economy, currency carry trades should produce a zero return over time; their expected return should be zero, and therefore they should be an unattractive proposition. This is because, at equilibrium, the high interest rate for a high interest rate currency will reflect the expectation of a similarly high inflation rate over time. Conversely, a low interest rate currency would be expected to have a low inflation rate over time. Therefore, the expectation should be that the high interest rate currency will depreciate against the low interest rate currency at a rate in line with the inflation differential, and therefore in line with the interest rate differential, because this is required for the maintenance of the high interest rate country’s trade competitiveness.

The End of Indexing: Six Structural Mega-Trends That Threaten Passive Investing by Niels Jensen

Alan Greenspan, Basel III, Bear Stearns, declining real wages, deglobalization, disruptive innovation, diversification, Donald Trump, driverless car, eurozone crisis, falling living standards, fixed income, full employment, Greenspan put, income per capita, index fund, industrial robot, inflation targeting, job automation, John Nash: game theory, liquidity trap, low interest rates, moral hazard, offshore financial centre, oil shale / tar sands, old age dependency ratio, passive investing, Phillips curve, purchasing power parity, pushing on a string, quantitative easing, regulatory arbitrage, rising living standards, risk free rate, risk tolerance, Robert Solow, secular stagnation, South China Sea, total factor productivity, working-age population, zero-sum game

The Global Financial Crisis was caused by abnormally high debt levels in certain sectors and countries, and monetary authorities responded by lowering interest rates – both at the near-end (through policy rates) and the long-end (through QE). To begin with, such a strategy made sense, but it is way past its sell-by date now. We have reached a point where the solution (low interest rates) is causing more damage than the problem itself (high debt levels). Low interest rates lead to lower productivity growth Low interest rates damage economic growth through the negative impact they have on productivity. The logic is as follows. The fall in interest rates ever since the early 1980s has led to a monumental bull market in credit and equity markets, lasting over 30 years.

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Why our leaders suddenly think they can fix everything with only one policy tool (monetary policy) is beyond me. Anyway, what has been achieved with the extraordinary low interest rates of recent years is that savings-induced consumer spending has been converted to debt-induced consumer spending. This means that another of my trends – the end of the debt super-cycle – is very much part of the same story. The extraordinarily low interest rates that we supposedly all benefit from form one of the biggest challenges Europe has faced since the war. How I can possibly think of low interest rates as a challenge? After all, don’t we all benefit from exceedingly low mortgage rates, which pays for those extra couple of weeks in Mallorca every year?

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I will discuss those two investment themes in more detail in chapters 4 and 5 respectively. In that respect, low interest rates, in particular when low relative to the level of GDP growth, encourage banks to lend more and borrowers to borrow more. When money is cheap, a significant percentage of new capital is misallocated, i.e. it generates a return below the cost of capital. Capital that is misallocated causes productivity growth to shrink, i.e. one could argue that low interest rates in fact drive productivity lower. There is no doubt that the growing use of advanced robotics will have a positive impact on productivity growth and hence on GDP growth in the years to come (see chapter 10 for more on this).

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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Compared with a typical period of recession, during which interest rates fall rapidly only to rise swiftly thereafter, the absence of meaningful recovery leaves pension funds facing the prospect of permanently lower interest rates and, thus, growing difficulties in meeting their obligations. While low interest rates are not the fault of QE alone, there can be no doubt that the persistence of low interest rates has left many pension funds seriously in deficit. That, in turn, threatens changes in behaviour elsewhere within the economy that are ultimately inconsistent with economic recovery: individuals save more (or borrow less), aware that they are at risk of suffering a pension shortfall; companies choose to divert profits into their pension funds instead of investing in the capital that might kick-start economic growth; and governments have to raise taxes or cut public spending as they bid to satisfy the expectations of the boomers.

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Lower yields may provide a justification for additional government borrowing but, as in Japan's case, there is no guarantee that the additional borrowing will deliver the right results. Worse, instead of being a vote of confidence in a nation's anti-inflation capabilities, persistently low interest rates may simply imply that investors have lost all appetite for risk or for adding to capacity. Riskier assets then lose value, investment is increasingly constrained, the economy slumps and inflation ends up too low. Rather than paving the way towards sustained economic recovery, low interest rates become a symptom of a deep economic and financial malaise. It is tempting to believe that, with remarkably low borrowing costs, the US, UK and German governments are trusted by creditors to spend wisely.

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Keen to avoid a repeat of Japan's ongoing stagnation, and confident that they had the tools to do so, Western policy-makers offered massive monetary and fiscal stimulus: interest rates tumbled, budget deficits rose and the threat of debt deflation – of falling prices that would increase the real value of debt – was averted. However, all was not well. With low interest rates and gossamer-thin regulation, housing markets boomed, as did the issuance of mortgage-backed securities, which offered higher returns than government bonds and, so it seemed, more safety than jittery stock markets. Economic growth returned but millions upon millions of unsuspecting people – whether borrowers or lenders, whether Americans or foreigners – found themselves directly or indirectly owning a stake in an apparently ever rising US housing market.

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

Alan Greenspan, asset allocation, banking crisis, banks create money, barriers to entry, behavioural economics, benefit corporation, Berlin Wall, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, book value, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, data science, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, equity risk premium, Fall of the Berlin Wall, financial engineering, financial innovation, fixed income, Flash crash, foreign exchange controls, forward guidance, Francis Fukuyama: the end of history, general purpose technology, gentrification, geopolitical risk, George Akerlof, Glass-Steagall Act, household responsibility system, housing crisis, index fund, invention of the printing press, inverted yield curve, Isaac Newton, James Watt: steam engine, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, Kickstarter, Kondratiev cycle, liberal capitalism, light touch regulation, liquidity trap, Live Aid, low interest rates, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, Phillips curve, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Shenzhen special economic zone , Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, tail risk, Tax Reform Act of 1986, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

These authors also found that US state and municipal sponsors with weak balance sheets have increased their risk exposure as bond yields have fallen. They estimate that up to a third of funds' total risk was related to underfunding and low interest rates between 2002 and 2016. Also see Lu, L., Pritsker, M., Zlate, A., Anadu, K., and Bohn, J. (2019). Reach for yield by U.S. public pension funds. FRB Boston Risk and Policy Analysis Unit Paper No. RPA 19–2 [online]. Available at https://www.bostonfed.org/publications/risk-and-policy-analysis/2019/reach-for-yield-by-us-public-pension-funds.aspx 10 Lian, C., Ma, Y., and Wang, C. (2018). Low interest rates and risk taking: Evidence from individual investment decisions. The Review of Financial Studies, 32(6), 2107–2148. 11 See Antolin, Schich, and Yermi, (2011).

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The Review of Financial Studies, 32(6), 2107–2148. 11 See Antolin, Schich, and Yermi, (2011). The economic impact of low interest rates on pension funds and insurance companies. 12 See Belke, A. H. (2013). Impact of a low interest rate environment – Global liquidity spillovers and the search-for-yield. Ruhr Economic Paper No. 429. Chapter 11 The Impact of Technology on the Cycle In chapter 9, I discussed the changes to the cycle since the Great Recession of 2008 and the financial crisis that followed. This economic cycle has been weaker but longer than usual. Meanwhile, the equity market cycle has been stronger.

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It is the way in which economic and corporate fundamentals (expected growth, profit, inflation and interest rates, for example) are perceived by investors that is the crucial mix. Academic work has increasingly shown that risk-taking appetite has been a key channel through which supportive policy (for example, low interest rates) can affect cycles (Borio 2013).7 Willingness to take risk and periods of excessive caution (often after a period of weak returns) are factors that tend to amplify the impact of economic fundamentals on financial markets and contribute to cycles and repeated patterns. The emotions of fear and greed, of optimism and despair, and the power of crowd behaviour and consensus can transcend specific periods of time or events, supporting the tendency for patterns to be repeated in financial markets even under very different circumstances and conditions.

The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival by Charles Goodhart, Manoj Pradhan

asset-backed security, banks create money, Berlin Wall, bonus culture, Boris Johnson, Branko Milanovic, Brexit referendum, business cycle, capital controls, carbon tax, central bank independence, commodity super cycle, coronavirus, corporate governance, COVID-19, deglobalization, demographic dividend, demographic transition, Deng Xiaoping, en.wikipedia.org, Fall of the Berlin Wall, financial independence, financial repression, fixed income, full employment, gig economy, Gini coefficient, Greta Thunberg, housing crisis, income inequality, inflation targeting, interest rate swap, job automation, Kickstarter, long term incentive plan, longitudinal study, low interest rates, low skilled workers, manufacturing employment, Martin Wolf, mass immigration, middle-income trap, non-tariff barriers, offshore financial centre, oil shock, old age dependency ratio, open economy, paradox of thrift, Pearl River Delta, pension reform, Phillips curve, price stability, private sector deleveraging, quantitative easing, rent control, savings glut, secular stagnation, shareholder value, special economic zone, The Great Moderation, The Wealth of Nations by Adam Smith, total factor productivity, working poor, working-age population, yield curve, zero-sum game

Immigrants, taking up unskilled jobs Immigration Immigration, and productivity Immigration, causes political tension Immigration, impact on public finance Immigration, opposition to Immigration, public opposition to Immigration, targeted for care workers Immigration control Impossible trinity Incentives, of managers, misaligned Income inequality Income percentile Income share, of top percentiles Income taxation, progressive Index tracking, by asset managers India India, abundant supply of labour India, administration and reform India, administrative capital, weak India, airports India, facing decline in world labour supply India, growth decline in 2018/19 India, have the ability to replicate China’s ascent India, inflection of dependency ratio distant India, massive population, an attractive market India, new bankruptcy code (IBC) India, population of India’s growth India’s growth, private sector drives Indirect taxes Indonesia Industrialization Industrial Revolution Inequality Inequality, between countries Inequality, declining Inequality, falling Inequality, global Inequality, within countries Inequality, within economies Inequality of income Inequality of wealth Inflation Inflation, a monetary phenomenon Inflation, consequence of wars Inflation, low in Japan Inflation, reviving Inflation, stronger pressures for Inflation, surge of Inflation target, political pressure to modify Inflation, targets Inflation, unexpected Inflation accelerated Inflation and age-structure of population, linked Inflationary bias, major Inflation expectations, well anchored Inflation indexed bonds Inflation targeting Inflexion Inflexion point Informal care costs Information and communication technology Infrastructure Innovation Insiders Insiders, in Japan Insiders in Japan, having primary loyalty to company Insiders, in labour force Insolvency risks Institute for Fiscal Studies Institutional shareholders, when large can gain information and influence management Intangible investment Intellectual property rights Interest, paid on commercial bank reserves at central bank Interest rates Interest rates, exceptionally low Interest rates, extraordinarily low Interest rates, falling Interest rates, falling to historical lows Interest rates, trending down Interest rate swaps ‘Internal Labour Markets’ in Japan Internal migration International Monetary Fund (IMF) Inter-war period Inventories Inventory accumulation Investment Investment cycle, US Investment, ex ante (expected) Investment, in Japan, collapsing Investment, offshored to Asia Investment, reduced by shift of production via globalization Inward investment, into Japan Ipsos MORI Iran Iraq Ireland Islamic finance Italy J Jackson Hole Jackson Hole Conference Japan Japan, affected by China’s growth Japan, blueprint for ageing societies Japan, collapse of investment growth Japan, conventional analysis flawed Japan, corporate sector, delevering Japan, distinction between output per capita and output per worker Japan, dividend exemption policy Japan, experience of Japan, impressive record of productivity Japan, labour supply decline Japan, lessons of Japan, lost decade Japan, ‘miracle’ decades Japan, no sign of inflationary pressures Japan, owes debt to households Japan, revisionist history Japan, unit labour costs Japan, wage growth Japan, wage inflation in Japan corporate sector Japanese business, offshored production to China Japanese corporates, investing abroad rather than at home Japanese evolution, conventional interpretation Japanese labour market, particular features of Japan’s domestic investment Japan Spillover Report Japan’s Productivity Surge Jetsupphasuk, M.

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Although debt ratios have risen dramatically, there is not enough concern about leverage. That’s because debt service ratios have not risen along with debt ratios, thanks to an almost exact inverse correlation between rising debt ratios and declining interest rates. This is set out in Chapter 11. At the same time, these low interest rates have, naturally, enhanced asset prices. Sometimes the monetary policies of Central Banks have been accused of exacerbating inequality. But if Central Banks had not expanded, other policies being held constant, unemployment would have been worse, which normally hurts the poorest most. So Central Bank policies have, on balance, probably reduced income inequality.

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Let alone receiving protection against inflation on their deposits in the banking sector, the inability to participate in China’s growth through financial investment at home or abroad was a double-digit, inflation-adjusted penalty on households. Households had very few means of protecting themselves financially; buying houses was the investment of choice. Household leverage rose as a result. In other words, low interest rates were effectively a tax on households. As household savings were collected by banks and redirected towards SOEs, the tax on households effectively became a subsidy for SOEs with banks acting as a conduit. But why did households continue to put their money in banks rather than in other financial assets?

The Corona Crash: How the Pandemic Will Change Capitalism by Grace Blakeley

Anthropocene, asset-backed security, basic income, Big Tech, bond market vigilante , Bretton Woods, business cycle, capital controls, carbon tax, central bank independence, coronavirus, corporate governance, COVID-19, creative destruction, credit crunch, crony capitalism, debt deflation, decarbonisation, degrowth, deindustrialization, don't be evil, financial deregulation, Francis Fukuyama: the end of history, full employment, gig economy, global pandemic, global value chain, green new deal, Greenspan put, income inequality, informal economy, inverted yield curve, invisible hand, Jeff Bezos, liberal capitalism, light touch regulation, lockdown, low interest rates, Martin Wolf, Modern Monetary Theory, moral hazard, move fast and break things, Network effects, North Sea oil, Northern Rock, offshore financial centre, pensions crisis, Philip Mirowski, post-war consensus, price mechanism, quantitative easing, regulatory arbitrage, rent control, reshoring, Rishi Sunak, savings glut, secular stagnation, shareholder value, social distancing, structural adjustment programs, too big to fail, universal basic income, unorthodox policies, Washington Consensus, yield curve

Crossborder capital flows declined by 65 per cent between 2007 and 2016.9 Global growth was buoyed only by incredibly cheap credit and public investment undertaken by developmental states in the Global South. Central bankers were forced to keep the economy on life support through ultra-low interest rates and quantitative easing. But even with monetary policy so loose, private investment in fixed capital was not forthcoming. Instead, the main effect of low interest rates was to inflate a debt bubble three times the size of global GDP.10 The problem was clear: capitalism had lost all momentum. Many economists were predicting that a recession would hit the US, the UK and the Eurozone by 2022.11 The yield curve, which shows the returns on US Treasuries of different maturities, had inverted for the first time since 2007 – meaning that short-term government bonds had higher yields than long-term bonds.12 An inverted yield curve has augured every major recession for the last half century.

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The fiscal austerity and productivity crisis that kept wages excessively low made it harder for young people to access mortgages.44 Many expected never to retire, given the trends in wages and public policy, and even if they did, pension funds were struggling to meet their liabilities in the context of widespread economic stagnation.45 The financial crisis had generated a unique problem for the neoliberal settlement: why should young people support capitalism when they could never expect to own any capital? In economies fuelled by consumer spending, the decade after the 2008 financial crisis saw a deepening of the regime of privatised Keynesianism developed before it. Households had become so indebted that permanently low interest rates were required to avoid another crisis, yet permanently low interest rates only led to higher levels of indebtedness. This model is most familiar in Japan and Anglo-America, but over the last twelve years it has spread around the world.46 A familiar-looking set of challenges emerged in Australia, New Zealand and Canada before the pandemic – the combination of rising household debt, rising real estate prices and a burgeoning current account deficit.47 Household debt had also started to rise in the Global South, particularly in China.

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The interests of the dominant sections of British capital and the Conservative voter base were largely protected throughout this period by extremely loose monetary policy, which kept the cost of borrowing low. Businesses that otherwise might have gone under were able to stay afloat with cheap credit. Among consumers, those best able to access credit – those with high incomes and existing assets – were the main beneficiaries of low interest rates, which, along with changes to the rules around pensions withdrawals, made it easier for them to acquire more wealth, particularly housing wealth.41 By combining tight fiscal policy and loose monetary policy, the Conservatives achieved the remarkable feat of protecting the interests of British capital at a time of unique fragility while rebuilding an electoral coalition that has made it the largest party in every election since 2010.

Platform Capitalism by Nick Srnicek

"World Economic Forum" Davos, 3D printing, additive manufacturing, Airbnb, Amazon Mechanical Turk, Amazon Web Services, Big Tech, Californian Ideology, Capital in the Twenty-First Century by Thomas Piketty, cloud computing, collaborative economy, collective bargaining, data science, deindustrialization, deskilling, Didi Chuxing, digital capitalism, digital divide, disintermediation, driverless car, Ford Model T, future of work, gig economy, independent contractor, Infrastructure as a Service, Internet of things, Jean Tirole, Jeff Bezos, knowledge economy, knowledge worker, liquidity trap, low interest rates, low skilled workers, Lyft, Mark Zuckerberg, means of production, mittelstand, multi-sided market, natural language processing, Network effects, new economy, Oculus Rift, offshore financial centre, pattern recognition, platform as a service, quantitative easing, RFID, ride hailing / ride sharing, Robert Gordon, Salesforce, self-driving car, sharing economy, Shoshana Zuboff, Silicon Valley, Silicon Valley startup, software as a service, surveillance capitalism, TaskRabbit, the built environment, total factor productivity, two-sided market, Uber and Lyft, Uber for X, uber lyft, unconventional monetary instruments, unorthodox policies, vertical integration, warehouse robotics, Zipcar

In terms of funding, in 2014 Uber outpaced all the other service companies, taken together, by 39 per cent.85 In 2015 Uber, Airbnb, and Uber’s Chinese competitor, Didi Chuxing, combined to take 59 per cent of all the funding for on-demand start-ups.86 And, while the enthusiasm for new tech start-ups has reached a fever pitch, funding in 2015 ($59 billion) still paled in comparison to the highs of 2000 (nearly $100 billion).87 Where is the money coming from? Broadly speaking, it is surplus capital seeking higher rates of return in a low interest rate environment. The low interest rates have depressed the returns on traditional financial investments, forcing investors to seek out new avenues for yield. Rather than a finance boom or a housing boom, surplus capital today appears to be building a technology boom. Such is the level of compulsion that even non-traditional funding from hedge funds, mutual funds, and investment banks is playing a major role in the tech boom.

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Even the Economist is forced to admit that, since 2008, ‘if the share of domestic gross earnings paid in wages were to rise back to the average level of the 1990s, the profits of American firms would drop by a fifth’.91 An increasingly desperate surplus population has therefore provided a considerable supply of workers in low-wage, low-skill work. This group of exploitable workers has intersected with a vast amount of surplus capital set in a low interest rate world. Tax evasion, high corporate savings, and easy monetary policies have all combined, so that a large amount of capital seeks out returns in various ways. It is no surprise, then, that funding for tech start-ups has massively surged since 2010. Set in context, the lean platform economy ultimately appears as an outlet for surplus capital in an era of ultra-low interest rates and dire investment opportunities rather than the vanguard destined to revive capitalism. While lean platforms seem to be a short-lived phenomenon, the other examples set out in this chapter seem to point to an important shift in how capitalist firms operate.

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Likewise, the Bank of England dropped its primary interest rate from 5.0 per cent in October 2008 to 0.5 per cent by March 2009. October 2008 saw the crisis intensify, which led to an internationally coordinated interest rate cut by six major central banks. By 2016 monetary policymakers had dropped interest rates 637 times.23 This has continued through the postcrisis period and has established a low interest rate environment for the global economy – a key enabling condition for parts of today’s digital economy to arise. But, when the immediate threat of collapse was gone, governments were suddenly left with a massive bill. After decades of increasing government deficits, the 2008 crisis pushed a number of governments into a seemingly more precarious position.

War and Gold: A Five-Hundred-Year History of Empires, Adventures, and Debt by Kwasi Kwarteng

accounting loophole / creative accounting, Alan Greenspan, anti-communist, Asian financial crisis, asset-backed security, Atahualpa, balance sheet recession, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, California gold rush, capital controls, Carmen Reinhart, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, Deng Xiaoping, discovery of the americas, Etonian, eurozone crisis, fiat currency, financial engineering, financial innovation, fixed income, floating exchange rates, foreign exchange controls, Francisco Pizarro, full employment, German hyperinflation, Glass-Steagall Act, guns versus butter model, hiring and firing, income inequality, invisible hand, Isaac Newton, it's over 9,000, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, joint-stock limited liability company, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, land bank, liberal capitalism, low interest rates, market bubble, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, plutocrats, Ponzi scheme, price mechanism, quantitative easing, rolodex, Ronald Reagan, South Sea Bubble, subprime mortgage crisis, Suez canal 1869, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, The Wealth of Nations by Adam Smith, too big to fail, War on Poverty, Yom Kippur War

Early in his administration, Johnson told him that ‘he came from a part of the country that liked low interest rates’. That was how Johnson believed ‘interest rates should be’. Martin responded in a combative tone to a President known for his bullying manner. ‘I, too, like to see interest rates as low as conditions of inflation . . . permit them to be.’ The difference was just that Johnson ‘liked them to be low . . . all the time’. During his presidential interview Martin cited the traditional tenets of the conservative banker. ‘Mr President, I want to tell you how you can have low interest rates, and the only way you can have low interest rates,’ Martin began. He continued, it ‘is with budgetary responsibility, both in respect to Government spending and taxing, and a fiscal policy that makes that responsibility plain’.

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Hirst airily dismissed Central America, observing that it ‘is hardly possible to speak of “investment” in Central America’, since ‘bankruptcy and repudiation are the rule, payment of interest the exception’.12 The country which, of course, was seared on the consciousness of everybody in the City was Argentina, which had been the cause of the crisis in 1890, in which Barings had been laid low. The years preceding the actual failure of Barings were years of ‘extensive speculation’. This may have been due to the same low-interest-rate environment which had prevailed in 1825, when low interest rates on government debt had prompted investors to seek riskier assets to order to obtain a better return, the ‘search for yield’ often referred to by modern market analysts. Eighteen-eighty-eight was the year of the sensational crimes associated with the name ‘Jack the Ripper’.

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There is a well-known inverse relationship between interest rates and bond prices which follows the simple intuition that the greater the demand for a borrower’s debt, the less interest the borrower will have to pay; only needing to pay low interest rates and having a high price for your debt means the same thing. This is known as an ‘identity relationship’. The low-interest-rate environment created the climate in which there was a search for yield. Investors speculated in higher-interest-yielding securities because traditional investments, like US government bonds, gave such low returns. Historians could look back to the circumstances in 1825, when there was a bubble and panic.

The Great Divide: Unequal Societies and What We Can Do About Them by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, accounting loophole / creative accounting, affirmative action, Affordable Care Act / Obamacare, agricultural Revolution, Alan Greenspan, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Branko Milanovic, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, Carmen Reinhart, carried interest, classic study, clean water, collapse of Lehman Brothers, collective bargaining, company town, computer age, corporate governance, credit crunch, Credit Default Swap, deindustrialization, Detroit bankruptcy, discovery of DNA, Doha Development Round, everywhere but in the productivity statistics, Fall of the Berlin Wall, financial deregulation, financial innovation, full employment, gentrification, George Akerlof, ghettoisation, Gini coefficient, glass ceiling, Glass-Steagall Act, global macro, global supply chain, Home mortgage interest deduction, housing crisis, income inequality, income per capita, information asymmetry, job automation, Kenneth Rogoff, Kickstarter, labor-force participation, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market fundamentalism, mass incarceration, moral hazard, mortgage debt, mortgage tax deduction, new economy, obamacare, offshore financial centre, oil shale / tar sands, Paul Samuelson, plutocrats, purchasing power parity, quantitative easing, race to the bottom, rent-seeking, rising living standards, Robert Solow, Ronald Reagan, Savings and loan crisis, school vouchers, secular stagnation, Silicon Valley, Simon Kuznets, subprime mortgage crisis, The Chicago School, the payments system, Tim Cook: Apple, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, Turing machine, unpaid internship, upwardly mobile, urban renewal, urban sprawl, very high income, War on Poverty, Washington Consensus, We are the 99%, white flight, winner-take-all economy, working poor, working-age population

REBUTTING THE DEFENSE Alan Greenspan has tried to shift the blame for low interest rates to China, because of its high savings rate.2 Clearly, Greenspan’s defense is unpersuasive: The Fed had enough control, at least in the short run, to have raised interest rates in spite of China’s willingness to lend to America at a relatively low interest rate. Indeed, the Fed did just that in the middle of the decade, which contributed—predictably—to the popping of the housing bubble. Low interest rates did feed the bubble. But that is not the necessary consequence of low interest rates. Many countries yearn for low interest rates to help finance needed investment.

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Our financial markets failed to do that. Our regulatory authorities allowed the financial markets (including the banks) to use the abundance of funds in ways that were not socially productive. They allowed the low interest rates to feed a housing bubble. They had the tools to stop this. They didn’t use the tools that they had. If we are to blame low interest rates for “feeding” the frenzy, then we have to ask what induced the Fed to pursue low interest rates. It did so, in part, to maintain the strength of the economy, which was suffering from inadequate aggregate demand as a result of the collapse of the tech bubble. In that regard, Bush’s tax cut for the rich was perhaps pivotal.

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HOW WE GOT HERE The troubles we now face were caused largely by the combination of deregulation and low interest rates. After the collapse of the tech bubble, the economy needed a stimulus. But the Bush tax cuts didn’t provide much stimulus to the economy. This put the burden of keeping the economy going on the Fed, and it responded by flooding the economy with liquidity. Under normal circumstances, it’s fine to have money sloshing around in the system, since that helps the economy grow. But the economy had already overinvested, and so the extra money wasn’t put to productive use. Low interest rates and easy access to funds encouraged reckless lending, the infamous interest-only, no-down-payment, no-documentation (“liar”) subprime mortgages.

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, bond market vigilante , book value, Boris Johnson, British Empire, capital controls, carbon credits, carbon footprint, carbon tax, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, Crossrail, currency risk, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, Eyjafjallajökull, financial deregulation, financial engineering, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, high-speed rail, hiring and firing, inflation targeting, Irish property bubble, junk bonds, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, low interest rates, margin call, market clearing, megacity, megaproject, Mikhail Gorbachev, mini-job, mittelstand, Money creation, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, tail risk, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, WikiLeaks, working-age population, zero-sum game

His healthy £1100 monthly pension reset in February 2012 to take account of the record low interest rates on UK government borrowing. His pension was cut by £500 per month. This extreme case was as a result of a combination of factors, but there were many millions with some version of this story. ‘It’s dropped off the face of a cliff, it’s halved. It’s driven by low interest rates, QE and government policy,’ he told me in his kitchen on the day another £50 billion of QE was announced. I put to him the Bank of England argument that he had benefited from the fact that QE had kept the economy out of depression. ‘I don’t need low interest rates, because I don’t borrow any money.

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He traces the root cause of the problem to German reunification in 1990, when a 1:1 exchange rate was agreed for the West German and East German mark. This generated a very deep real-estate recession in Germany that lasted a decade. And then the euro arrived with super-low interest rates and a relaxed monetary policy, matching those of the USA. Eurozone interest rates were naturally focused on helping the depressed German economy, by far the biggest economy in the zone, without much heed being paid to the consequences elsewhere within the monetary union. The end result for countries such as Spain was very low interest rates for a very long time – so low, that taking the still-elevated level of inflation into account, such peripheral countries in fact experienced an extended period of negative interest rates.

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By the summer of 2011 it had already become apparent that Greece had no chance of repaying its debts in full. At this point, at the behest of the IMF, the man known as the Red Adair of sovereign debt crises flew into Athens. Lee Buchheit is an expert in helping nations renegotiate the money they owe their bankers. The theory emerging from Berlin was that the idiots who had lent Greece billions at low interest rates, presuming it was guaranteed by the German taxpayer, should lose at least part of their shirts. Why should German taxpayers bail out the private sector? The European Central Bank took a contrary view, partly because of the impact this would have on a fragile European banking system, and partly because of the risk of contagion to other vulnerable economies.

Fault Lines: How Hidden Fractures Still Threaten the World Economy by Raghuram Rajan

"World Economic Forum" Davos, accounting loophole / creative accounting, Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, assortative mating, bank run, barriers to entry, Bear Stearns, behavioural economics, Bernie Madoff, Bretton Woods, business climate, business cycle, carbon tax, Clayton Christensen, clean water, collapse of Lehman Brothers, collateralized debt obligation, colonial rule, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, currency manipulation / currency intervention, currency risk, diversification, Edward Glaeser, financial innovation, fixed income, floating exchange rates, full employment, Glass-Steagall Act, global supply chain, Goldman Sachs: Vampire Squid, Greenspan put, illegal immigration, implied volatility, income inequality, index fund, interest rate swap, Joseph Schumpeter, Kaizen: continuous improvement, Kenneth Rogoff, knowledge worker, labor-force participation, Long Term Capital Management, longitudinal study, low interest rates, machine readable, market bubble, Martin Wolf, medical malpractice, microcredit, money market fund, moral hazard, new economy, Northern Rock, offshore financial centre, open economy, Phillips curve, price stability, profit motive, proprietary trading, Real Time Gross Settlement, Richard Florida, Richard Thaler, risk tolerance, Robert Shiller, Ronald Reagan, Savings and loan crisis, school vouchers, seminal paper, short selling, sovereign wealth fund, tail risk, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, upwardly mobile, Vanguard fund, women in the workforce, World Values Survey

Moreover, it offers a one-way bet to bankers: plunge the system into trouble, and they will get a great deal on interest rates. Finally, it is not clear that ultralow nominal interest rates (around 0 percent) offer a significantly greater incentive for firms to invest than merely low interest rates (2 to 3 percent), but the difference in risk taking between ultralow and low interest rates could be enormous. More damaging still is the Fed’s ongoing attempt to prop up housing prices, both indirectly through low interest rates and directly by lending into the housing market. Although such support is justified as a way to allow the bubble to deflate slowly, it contributes to prolonged delays in adjustment in the housing market.

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Typically, such a move boosts corporate investment, but corporations had invested too much already during the dot-com boom and had little incentive to do more. Instead, the low interest rates prompted U.S. consumers to buy houses, which in turn raised house prices and led to a surge in housing investment. A significant portion of the additional demand came from segments of the population with low credit ratings or impaired credit histories—the so-called subprime and Alt-A segments—who now obtained access to credit that had hitherto been denied to them. Moreover, rising house prices gave subprime borrowers the ability to keep refinancing into low interest rate mortgages (thus avoiding default) even as they withdrew the home equity they had built up to buy more cars and TV sets.

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Moreover, when unemployment stays high, wage inflation, the primary concern of central bankers today, is unlikely, so the Fed feels justified in its policy of maintaining low interest rates. But there are consequences: one problem is that a variety of other markets, including those abroad, react to easy policy. For instance, prices of commodities such as oil and metals are likely to rise. And the prices of assets, such as houses and stocks and bonds, are also likely to inflate as investors escape low short-term interest rates to invest in anything that offers a decent return. More problematic still, the financial sector is also prone to take greater risks at such times. In the period 2003–2006, low interest rates added to the incentives already provided by government support for low-income housing and fueled an extraordinary housing boom as well as increasing indebtedness.

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

bank run, banks create money, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, market clearing, Martin Wolf, means of production, Money creation, money market fund, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, We are all Keynesians now, Y2K

This powerful tendency causes rich countries to get richer. For any society that prefers more goods and services to fewer goods and services, a high savings rate and low interest rates are certainly desirable, as these two will help build and maintain the capital stock that allows for high-productivity production processes. Yet, it is also clear that any attempt to force interest rates lower through market intervention is dangerous and ultimately futile. Low interest rates are of no use but, indeed, harmful if they do not correspond with the population’s time preference. If the government of a poor country managed to artificially lower the interest rates on the loan market with the aim of encouraging borrowing, investing, and the expansion of a wealth-enhancing capital stock, they would certainly not do their population any favors.

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., Innsbruck: Verlag der Wagnerschen Universitaets-Buchhandlung, 1909), pp. 426–453; for a short and excellent summary of these theories, see also Joerg Guido Huelsmann Mises: The Last Knight of Liberalism (Auburn, AL: Mises Institute, 2007), pp. 773–779; also: George Reisman, Capitalism, pp. 55–56. 5. Ludwig von Mises, Human Action, p. 526. 6. Ibid., pp. 526–537. 7. It would be more correct to say that low interest rates indicate that the public is happy to see resources allocated to uses where they are at greater distance to immediate consumption. This way, the statement includes investments in long lasting consumption goods, that only expend their use-value over a longer period. The obvious example is houses. Low interest rates encourage investment in productive capacity and in long lasting consumption goods. For ease of presentation, the analysis will focus on productive investment only.

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Only the state as monopolist of legalized force can sideline these uncooperative economic actors and ensure that resources continue to be allocated to where they created the preceding boom. And to the extent that this state intervention comes in the form of money printing and low interest rates, which it always does, many of these sidelined constituencies are likely to end up the future victims of false market signals themselves. Entrepreneurs will again be disoriented by low interest rates and scale their investment projects to unrealistic assumptions about the availability of voluntary savings. Many of their projects will inevitably end in disappointment, too. The effect of every intervention is necessarily that old dislocations persist and new ones are generated.

The End of Loser Liberalism: Making Markets Progressive by Dean Baker

Alan Greenspan, Asian financial crisis, banking crisis, Bear Stearns, Bernie Sanders, business cycle, collateralized debt obligation, collective bargaining, corporate governance, currency manipulation / currency intervention, Doha Development Round, financial innovation, full employment, Glass-Steagall Act, Home mortgage interest deduction, income inequality, inflation targeting, invisible hand, low interest rates, manufacturing employment, market clearing, market fundamentalism, medical residency, patent troll, pets.com, pirate software, price stability, public intellectual, quantitative easing, regulatory arbitrage, rent-seeking, Robert Shiller, Silicon Valley, too big to fail, transaction costs

With the weak bargaining position of workers in the 1990s, inflation simply was not a problem, and Greenspan was an astute enough observer of the economy (unlike most academic economists) to recognize this fact. Low interest rates have a positive but limited impact in increasing demand. They do lead to somewhat higher investment, but a large body of research shows that investment is not very responsive to lower interest rates. Low interest rates can lead to a fall in the dollar, which would boost net exports, but there were other factors keeping the dollar high during this period. In fact, the main effect of the low interest rates sustained through the late 1990s and the 2000s was to create the possibility for the bubble economy, the dynamics of which are explored in the next chapter.

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By creating limited liability corporations the government is allowing the individuals who form a corporation to take the property (or even lives) of others without compensation. This is not a free market. Federal Reserve monetary controls A government policy with tremendous influence over economic outcomes is the power of the Federal Reserve Board in determining the level of employment. The Fed can foster growth and employment with low interest rates and expansionary monetary policy. But it can and often does deliberately raise the unemployment rate by raising interest rates. Moreover, the Fed’s policy on holding assets like government bonds has an enormous impact on the government’s debt burden, which in turn has redistributive implications.

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This is a historically low real interest rate that is not consistent with a story of investors panicking over the ability of the U.S. government to repay its debt. When lenders worry about the solvency of their borrowers, they demand real interest rates of 6, 8, or even 10 percent. If investors are willing to hold vast amounts of government bonds at very low interest rates, it is clear that the people who actually have money on the line are not worried about the creditworthiness of the U.S. government, even if the politicians and the pundits are telling them that they should be. In short, the deficit is not the country’s problem right now. The problem is a lack of demand, pure and simple.

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

3D printing, Alan Greenspan, bank run, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Glass-Steagall Act, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, market bubble, market clearing, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, Phillips curve, Post-Keynesian economics, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, subprime mortgage crisis, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

The argument that the recession would have been much worse had there not been a sustained policy of keeping interest rates low is a counterfactual which is difficult to disprove. The low interest rates which have persisted have given households room to deleverage slowly rather than being forced into mortgage foreclosures, as has happened in earlier recessions. This may have eased the pain of holding negative equity. Many firms – Zombie firms, as they are called – have avoided bankruptcy thanks to the historically low interest rates. But then, at the same time, it has also postponed the required adjustment to correct the core problem of too much debt. This leads to the problem of a stock disequilibrium.

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Hayek and Myrdal took Wicksell’s idea of the gap between the natural rate and the market rate as their starting point. Hayek, in his lauded publication Prices and Production, based on a series of lectures given at the LSE in 1931, argued that the explanation for the Depression lay in banks lending money at low interest rates to prospective investors. Low rates made those projects feasible which had a distant payoff. These projects would enhance the productivity of the economy (somewhat like Schumpeter’s innovations, though Hayek did not use that analogy). But the economy was by assumption at full capacity, producing goods with old technology which had a shorter payoff.

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This leads to the projects with a long-run payoff – in this case the cattle yielding leaner beef – being abandoned, incomplete and with idle but unusable intermediate inputs and idle labor. It takes a long time for the older businesses to reabsorb the idle inputs and hence the recession is prolonged. The low interest rate has distorted the “price gradient” between short- and long-run goods and until that is restored there will be no return to full employment. Hayek’s construction of his argument was vitiated by his reliance on the Austrian capital theory, which proved an obstacle for most of his readers. But the idea that cheap credit causes unsustainable booms by encouraging “mal-investments” was well taken and has a contemporary resonance.

Capitalism 4.0: The Birth of a New Economy in the Aftermath of Crisis by Anatole Kaletsky

"World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Black Swan, bond market vigilante , bonus culture, Bretton Woods, BRICs, business cycle, buy and hold, Carmen Reinhart, classic study, cognitive dissonance, collapse of Lehman Brothers, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, currency manipulation / currency intervention, currency risk, David Ricardo: comparative advantage, deglobalization, Deng Xiaoping, eat what you kill, Edward Glaeser, electricity market, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, F. W. de Klerk, failed state, Fall of the Berlin Wall, financial deregulation, financial innovation, Financial Instability Hypothesis, floating exchange rates, foreign exchange controls, full employment, geopolitical risk, George Akerlof, global rebalancing, Goodhart's law, Great Leap Forward, Hyman Minsky, income inequality, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, Kickstarter, laissez-faire capitalism, long and variable lags, Long Term Capital Management, low interest rates, mandelbrot fractal, market design, market fundamentalism, Martin Wolf, military-industrial complex, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Nelson Mandela, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, paradox of thrift, Pareto efficiency, Paul Samuelson, Paul Volcker talking about ATMs, peak oil, pets.com, Ponzi scheme, post-industrial society, price stability, profit maximization, profit motive, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, rising living standards, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, seminal paper, shareholder value, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, statistical model, systems thinking, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, Vilfredo Pareto, Washington Consensus, zero-sum game

Very low interest rates are the best way to keep demand and supply in balance in an economy where savings are structurally high. Low interest rates, far more than Keynesian policies of deficit spending, were the key to the full employment achieved in the 1940s and 1950s, when Americans and Britons were saving roughly twice as much in relation to their incomes as they do today—and channeling these savings into the enormous investments of postwar reconstruction and the subsequent global boom. The same combination of high rates of savings and investment and structurally very low interest rates can be observed in China today.

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The United States and Britain experienced even longer periods of very low rates in the 1940s and 1950s. Throughout the twenty-five years from 1930 until 1955, U.S. and British Treasury bills never paid more than 2 percent, and for much of that time they yielded less than 1 percent. These low interest rates were not symptomatic of recession or deflation. In fact, the period of extremely low interest rates from 1930 to 1955 saw some of the fastest growth ever recorded around the world. This historical experience coincided with a world war, as well as with tight financial regulation and rationing of credit and does not prove that near-zero interest rates are desirable.

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Megatrends in Housing and Finance The most fundamental cause of property inflation all over the world from 1989 onward was the sustained decline in interest rates that resulted from low inflation, economic stability, and globalization. Because houses are mostly purchased with mortgages, interest rates are a powerful driver of property prices. Thus, the interest rate effects of the post-1989 megatrends were almost bound to create house-price booms all over the world, as households and banks gradually realized that low interest rates had become a permanent fact of life. But the interaction of rising house prices with deregulated finance had a further structural effect. As mentioned, the deregulation of finance meant that property investments could be readily turned into cash through the mortgage market. Homeowners who wanted to spend part of the capital they had invested in property no longer had to sell their homes and trade down or become renters.

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, balance sheet recession, bank run, barriers to entry, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, driverless car, Erik Brynjolfsson, eurozone crisis, fear index, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, geopolitical risk, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, low interest rates, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, Sheryl Sandberg, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

They can take you far and fast, but it’s a lucky few who get behind the wheel.”10 There is a second set of effects also worth mentioning. They involve the direct income effects on borrowers and lenders of persistent highly repressed interest rates, a key component of central banks’ unconventional approach. Clearly low interest rates—and, especially, artificially low interest rates—benefit large net borrowers and debtors at the expense of large net lenders and creditors. As such, the largest beneficiaries have tended to be governments, followed by nonfinancial companies. And the amounts are not immaterial. In a paper published at the end of 2013, researchers at the McKinsey Global Institute estimated $1.6 trillion of savings between 2007 and 2012 for governments in the Eurozone, United Kingdom, and United States, and $710 billion of savings for nonfinancial companies there.11 Households have done less well in those countries.

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Asset managers’ approach to business risk has also been shown to be a “strong motivator for institutional herding and rational bubble riding.”3 The Minsky financial instability hypothesis is also relevant here, reminding us that long periods of stability tend to encourage behaviors that then fuel instability. All these shifts have been turbocharged by the low interest rate environment. As Jaime Caruana, the general manager of the BIS, put it in a December 2014 speech in Abu Dhabi when commenting on the migration of risks to the nonbank sector: “It is likely, though not undisputed, that the search for yield in a low interest rate environment can contribute to the build-up of financial imbalances. This so-called risk-taking channel of monetary policy could be particularly relevant when economic agents anticipate that the low rate environment will persist or that monetary policy will be eased in the case of market turmoil—a kind of central banker’s put, if you will.”4 Together, these factors add an important element of pro-cyclicality to financial market behaviors, one that will likely fuel overshoots in both directions.

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This effort entailed careful wording permutations (“linguistic gymnastics”), including various specification of “thresholds” and policy time periods. They evolved from covering triggering economic developments (such as the 2013 reference to a specific level of unemployment) to calendar guidance (such as the phrase “considerable period of time” to signal a minimum six-month period of unchanged and abnormally low interest rates, and, in early 2015, “patient” to signal an interlude of at least two policy meetings before a change in policy stance). Finally, the Fed started publishing the “blue dots,” that is, the individual forecasts of members of its policy-making Federal Open Market Committee, or FOMC. As such, markets were regularly informed of the evolution of these members’ numerical and timing expectations for the evolution of interest rates, including “central tendencies” (though no specific names would be disclosed).

End the Fed by Ron Paul

affirmative action, Alan Greenspan, Bear Stearns, Bernie Madoff, Bernie Sanders, Bretton Woods, business cycle, crony capitalism, currency manipulation / currency intervention, fiat currency, Fractional reserve banking, guns versus butter model, hiring and firing, housing crisis, illegal immigration, invisible hand, Khyber Pass, Long Term Capital Management, low interest rates, market bubble, means of production, military-industrial complex, Money creation, moral hazard, Ponzi scheme, price mechanism, reserve currency, road to serfdom, Robert Gordon, Ronald Reagan, Savings and loan crisis, too big to fail, tulip mania, We are all Keynesians now, Y2K

And we ignored the fundamental flaw, and that is that not only have we had a subprime market in housing; the whole economic system is subprime, in that we have artificially low interest rates. And it wasn’t under your tenure in office; it’s been going on for ten years and longer and now we’re bearing the fruits of that policy. I mean, a 1 percent interest rate, overnight rates and that’s not a distortion? Instead of looking at these—the consumer prices, which nobody in this country really believes, we need to talk about the distortion, the malinvestment, the misdirection, the bad information that is gotten from artificially low interest rates. In many ways, some people refer to you as a price fixer, you know, because you fix interest rates.

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That blame will be placed on the current Federal Reserve Board, Congress, the President, the Treasury, but above all on Keynesian economic policy, the same philosophy that gave us the Great Depression of the 1930s. The economic downturn is the necessary correction of the artificial boom period produced by the central bank’s easy credit and artificially low interest rates. The duration itself is a consequence of the interference with the liquidation of debt and malinvestment and adjustment in prices of labor, goods, and services. It’s too much to ask politicians or bureaucrats not to centrally plan the economy, especially when the market is struggling to rectify all the mistakes that come as a consequence of the Federal Reserve Board policy.

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The current crisis, started in 2007 with the break in the housing mortgage market, is now in full swing and signifies the end of the fiat dollar reserve currency system. It is impossible to understand the current crisis without understanding the international monetary system, which has been dominated by our Federal Reserve. The core of the contemporary problem dates from 2001 when the Fed attempted to forestall recession through low interest rates. Actual interest rates fell well below historical averages and any monetary rule that the Fed claimed to be following. 2 Greenspan slashed the federal funds target from 6.5 percent in January 2001 down to 1 percent by June 2003. He held the rate at this level for a full year before ratcheting them up again to 5.25 percent in June of 2006, a move that popped the bubble he had earlier created.

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

Alan Greenspan, Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, behavioural economics, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, classic study, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial engineering, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Glass-Steagall Act, Great Leap Forward, Hyman Minsky, inflation targeting, invisible hand, Japanese asset price bubble, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, low interest rates, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, no-fly zone, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Solow, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

With interest rates so low, financial institutions and investors started to take on more and more risk, in an increasingly desperate hunt for higher returns, without adequate compensation. Investors were slow to adjust and reluctant to accept that, in a world of low interest rates and low inflation, returns on financial assets would also be at historically low levels. Greed and hubris also led them to demand higher returns – such behaviour became known as the ‘search for yield’. Central banks warned about the consequences of low interest rates, but by allowing the amount of money in the economy to expand rapidly did little to prevent the search for yield and increased risk-taking.27 In addition, financial institutions, such as pension funds and insurance companies, were coming under pressure to find ways of making their savings products more attractive and reduce the rising cost of pension provision in the face of falling real interest rates.

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In countries with trade surpluses, such as China and Germany, spending was too low relative to likely future incomes. And the imbalance between countries – large trade surpluses and deficits – continued. All this reinforced the determination of central banks to maintain extraordinarily low interest rates. Monetary stimulus via low interest rates works largely by giving incentives to bring forward spending from the future to the present. But this is a short-term effect. After a time, tomorrow becomes today. Then we have to repeat the exercise and bring forward spending from the new tomorrow to the new today. As time passes, we will be digging larger and larger holes in future demand.

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And economic growth requires saving and investment to add to the stock of productive capital and so increase the potential output of the economy in the future. In a healthy growing economy all three rates – the interest rate on saving, the rate of return on investment, and the rate of growth – are well above zero. Today, however, we are stuck with extraordinarily low interest rates, which discourage saving – the source of future demand – and, if maintained indefinitely, will pull down rates of return on investment, diverting resources into unprofitable projects. Both effects will drag down future growth rates. We are already some way down that road. It seems that our market economy today is not providing an effective link between the present and the future.

The Lords of Easy Money: How the Federal Reserve Broke the American Economy by Christopher Leonard

2021 United States Capitol attack, Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, collateralized debt obligation, coronavirus, corporate governance, COVID-19, Donald Trump, Dutch auction, financial engineering, financial innovation, fixed income, Ford Model T, forensic accounting, forward guidance, full employment, glass ceiling, Glass-Steagall Act, global reserve currency, Greenspan put, hydraulic fracturing, income inequality, inflation targeting, Internet Archive, inverted yield curve, junk bonds, lockdown, long and variable lags, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, Money creation, mortgage debt, new economy, obamacare, pets.com, power law, proprietary trading, quantitative easing, reserve currency, risk tolerance, Robinhood: mobile stock trading app, Ronald Reagan, Silicon Valley, stock buybacks, too big to fail, yield curve

Hawks hated inflation, and therefore wanted to keep interest rates higher and limit the Fed’s reach. Doves were less afraid of inflation, and therefore more willing to print lots of money. It is unclear exactly who started the hawk-and-dove motif inside the Fed, but it stuck. Janet Yellen, for example, was often described as dovish because she supported low interest rates and more intervention. Tom Hoenig and Richard Fisher, in contrast, were described as hawkish because they sought to raise interest rates and limit the Fed’s reach into markets. Needless to say, among the public, the doves got better press. Who could take issue with a dove? The theory seemed to be that doves were compassionate and wanted to help the economy and working people, while hawks were harsh and severe and wanted to stop the Fed from helping people.

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He said something that most Fed officials never acknowledged, at least in public. The central bank hadn’t just rescued the economy from the crash of 2008. The Fed bore a great deal of responsibility for it. “The financial and economic shocks we’ve experienced did not just come out of nowhere,” he said. “They followed years of low interest rates, high and increasing leverage, and overly lax financial supervision, as prescribed by both Democratic and Republican administrations.” He was explaining his dissent at that meeting, and warning that the Fed might be making the same mistakes that led to 2008. “The continued use of zero-interest rate will only add the risk to the longer-run outlook,” he said.

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“I would be optimistic in the results of these actions,” he said. “I think the best indications that I have now in an uncertain world is that it can be accomplished reasonably smoothly.” Volcker was wrong on this point. Nothing went reasonably smoothly. The American economic ecosystem had settled itself around the North Star of low interest rates. Volcker moved the polestar overnight, and everything reoriented. A decade’s worth of resource allocation would change and everything would shift back in from the edge of the yield curve, away from risk. The change was wrenching. It played out very quickly in the Kansas City Federal Reserve’s district.

Global Financial Crisis by Noah Berlatsky

"World Economic Forum" Davos, accounting loophole / creative accounting, Alan Greenspan, asset-backed security, banking crisis, Bear Stearns, Bretton Woods, capital controls, Celtic Tiger, centre right, circulation of elites, collapse of Lehman Brothers, collateralized debt obligation, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, Doha Development Round, energy security, eurozone crisis, financial innovation, Food sovereignty, George Akerlof, Glass-Steagall Act, God and Mammon, Gordon Gekko, housing crisis, illegal immigration, income inequality, low interest rates, market bubble, market fundamentalism, mass immigration, Money creation, moral hazard, new economy, Northern Rock, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, social contagion, South China Sea, structural adjustment programs, subprime mortgage crisis, too big to fail, trade liberalization, transfer pricing, working poor

The crisis originated in the United States. During the 2000s, Americans began to invest heavily in houses. As more and more people purchased houses with borrowed money, the prices of houses rose and rose. This trend was partially fueled by low interest rates, which made it cheaper to borrow money. Thus, Dean Baker, writing in Real-World Economics Review in 2008, noted that “extraordinarily low interest rates accelerated the run-up in house prices.” Price inflation of this sort is often referred to as a “bubble.” William Watson, writing in the Gazette in 2006, said that “A bubble . . . is a run-up in prices going beyond anything that reasonable economic calculation can justify.”

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The Weakness of Banking Regulations Caused the Crisis Vince Cable Some British banks have grown too big to fail, and perhaps too big for regulators to handle. Yet they want freedom from regulation and freedom to persue high risk investments. But the British taxpayer should not be responsible for financial risks taken outside the nation’s borders. 42 5. Low Interest Rates Caused the Crisis Tito Boeri and Luigi Guiso 53 The housing crisis was fueled by the actions of the chairman of the Federal Reserve, Alan Greenspan, who kept interest rates low. These circumstances encouraged people to borrow too much to pay for homes they could not afford. 6. Abandoning the Gold Standard Caused the Crisis Dominic Lawson 59 If currency is not backed by gold, politicians and bankers will simply print money, resulting in inflation and a cycle of boom and bust.

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In addition, there will have to be a major structural adjustment out of traded financial services into other services and manufacturing. 51 The Global Financial Crisis Unfortunately a weak, demoralised, delegitimised Labour government is in no shape to face this challenge, and a Tory government pumped up by City donations would have no need or inclination to take it on. The opportunity for reform and renewal is passing us by and, if it does, financial crises will return with even greater ferocity in years to come. 52 5 Viewpoint Low Interest Rates Caused the Crisis Tito Boeri and Luigi Guiso Tito Boeri is a professor of economics at Bocconi University in Milan, Italy. Luigi Guiso is a professor of economics at the European University Institute in Florence, Italy. In the following viewpoint, the authors argue that Alan Greenspan, former chairman of the Federal Reserve, made the wrong decision in drastically lowering interest rates in response to the recession of 2001.

Angrynomics by Eric Lonergan, Mark Blyth

AlphaGo, Amazon Mechanical Turk, anti-communist, Asian financial crisis, basic income, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big Tech, bitcoin, blockchain, Branko Milanovic, Brexit referendum, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collective bargaining, COVID-19, credit crunch, cryptocurrency, decarbonisation, deindustrialization, diversified portfolio, Donald Trump, Erik Brynjolfsson, Extinction Rebellion, fake news, full employment, gig economy, green new deal, Greta Thunberg, hiring and firing, Hyman Minsky, income inequality, income per capita, Jeremy Corbyn, job automation, labour market flexibility, liberal capitalism, lockdown, low interest rates, market clearing, Martin Wolf, Modern Monetary Theory, precariat, price stability, quantitative easing, Ronald Reagan, secular stagnation, self-driving car, Skype, smart grid, sovereign wealth fund, spectrum auction, The Future of Employment, The Great Moderation, The Spirit Level, universal basic income

AfD (Alternative für Deutschland) 114 Afghanistan 6 aging population 10, 13, 14, 95, 106–11 and consumption 109–10 and government bonds 138–9, 152 and inequality 56–7, 58, 107–10 and inter-generational transfer 106–107 and poverty 57, 107 as stressor 57, 91, 106, 110, 111, 116, 118 and technological change 90, 106, 122 AIG 85, 124 Amazon 96, 98, 104, 142, 143–4 Anderson, Elizabeth 176 anger 2–3, 7–9, 10, 11–12, 159, 161 misplaced 13 as opportunity 16 and play 153 private see private anger public see public anger reducing see calming strategies anxiety/stress 9, 13–14, 50, 53, 55–6, 88, 118, 161 and cognitive effort 89–90, 91 and job insecurity 95–6 three causes of 91 and uncertainty see uncertainty Apple 96, 142, 143 Aristotle 59, 153 artificial intelligence (AI) 14, 102–106, 142 Asian financial crisis (1998) 77, 140 asset ownership 130–31, 133, 136, 140–41 Atkinson, Tony 80, 173 austerity policies 2–3, 6, 15, 34–5, 41, 48, 84 and euro crisis 44–5 and low interest rates 135 Australia 125 Austria 3 baby boomers 107–108, 110, 111, 175 Bank of England 84, 103, 120, 145, 148 TFS scheme 149–50, 166 banks 1, 6, 15, 33–5, 42, 44, 48, 145–50 and capital/liquidity ratios 126 and direct support for consumption 145–8 and dual interest rates 149–50 and economic models 3, 4 failure of 119–21, 122 and helicopter money 131, 146 independence of 78, 79 and leverage see financial leverage and problem of low interest rates 120–21, 122, 131, 135 regulations on 125–6, 127, 129, 132 restrictions on 72, 77 see also financial crisis (2008) Beck, Aaron 171–2 Bernanke, Ben 6, 148 Biden, Joe 106 billionaires 4 Bitcoin 102, 103 Blackrock 165 blockchain technology 14, 103 Blyth, Mark 172, 175 bonuses 81, 85, 124 Brazil 11, 127 Brexit 4, 7, 11, 22, 24, 37, 38, 55, 117, 154 and austerity policies 41, 45 and immigration 111, 112, 114, 116 and job insecurity 100–101 Brill, Stephen 175 Britain (UK) 3, 38, 119, 155, 162, 164 aging population in 107, 110 austerity policies in 41 dual interest rates in 149–50 and EU see Brexit fear of immigration in 27 gig economy in 100 and government bonds 135, 140 government spending in 71 immigration in 111, 112, 114, 115–16 inequality in 6 interest rates in 145 nationalism in 23 Thatcherism in 75, 76 Brittan, Samuel 151 Brynjolfsson, Erik 173 budget deficits 71, 75 Buffett, Warren 130 calming strategies 12, 15, 118, 122, 123–57 and data dividend see data dividend and direct support for consumption 145–8 and dual interest rates 149–50 and economic diversity 153–6 and inequality see inequality, strategies to reduce and national wealth fund see NWF and regulations on banks 125–6, 127, 129, 132 and sustainable investment see sustainable investment Canada 125 cancer 53, 87, 88, 106 capital 4 cost of 137, 139, 153 and dispersion 97–98 as “fictitious” commodity 65 formation, rate of 108 global 40, 42, 43, 49, 50, 58 and labour 50, 60, 69, 72 and neoliberalism 75, 76, 77, 79 protection of, following financial crisis 85 versus capital 97, 98 Capital in the Twenty-First Century (Piketty) 49, 108–10 capital/liquidity ratios 126 capitalism 64–5 and commodities 65–6 capitalism as computer 11, 61–72 fixing 124–25 hardware of 62–3, 117 software of 63–4, 68–71 and unemployment/inequality 66–7 version 1.0 68–9 version 1.0 crash 64, 66, 67, 71, 73, 83, 118 version 2.0 69–73, 74, 75, 76, 116 version 2.0 crash 70–71, 73, 83–4, 118 version 3.0 74–80, 98–9, 117, 125, 140–41 version 3.0 crash 116 car industry 100–101 caring industry 104 Case, Anne 54, 176 centrism, political 38, 48, 118–19, 121, 160–61, 162 CEOs (chief executive officers) 4 Chamberlain, Joseph 66 Chile 3 China 42, 63, 64, 78, 93, 137, 151, 156 Citibank 81, 82 cities 55, 56 climate change 104, 111, 121, 129, 131, 153, 159–60 and investment see sustainable investment Clinton, Hillary 160 Coggan, Philip 172 cognitive effort 89–90, 91 Cold War 28, 48 ending/legacy of 5, 23, 26, 29, 30, 37, 116 communism 68, 71 competition/competitiveness 47, 65, 94, 95, 111, 116, 125 and technology 105 see also product market competition computer analogy see capitalism as computer constrained volatility 85 consumption, direct support for 145–8, 150–51, 160 consumption, distribution of 52–3, 58 Corbyn, Jeremy 119 corporations 6, 20, 57 and competition 95, 96 and data dividend see data dividend corruption 8, 29, 61, 130 Covid-19 163 culture 160 Czech Republic 146, 147, 155 data dividend 141–4, 160, 162 and monopolies 142, 143, 144 and privacy 141–2 and property rights 142–3 de-unionization 50, 95, 99 Deaton, Angus 54, 176 debt 75, 84, 120, 132, 145, 150 and demography 109, 111, 131 government 136–7, 151, 152 net 136 deflation 65, 69, 120, 128, 144, 148 demand management 44–5, 47, 126–7 democracy 16, 25, 29, 39, 40, 104, 117, 130 and markets 68 demography see aging population Denmark 64, 164 depression see recession deregulation 28, 40, 48, 50, 58, 75 and inflation 127 as micro-stressor 94, 96, 99, 101, 118 DGSE (dynamic stochastic general equilibrium) models 3–4 Doughnut Economics (Raworth) 131–2, 165 dual interest rates 131–2, 149–50, 174 Dublin (Ireland) 17–18 economic change 9–10, 29, 43, 153 see also fiscal reform; recession economic growth 2, 6, 41, 69, 71, 86 and demography 108–10 and immigration 116 and inequality 76, 79–80 and quality of jobs/wages 46, 47, 85 economic ideology 28 economics 12, 54–5 shortcomings of models 3–5, 6, 7 education 24, 53, 58, 135, 141 tuition fees/student loans 107, 111 electoral politics 5–6, 104 and demographics 107, 110 and tribalism 13, 22, 24–7, 29, 30, 31 electric vehicles 153 elites 2–3, 5, 6, 7, 9, 37 in cities 55, 56 and corruption 8, 29 and ethical norms 20 and financial crisis 43–4 manipulation of tribal identity by 22, 24, 61, 116, 161 policy failures of 48–9 Engbom, Niklas 175–6 environmental degradation 29, 161 see also climate change environmental and social governance 168 ethical norms 20 euro crisis 7, 37, 44, 77, 144 Europe 34, 42, 137, 140 inequality in 41, 53, 56, 58 migrant crisis in 7 tribalism in 30 European Central Bank (ECB) 34, 84, 146, 155, 164–5 TLTRO programme 147–8, 166 European Union (EU) 22, 33, 34–5, 37, 43, 119 austerity policies in 2, 36, 48 and financial crisis (2008) 82 micro-stressors in 47–8 and nationalism 154–6 and neoliberalism 76, 77 unemployment in 44–5 see also Brexit eurozone 45, 65, 83, 148, 151, 155 exchange rates 72, 134 Extinction Rebellion 8, 131–2 Facebook 27, 96, 98, 142, 143 fake news 26 Farage, Nigel 17, 161 Farmer, Roger 174 fascism 45–6, 66, 67–8, 71 fear 16, 17, 94, 113, 117, 150, 161 and media 26, 27 and politics 7, 45 financial crisis (2008) 1–2, 6, 26, 29, 30, 39, 48, 127, 163 and automation 102–103 and bail-out of banks 84 fragility of recovery from 46, 85, 89, 121 further reading on 172–3 and globalized financial system 84 and growth of populism 85 and inequality 79–80 and low interest rates 135 and regulation of banks 129 financial leverage 72, 81–3, 85, 99, 126, 157 and credit crunch 83 and interest rates 81–2 financial market deregulation 77 fiscal councils 150–51 fiscal reform 15, 150–53, 162 Fischer, Stan 148, 165 Florence (Italy) 87–8 foodbanks 6, 53 football fans 8, 19, 56 France 2, 3, 20, 55, 56, 71, 101, 154, 156 and NWF 135 Franklin, Benjamin 87 free markets 30, 69, 118 Friedman, Milton 118 full employment 40, 47, 60, 66, 71–2, 79, 85, 175 and inflation 73–4, 76 without inflation 121, 125, 126 future 101–102, 111 Garcia family, parable of 33–5, 43 Gates, Bill 130 GDP (gross domestic product) 5, 44, 76, 79, 100–101, 106, 151, 152 and NWF 135, 141 Germany 3, 11, 34, 38, 42, 62–3, 66, 151, 154, 156, 167 and migrant crisis 111, 113–14 and NWF 135 Gibley, Bruce Cannon 175 gig economy 94, 98, 99–100 global economy 12, 39–40, 50, 53, 58, 133 and nationalism 154 and neoliberalism 77 globalization 5, 39, 41, 42–3, 48, 77, 117 hyper- 40 and inequality 80 and inflation 127 and insecurity 101 and labour market 42, 43 and nationalism 154 Gold Standard 65, 67 Google 96, 98, 104, 142 government bonds 72, 131, 133, 135, 137, 138–9, 152 as insurance policies 139, 140 government borrowing 134–5, 137, 152–3 and cost of capital 137, 139, 153 and low inflation 128, 138–40, 150 and NWF 136–137, 138–40 Great Depression 40, 44, 66, 69, 120 Great Moderation 6, 120 Greece 35, 38, 44, 45, 106–07, 110, 144 green revolution see sustainable investment gross domestic product see GDP Guilluy, Christophe 55 Gulf States 133, 134 Hayek, Friedrich 118 healthcare 47, 53–4, 58, 123–4, 135, 139 and access to data 141–2 and NWF 141 and uncertainty/probability 92 hedge fund managers 4 helicopter money 131, 146, 166 Hildebrand, Philipp 165 Hong Kong 2–3, 140, 164 Hopkin, Jonathan 172 Hopkins, Ellen 123 housing 71, 113, 114, 135 Hungary 11, 23, 30 Iceland 1–2, 8, 20 immigration 5, 7, 26, 27, 111–17, 164 economic effects of 115–16 and housing/training 113, 114 and income distribution 112, 113, 114–15 and manipulation by media/politicians 111, 115 as stressor 113, 115 and technological change 106 and tribalism 95, 111, 112, 113 income see wages income distribution 43, 50, 51 and Keynesian economics 71 and neoliberalism 80, 81 independent fiscal councils 150–51 India 23, 127 individualism 29, 154 Indonesia 3 inequality 3, 4, 6, 15, 29, 30, 40–41, 43, 49–57, 58, 61, 79, 118 difficulties in measuring 50–53 and distribution of income/consumption 53–4 and financial crisis (2008) 79–80, 83, 85 further reading on 173, 176 intergenerational 56–7, 107–10 and populism 54–5 and uncertainty 49–50 inequality, strategies to reduce 121–2, 129–31, 132, 162 asset ownership 130–31, 133, 136, 140–41 and data dividend 141–4 National Wealth Fund see NWF optimal/effective 132–3 and universal basic income (UBI) 141, 144 wealth tax 130, 132 inflation 5, 40, 51–2, 53, 69 death of 126, 128 and full employment 73–4, 76, 121, 122, 125 and global financial markets 78 and interest rates 75, 81–2, 120 low see low inflation and oil prices 96–7 and printing money 78, 128, 145 and raising taxes 129 and recession 144–5 and regulation of banks 125–6, 127, 132 and stagflation 40, 74, 120, 128 inheritance 132, 133, 160 national 136 innovation see technological change insurance industry 93 interest rates 15, 33–4, 75, 81–2, 165–6 dual, and sustainable investment 131–2, 149–50 low, problem of 120–21, 122, 131, 132, 135, 146–8, 152 negative, problem of 15, 148, 149, 150 and spending 147 internet 25 investment spending 40, 60, 69 and future expectations 103 and global capital flows 77–8 and inflation 74 public sector 67, 70–71 sustainable see sustainable investment IRA (Irish Republican Army) 17 Iraq 6 Ireland 17–18, 23, 24 Islam 27 Italy 35, 37, 38, 39, 44, 66, 71, 87–8, 144, 156, 167 aging population in 110 poverty in 47 tribalism in 45–6 Japan 26, 84, 110, 137, 140, 148 job security/insecurity 34, 50, 56, 61, 94, 95–6, 100–101 and technology 102 Kalecki, Michał 60–61, 73–5, 120, 121, 127 Keynes, John Maynard/Keynesian economics 60, 66–7, 68–70, 92, 103, 118, 127, 151 General Theory of Employment, Interest and Money 66, 175 and inflation 67, 69, 128 labour market 35, 40–41, 42, 43, 44 and automation 102–106 deregulation 50, 95, 99, 122, 127 dispersion in 98–9 and full employment see full employment and immigration 115–16 in Keynesian system 71–2 and labour as commodity 59, 60, 65–6, 73, 85 and protectionism 59–61, 66 and secular stability 125, 126 and training 62–3 see also wages Lagarde, Christine 167 Lerner, Abba 118 libertarianism 63 Lonergan, Eric 174 Los Indignatios 85 low inflation 79, 134, 157 and full employment/secular stability 126 and government spending/borrowing 128, 138–40, 150, 152 and recession 144–5, 150, 162 Luce, Edward 164 Ludd, Ned/Luddites 102 machine learning (MI) 102–104 see also artificial intelligence macroeconomics 9, 13, 47, 89 failure of 119–20 and uncertainty 94 Macron, Emmanuel 162 Mair, Peter 172 markets 30, 59–61, 62, 66–7 and democracy 68 and quantity theory of money 68–9 see also labour market Mauss, Marcel 21–2 Mazzucato, Mariana 156 media 11, 43, 47 and technological change 98, 102–103, 105 and tribalism 24–5, 26–7, 29, 31, 61, 116, 161 Merkel, Angela 114 Mexico 63 micro-stressors 47–8, 53, 84, 91 and aging populations see aging populations and change 94 and fourth industrial revolution 94 and immigration see immigration microeconomics 9, 13–14, 160 migrant crisis 7, 111 Milanovic, Branko 52, 80 minimal group paradigm 21 Minsky, Hyman 128 mobile phones 53, 96, 97, 142 modern monetary theory (MMT) 118, 128–9 money, printing 78, 128, 145 monopolies 142, 143, 144 moral outrage 8, 13, 15, 35–6, 57–8, 117, 130, 161 and inequality see inequality as rational 36 and tribalism, compared 19, 20, 22, 29, 30–31, 36 triggers for 36 mortgages 34, 35, 38, 82, 111, 137, 145 nation state 39–40, 48, 50, 117, 119 national wealth fund see NWF nationalism 5, 11, 23, 29, 31, 39, 41, 116, 119 as positive 153–6 neoliberalism 4, 28–9, 37, 75–8, 122 and global capital flows 77–8 and inequality 51, 52, 53 NHS (National Health Service) 107 Nissan 100–101 Nixon, Richard 26 Northern Ireland 17–18, 23, 24 Norway 133, 134 Nussbaum, Martha 16, 35, 36 NWF (national wealth fund) 15, 132, 133–41, 143, 152, 168 and aging population 138–9 and asset ownership 133, 136, 140–41 and government borrowing/debt 136–7, 138–40 and growth of global stock market 137–8 and individual trust funds 135 and negative interest rates 134–5, 136 and risk 136, 137–8 sovereign 133–4 and trade surplus 134 Obama, Barack 29, 46 oil prices 96–7 Orban, Viktor 23, 30, 161 “Panama Papers” 2, 20 pensions 57, 63, 106–107, 138 perpetual loans 147–8 Philadelphia Eagles 20 Pickett, Kate 168 Piketty, Thomas 49, 52, 80, 108–10 play 153 Poland 11, 30 Polanyi, Karl 59–61, 64–5, 67, 175 political centrism 38, 48, 118–19, 121, 160–61, 162 political disengagement 29 political economy 12, 13 political identity 22–3, 29–30, 37, 48, 116, 117 further reading on 172 political parties 5–6, 7, 28 politics, new 15–16, 58, 160 populism 11, 27, 39 and financial crisis 86 three genres of 54–5 Portugal 35, 38, 44, 144 poverty 47, 67, 72, 80, 115 and demographics 57, 107 power 4, 48 powerlessness 9, 41 price stability 76, 79, 128, 147 private anger 7, 8, 9, 10, 13–14, 36, 117 and cognitive effort 89–90, 91 see also anxiety/stress private sector debt 131, 145 and government borrowing 134–5, 137, 138–40 investment 67, 70, 149–50, 151 liability in financial crisis 85, 127 privatization 28, 40, 96, 107 probability 91–3 product market competition 94, 95–8, 116, 125 and deregulation/privatization 96–7 and dispersion 97, 98–9 intensification of 96, 101 and technological change 96, 97–8, 99 productivity 40 and technological innovation 9, 10, 15, 102, 104–105 and wages 71, 72, 74, 76 profit margins 98, 101, 105, 143 property prices 34, 38 property rights 142, 143, 154 protectionism 59–60, 61, 66 public anger 7, 8–9, 10, 89, 98, 117–18 economic causes of 13 see also moral outrage; tribalism/tribal anger public housing 71, 113, 114 public sector investment 67, 70–71 public services 24, 115, 116 quantitative easing (QE) 146–7, 167 quantity theory of money 68–9, 78 racism 26, 54, 55, 115 Raworth, Kate 131–2, 173 Reagan, Ronald 26, 75, 118 recession 15, 29, 30, 34–5, 44, 49, 55, 58, 84, 152, 153 and dual interest rates 150 and interest rates 75, 120–21 and investment spending 60, 70, 71 and low inflation 144–5, 150, 162 and MMT 128–9 and stock markets 139, 140 see also euro crisis referenda 37 regeneration, economic 132 regional development 15, 115, 116, 149, 153, 156 Renzi, Matteo 37 risk 91–2, 127, 136, 137, 153 Roberts, Carys 174 robotics see artificial intelligence Rodrik, Dani 4, 39, 40 Russia 11, 41 Sahm, Claudia 150–51 Salvo, Francesca 87–8 Sandbu, Martin 174 Sanders, Bernie 128, 164 savings 93 scale economies 98, 99, 142 Scottish nationalism 7, 119 secular stability 125, 126, 127 service-based economy 52 Singapore 133, 134, 162 SMEs (small- and medium-sized enterprises) 164–5, 166 social democracy 63–4 social media 26, 27, 90, 98 Solow growth model 109 sovereign wealth funds 133–4 sovereignty 39 Spain 33–5, 38, 44, 45, 144 protests against austerity in 85 spending increasing 145, 147, 151 investment 40, 60 power 145 public sector 67, 70–71, 128, 151 restrictions on 41, 44, 149 sports fans 8, 19–20, 21, 25 sports industry 99 stagflation 40, 74, 120, 128 status-injury 36, 54 stock markets 63, 137–8, 139–40 stress see anxiety/stress strikes 73, 74 student loans 111 supply–demand 60, 96, 104 sustainable investment 131–2, 149–50, 152, 153 Sweden 63–4, 72–3 Syria 111, 113 Tavris, Carol 36, 171 taxes 40, 50, 57, 108, 116, 124 cuts in 34, 44, 111, 151 dodging 2, 6, 20, 132–3, 143 political opposition to 129, 130, 132, 133 raising 152 on wealth 129, 130, 132, 140 Tea Party movement 85 technocracy 37, 42–3, 48, 160–61 technological change 29, 58, 96, 109 and aging population 90, 106, 122 and competition 96, 97–8 and dispersion of returns 97 and fourth industrial revolution 94 further reading on 173–4 and inequality 50, 53 and labour market 102–104 and media 24–5, 27 as micro-stressor 88, 91, 94, 96, 97–8, 99, 101–102, 105, 116, 118 and productivity 9, 10, 15, 105, 122 and rate of diffusion 14 and uncertainty 101–102 telecommunications 96, 97, 142 terrorism 17, 18, 27 Thatcher, Margaret 75, 76, 118, 131 Thunberg, Greta 150 TLTRO programme (European Central Bank) 147–8 trade 21–2, 26, 42, 78, 154 and neoliberalism 78 trade surplus 134 trade unions 28, 42, 63, 66, 72, 73, 76, 79 trade wars 21–2, 26 training 62–3, 93, 113, 114, 141 tribalism/tribal anger 8–9, 11, 18–31, 41, 45–6, 117 and central/eastern Europe 23, 30 destructiveness of 24 and ethical norms 20 and fascism 68 and financial crisis 86, 89 and global politics 21–2, 26, 28–9 and immigration 95, 111, 112, 113 manipulation by politicians/media of 13, 22, 24–7, 29, 30, 31, 35, 61, 95, 116, 161 and minimal group paradigm 21 and moral outrage, compared 19, 20, 22, 29, 30–31, 36 and political identity 22–23, 29–30 social function of 20–21 and sport fans 19–20, 25 see also nationalism trickling down/up 79–80 trilemma, political 39 trucking industry 103 Trump, Donald 11, 22, 23, 25–6, 27, 33, 38, 119, 126, 161 and deregulation 129 election of 41–2, 54 tax cuts of 11 Turkey 11 universal basic income (UBI) 141, 144 Ukraine 11 uncertainty 9–10, 43, 49–50, 65, 91–4, 99, 118, 161 and aging populations see aging populations and emerging technologies 102–103, 106 and healthcare 92 and immigration see immigration reducing 93–4 and risk/probability 91–3 and skills development 93 unemployment 2, 30, 34, 44–5, 48, 58, 66, 72, 84, 167 and inflation/interest rates 74, 75, 125 unfairness 25, 36, 105 United States (US) 3, 38, 93, 118, 129, 164 aging population in 107–108, 110, 111 automation in 103, 104–105 financial crisis in (2008) 82–3, 84, 85 gig economy in 100 healthcare in 47–8, 53–4, 58, 106, 123–4 independent fiscal councils in 150–51 inequality in 50, 51, 53–4, 58, 80–81 Keynesian system in 71, 72–3 labour market in 42, 44, 46, 62 micro-stressors in 47–8 neoliberalism in 76 and NWF 135 stock market in 63 tribalism in 23, 25, 29 wealth tax in 130 US Federal Reserve 6, 46, 84, 108, 110, 120, 148, 151 voice, loss of 37–9, 43, 48, 58 Volcker, Paul 75, 81–2 voting 37–8 see also electoral politics wages 2, 60 and automation 105 and competition 96–7, 98 and consumption 53–4, 58, 72 distribution of see income distribution growth in, without inflation 125 and immigration 115–16 and inequality 4, 50–53, 58 and neoliberalism 76, 77 and oil prices 96–7 and productivity 72, 76 stagnation in 34, 47, 58, 80–81, 83, 84, 85 and supply/demand 65–6 Wall Street Crash 67 Warren, Elizabeth 130, 132 Watson’s Analytics 19 wealth, distribution of 4, 15, 29, 30 welfare state 71 WhatsApp 2 Wilkinson, Richard 176 wind power, investment in 150 Wolf, Martin 80, 173 World Trade Organization (WTO) 42 Wren-Lewis, Simon 151 Yates, Tony 151 “Yellow Jackets” protests 2, 20, 55, 56

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We need to simultaneously unleash the productivity potential of technological change to cope with the challenges of demography and aging, while addressing extreme and corrupting inequality of wealth and income. We also need to revisit the labour market – can we keep the benefits of deregulation, but mitigate or eliminate the stressors? We agree that the supposed impotence of central banks in a world of low interest rates, is in fact a huge opportunity, both for a more effective monetary policy and for a smart expansion of the state’s balance sheet. The unexpected post-crisis success of high employment, no inflation, and negative real interest rates in fact frees government up to make some critical interventions.

…

Our new software needs to address wealth inequality so that our societies become more adaptive to change, and a broader asset ownership is key. And by that I mean something way more than Margaret Thatcher’s famous “property-owning democracy”. We need fundamentally new ideas about who owns what and who gets the returns to assets. The second more technical problem is low interest rates. This is partly a legacy of v.3.0’s success in controlling inflation, but it is also a consequence of demographic change and high private sector debt levels. The problem posed by close-to-zero interest rates is that central banks are impotent in the face of an economic shock that threatens recession.

How an Economy Grows and Why It Crashes by Peter D. Schiff, Andrew J. Schiff

Alan Greenspan, Bear Stearns, Bretton Woods, business climate, currency peg, hiring and firing, indoor plumbing, low interest rates, offshore financial centre, price stability, Robert Shiller, technology bubble

When they first burst onto the scene in the 1920s and 1930s, the disciples of Keynes (called Keynesians), came into conflict with the “Austrian School” which followed the views of economists such as Ludwig von Mises. The Austrians argued that recessions are necessary to compensate for unwise decisions made during the booms that always precede the bursts. Austrians believe that the booms are created in the first place by the false signals sent to businesses when government’s “stimulate” economies with low interest rates. So whereas the Keynesians look to mitigate the busts, Austrians look to prevent artificial booms. In the economic showdown that followed, the Keynesians had a key advantage. Because it offers the hope of pain-free solutions, Keynesianism was an instant hit with politicians. By promising to increase employment and boost growth without raising taxes or cutting government services, the policies advocated by Keynes were the economic equivalent of miracle weight-loss programs that required no dieting or exercise.

…

The Americans do well: they get stuff without producing it and they get to borrow money without having to save. For their part, the Chinese get to work without consuming what they produce. They save, but they don’t get to borrow. Where’s the benefit there? Most contemporary economic pundits also fail to appreciate the degree to which low interest rates in the United States are made possible by high savings rates abroad. Remember, in order to lend, someone has to save. Fortunately for the United States, the global economy allows these relationships to go beyond borders. The trump card for the United States thus far has been the status of the U.S. dollar.

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Sensing a potent campaign issue, the Senate got into the game to fix the problem. Arguing that hut ownership lay at the very core of the Usonian Dream, Senator Cliff Cod devised a plan where the government would ensure that everyone could get a hut loan. Not only would the Senate mandate ultra-low interest rates with very low down payment requirements, but it would stand behind the loans and pay the bank back if the borrower couldn’t. In order to facilitate the process, Cod created two agencies—Finnie Mae and Fishy Mac—to buy hut loans from the bank. The hut buyer would then pay back the agencies directly.

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

"World Economic Forum" Davos, Alan Greenspan, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Sanders, break the buck, Bretton Woods, business climate, business cycle, capital controls, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency peg, eurozone crisis, financial engineering, financial innovation, Flash crash, foreign exchange controls, George Akerlof, German hyperinflation, Google Earth, hiring and firing, inflation targeting, Isaac Newton, Julian Assange, low cost airline, low interest rates, market bubble, market design, middle-income trap, Money creation, money market fund, moral hazard, mortgage debt, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, Paul Samuelson, price stability, public intellectual, quantitative easing, rent control, reserve currency, Robert Shiller, Robert Solow, rolodex, Ronald Reagan, Savings and loan crisis, savings glut, Socratic dialogue, sovereign wealth fund, The Great Moderation, too big to fail, union organizing, WikiLeaks, yield curve, Yom Kippur War

October 23—Mervyn King delivers a speech saying that “printing money is not . . . simply manna from heaven.” He also says that “there are no shortcuts to the necessary adjustments in our economy,” as the Bank of England largely sits on its hands amid the new activism from the Fed and ECB. December 12—The Fed announces it expects to keep low-interest-rate policies in place until either the U.S. unemployment rate falls to 6.5 percent or inflation is poised to exceed 2.5 percent. Introduction: Opening the Spigot On August 9, 2007, Jean-Claude Trichet awoke at his childhood home of Saint-Malo, on the coast of Brittany, ready for a day puttering about in his motorboat and enjoying the company of his grandchildren.

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This creates a conflict of interest between countries with weak economies and populist governments—read Italy, or Spain, or anyway someone from Europe’s slovenly south—and those with strong economies and a steely-eyed commitment to disciplined economic policy—read Germany. The weak economies want low interest rates, and wouldn’t mind a bit of inflation; but Germany is dead set on maintaining price stability at all cost. Nor can Europe deal with “asymmetric shocks” the way the United States does, by transferring workers from depressed areas to prosperous ones. . . . The result is a ferocious political argument, and perhaps a financial crisis, as markets start to discount the bonds of weaker European governments.

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In a milder version of the deflation that paralyzed the world economy in the early 1930s, prices were stagnant to falling. That made the overhang of debt incurred in the boom years even more onerous, as the yen being used to repay loans were more valuable than those that had been originally lent out. Steady deflation even made the BOJ’s low-interest-rate policies less effective at boosting growth, because it meant that “real,” or inflation-adjusted, interest rates were higher than they would have been during a time of inflation. On March 20, 1998, Masaru Hayami, a longtime corporate executive who had worked at the BOJ many years earlier, became the central bank’s twenty-eighth governor.

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Ben Bernanke: helicopter money, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Dr. Strangelove, Edward Snowden, eurozone crisis, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global macro, global reserve currency, global supply chain, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Herman Kahn, high-speed rail, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, junk bonds, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, megaproject, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shale / tar sands, open economy, operational security, plutocrats, Ponzi scheme, power law, price stability, public intellectual, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, Solyndra, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

Asset swaps are just one of many ways financial institutions increase risk in the search for higher yields in low-interest-rate environments. A definitive study conducted by the IMF covering the period 1997–2011 showed that Federal Reserve low-interest-rate policy is consistently associated with greater risk taking by banks. The IMF study also demonstrated that the longer rates are held low, the greater the amount of risk taking by the banks. The study concludes that extended periods of exceptionally low interest rates of the kind the Fed has engineered since 2008 are a recipe for increased systemic risk. By manipulating interest rates to zero, the Fed encourages this search for yield and all the off-balance-sheet tricks and asset swaps that go with it.

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-Iran financial war and, 55, 57 Indonesia, 45 inflation, 3–4, 7–9, 75–83 alternative measures of, 3 Berlin Consensus and, 122–23 versus deflation, in depression of 2007 to present, 243–52, 260, 290–91 export of, through exchange-rate mechanism, 75, 155 Federal Reserve’s targeting of, 186–87 money illusion and, 7–8 in 1960s and 1970s, 7–8 in 1977 to 1981, 1 in 1981 to 1986, 2 in PDS framework, 183 pro-inflation (easy-money) policy of Federal Reserve (See easy-money policy of Federal Reserve) in 2008 to present, 3, 75, 76, 77 information asymmetry, 83–88 information warfare, 44 infrastructure spending Berlin Consensus and, 123 in China, 98–101, 107 In-Q-Tel, 34, 35 insider trading Stewart’s trading of ImClone Systems, 25 by terrorists (See terrorist insider trading) interest rates bank risk taking in low-interest-rate environment, 80–81 low-interest-rate policy, of Greenspan, 76, 260 negative real rates, 183–84 zero-interest-rate policy, of Bernanke, 185, 260 internal adjustment of unit labor costs, 131 International Emergency Economic Powers Act (IEEPA), 295 International Monetary Fund (IMF), 12, 81, 190–214 Articles of Agreement, 199, 212–14, 235 Asian financial crisis and, 45, 120 C-20 project, 235 cluster paradigm and, 192–93, 194, 198 commitments to expand lending capacity of, 202–6 as de facto central bank, 199–207 deposit-taking function of, 201 financial transmission and, 193–94 gold dispositions by, 235–36, 277 governance reforms, implications of, 296 historical roles of, 191 lending role of, 199–201 leverage of, 201–6 management of, 194–95 special drawing rights (SDRs) issued by (See special drawing rights [SDRs]) spillover effects of national policy, 193, 194, 198 international monetary system, 1, 12, 118–21 Beijing Consensus, 118, 120–21 Bretton Woods system, 118, 208–9, 235, 290 C-20 project and IMF reforms, 235–36 collapses of, 5 debt and deflation as problems of, since 2009, 290–91 gold reserve rebalancing and potential reform of, 279–84 Washington Consensus, 118–19 Internet, 174 interstate highway system, 174–75 investment Berlin Consensus and, 123 Bernanke’s monetary policies aimed at increasing, 86 Chinese economic growth and, 95–101, 107–110 gold as not constituting an investment, 218–19 infrastructure (See infrastructure spending) lack of, and duration of Great Depression, 84 regime uncertainty and, 84–86 investment portfolio recommendations, 298–301 alternative funds, 299–300 cash, 300 fine art, 299 gold, 298–99 land, 299 Iran, 12, 30, 151, 152, 153, 156 cyberattacks conducted by, 60 U.S.

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It was this deflation scare that prompted then Fed chairman Alan Greenspan to sharply lower interest rates. In 2002 the average Federal Funds effective rate was 1.67 percent, then the lowest in forty-four years. In 2003 the average Federal Funds rate was even lower, 1.13 percent, and it remained low through 2004, averaging 1.35 percent for the year. The extraordinarily low interest-rate policy during this three-year period was designed to fend off deflation, and it worked. After the usual lag, the consumer price index rose 2.7 percent in 2004 and 3.4 percent in 2005. Greenspan was like the pilot of a crashing plane who pulls the aircraft out of a nosedive just before it hits the ground, stabilizes the aerodynamics, then regains altitude.

Boom and Bust: A Global History of Financial Bubbles by William Quinn, John D. Turner

accounting loophole / creative accounting, Alan Greenspan, algorithmic trading, AOL-Time Warner, bank run, banking crisis, barriers to entry, Bear Stearns, behavioural economics, Big bang: deregulation of the City of London, bitcoin, blockchain, book value, Bretton Woods, business cycle, buy and hold, capital controls, Celtic Tiger, collapse of Lehman Brothers, Corn Laws, corporate governance, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, debt deflation, deglobalization, Deng Xiaoping, different worldview, discounted cash flows, Donald Trump, equity risk premium, Ethereum, ethereum blockchain, eurozone crisis, fake news, financial deregulation, financial intermediation, Flash crash, Francis Fukuyama: the end of history, George Akerlof, government statistician, Greenspan put, high-speed rail, information asymmetry, initial coin offering, intangible asset, Irish property bubble, Isaac Newton, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, junk bonds, land bank, light touch regulation, low interest rates, margin call, market bubble, market fundamentalism, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Network effects, new economy, Northern Rock, oil shock, Ponzi scheme, quantitative easing, quantitative trading / quantitative finance, railway mania, Right to Buy, Robert Shiller, Shenzhen special economic zone , short selling, short squeeze, Silicon Valley, smart contracts, South Sea Bubble, special economic zone, subprime mortgage crisis, technology bubble, the built environment, total factor productivity, transaction costs, tulip mania, urban planning

Instead, a series of tax breaks, subsidies and financing initiatives were granted to private real-estate companies, while the Ministry of Construction heavily deregulated the process of urban planning.18 This, combined with the liberalisation of mortgage lending and ultra-low interest rates, massively increased real-estate investment. The subsequent effect on urban land prices can be seen in Figure 8.1. Between 1985 and 1987, the price of land in the six major Japanese cities rose by 44 per cent. This attracted the attention of Japanese corporations, who found that capital gains on land were dwarfing the profits from their main operations. These corporations responded by shifting funds from core operations to land, creating an additional influx of money into the sector. Much of this money was borrowed to take advantage of the prevailing low interest rates.19 As a result, prices continued to rise, and the price of land was soon completely out of proportion with the income it could generate.

…

However, some economists have dismissed the role of global imbalances in driving down interest rates and have suggested that loose monetary policy and low central bank interest rates were more of a problem.47 The interest rates of the Eurozone were set to suit the core economies and, as a result, were too low for economies like Ireland and Spain. The Federal Reserve kept interest rates low after the dot-com bust and 2001 recession in order to stimulate the economy by encouraging housing starts and home sales with low mortgage rates.48 In one sense this worked too well, because low interest rates prompted US consumers to buy houses in an unprecedented fashion. 182 THE SUBPRIME BUBBLE Low interest rates, however, would not have been such a problem had they not been accompanied by such a dramatic extension of mortgage credit. The ratio of residential loans to GDP in the European Union as a whole was 36.4 in 2007; the equivalent figures for Ireland, Spain, the United Kingdom and the United States were 71.4, 59.8, 74.8 and 63.4 respectively.49 The ratio of mortgage debt to GDP in these four countries was higher than in any other country in the world, and they all had a relatively high proportion of lower-income households with mortgages.50 In the United States, mortgage debt climbed from $5.3 trillion in 2001 to $10.5 trillion in 2007 and mortgage debt per household rose from $91,500 in 2001 to $149,500 in 2007.51 To put this in context, mortgage debt in the United States rose almost as much in 6 years as it had in the period from 1776 to 2000!

…

However, just as one would not keep oxygen tanks beside an open fire, there are times and places where too much marketability can be dangerous.17 The fuel for the bubble is money and credit. A bubble can form only when the public has sufficient capital to invest in the asset, and is therefore much more likely to occur when there is abundant money and credit in the economy. Low interest rates and loose credit conditions stimulate the growth of bubbles in two ways. First, the bubble assets themselves may be purchased with borrowed money, driving up their prices. Because banks are lending other people’s money and borrowers are borrowing other people’s money, neither are fully on the hook for losses if an investment in a bubble asset fails.18 The greater the expansion of bank lending, the greater the amount of funds available to invest in the bubble, and the higher the price of bubble assets will rise.

The Levelling: What’s Next After Globalization by Michael O’sullivan

"World Economic Forum" Davos, 3D printing, Airbnb, Alan Greenspan, algorithmic trading, Alvin Toffler, bank run, banking crisis, barriers to entry, Bernie Sanders, Big Tech, bitcoin, Black Swan, blockchain, bond market vigilante , Boris Johnson, Branko Milanovic, Bretton Woods, Brexit referendum, British Empire, business cycle, business process, capital controls, carbon tax, Celtic Tiger, central bank independence, classic study, cloud computing, continuation of politics by other means, corporate governance, credit crunch, CRISPR, cryptocurrency, data science, deglobalization, deindustrialization, disinformation, disruptive innovation, distributed ledger, Donald Trump, driverless car, eurozone crisis, fake news, financial engineering, financial innovation, first-past-the-post, fixed income, gentrification, Geoffrey West, Santa Fe Institute, Gini coefficient, Glass-Steagall Act, global value chain, housing crisis, impact investing, income inequality, Intergovernmental Panel on Climate Change (IPCC), It's morning again in America, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", junk bonds, knowledge economy, liberal world order, Long Term Capital Management, longitudinal study, low interest rates, market bubble, minimum wage unemployment, new economy, Northern Rock, offshore financial centre, open economy, opioid epidemic / opioid crisis, Paris climate accords, pattern recognition, Peace of Westphalia, performance metric, Phillips curve, private military company, quantitative easing, race to the bottom, reserve currency, Robert Gordon, Robert Shiller, Robert Solow, Ronald Reagan, Scramble for Africa, secular stagnation, Silicon Valley, Sinatra Doctrine, South China Sea, South Sea Bubble, special drawing rights, Steve Bannon, Suez canal 1869, supply-chain management, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, total factor productivity, trade liberalization, tulip mania, Valery Gerasimov, Washington Consensus

However, in the context of a toughening regulatory regime, the effect of the credit crisis on lending standards of banks and the fact that many households and businesses were already overburdened with debt or were risk averse meant that very few households could get access to loans at low interest rates or had the spare capital to buy cheap post-crisis assets.17 For example, in September 2016 Italian government bonds traded at a yield of 1.1 percent but Italian mortgage rates were closer to 7 percent. In essence, this meant that only those who already had access to capital could benefit from QE by borrowing at low interest rates to buy cheap assets; ordinary households had to borrow at 7 percent. In some cases, the purchase of real estate by property funds (which were also able to access cheap capital) drove up property prices, putting pressure on affordability.

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A Westphalia for Finance Since 2009 central banks have aggressively pursued quantitative easing (and “zero” interest rates) in the hope of lowering borrowing costs and pushing up investment by companies and households. This has helped forestall financial crises but has done little else. It has not cured underlying economic problems and at the same time has fostered an addiction to low interest rates and accommodative central banks. Even the start of QE decommissioning by the US Federal Reserve is proving difficult for markets to digest. My proposal for provoking change is a framework to level debt and risk taking through a global conference leading to a treaty on debt and risk. The assumption, unfortunately, is that the only way governments would agree to this is if they were in the midst of a nasty market crisis and were facing a deep recession.

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One could build a picture of a (Western) world where class mobility is slowing and where access to education, capital, and health care, to name a few, is increasingly restricted. Each of these sustains inequalities in different ways. Access to capital is one route by which wealth inequalities are perpetuated and around which sociodemographic changes occur. In more recent years, those with access to capital have been able to take advantage of low interest rates and the flatteringly positive effect of quantitative easing on asset prices, while also being less exposed to some of QE’s negative consequences (such as rising pension deficits).24 This has fueled explosive growth in property prices in prestigious metropolitan areas, which, among many other things, now means that middle wealth / middle income households are being forced out of city centers.

How Will Capitalism End? by Wolfgang Streeck

"there is no alternative" (TINA), accounting loophole / creative accounting, air traffic controllers' union, Airbnb, Alan Greenspan, basic income, behavioural economics, Ben Bernanke: helicopter money, billion-dollar mistake, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, Clayton Christensen, collective bargaining, conceptual framework, corporate governance, creative destruction, credit crunch, David Brooks, David Graeber, debt deflation, deglobalization, deindustrialization, disruptive innovation, en.wikipedia.org, eurozone crisis, failed state, financial deregulation, financial innovation, first-past-the-post, fixed income, full employment, Gini coefficient, global reserve currency, Google Glasses, haute cuisine, income inequality, information asymmetry, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, junk bonds, Kenneth Rogoff, labour market flexibility, labour mobility, late capitalism, liberal capitalism, low interest rates, market bubble, means of production, military-industrial complex, moral hazard, North Sea oil, offshore financial centre, open borders, pension reform, plutocrats, Plutonomy: Buying Luxury, Explaining Global Imbalances, post-industrial society, private sector deleveraging, profit maximization, profit motive, quantitative easing, reserve currency, rising living standards, Robert Gordon, savings glut, secular stagnation, shareholder value, sharing economy, sovereign wealth fund, tacit knowledge, technological determinism, The Future of Employment, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, transaction costs, Uber for X, upwardly mobile, Vilfredo Pareto, winner-take-all economy, Wolfgang Streeck

This, however, was beyond the capacities of central banks, which: cannot enact the structural economic and financial reforms needed to return economies to the real growth paths authorities and their publics both want and expect. What central-bank accommodation has done during the recovery is to borrow time … But the time has not been well used, as continued low interest rates and unconventional policies have made it easy for the private sector to postpone deleveraging, easy for the government to finance deficits, and easy for the authorities to delay needed reforms in the real economy and in the financial system. After all, cheap money makes it easier to borrow than to save, easier to spend than to tax, easier to remain the same than to change.

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Instead of inflating the currency, governments began to borrow on an increasing scale to accommodate demands for benefits and services as a citizen’s right, together with competing claims for incomes to reflect the judgement of the market and thereby help maximize the profitable use of productive resources. Low inflation was helpful in this, since it assured creditors that government bonds would keep their value over the long haul; so were the low interest rates that followed when inflation had been stamped out. Just like inflation, however, accumulation of public debt cannot go on forever. Economists had long warned of public deficit spending ‘crowding out’ private investment, causing high interest rates and low growth; but they were never able to specify where exactly the critical threshold was.

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Individual debt replaced public debt, and individual demand, constructed for high fees by a rapidly growing money-making industry, took the place of state-governed collective demand in supporting employment and profits in construction and other sectors (Figure 2.4). These dynamics accelerated after 2001, when the Federal Reserve switched to very low interest rates to prevent an economic slump and the return of high unemployment this implied. In addition to unprecedented profits in the financial sector, privatized Keynesianism sustained a booming economy that became the envy not least of European labour movements. In fact, Alan Greenspan’s policy of easy money supporting the rapidly growing indebtedness of American society was held up as a model by European trade-union leaders, who noted with great excitement that, unlike the European Central Bank, the Federal Reserve was bound by law not just to provide monetary stability but also high levels of employment.

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bike sharing, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, export processing zone, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, general purpose technology, Gini coefficient, Glass-Steagall Act, global supply chain, Great Leap Forward, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low interest rates, low-wage service sector, manufacturing employment, market bubble, means of production, middle-income trap, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, technological determinism, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

During the economic boom of the 1950s in the United States, the top 1 per cent did only a little better than the rest, gaining some 5 per cent of the increased income. But since the Great Recession, the top 1 per cent have accounted for 95 per cent of the income gain, leaving the bottom 99 per cent with just 5 per cent of the gain between them. During recessionary periods, low interest rates make borrowing cheap and drive a recovery which typically boosts stocks. US markets have hit numerous record highs since the 2008 crisis, and such gains predominately go to the half of US households who own stocks. Of the richest 10 per cent of US households, 93 per cent own shares while it’s just 11 per cent among the poorest quintile of households.

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Roosevelt’s US National Industrial Recovery Act of 1933, commonly known as the New Deal, would improve the banking system and transport infrastructure of America, but the amount of government spending or fiscal stimulus injected under FDR’s plan was much smaller than the 11 per cent of GDP or national output Keynes believed was needed. Thus, he was critical of the legislation for putting reform before recovery. Britain was even worse in Keynes’s view. The UK government balanced the budget. Despite the lack of government support, a combination of exchange depreciation and low interest rates brought about a recovery. But it was temporary. In 1937–38, both economies once again fell into sharp recession. Like now, there was a heated debate over what more spending would mean for the budget deficit and high levels of government debt. A budget deficit arises if the government spends more than it receives in a given year.

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The combination of slow growth and low borrowing costs has added a new dimension to the austerity debate. Should governments be taking greater advantage of cheap rates to invest? Should budget deficits and debt be a secondary consideration when economic growth remains sluggish? Investment and low interest rates This question is being asked in both Europe and the US. In America, there is a push for more infrastructure investment, although the Republicans in Congress remain concerned about adding to the fiscal deficit. Of course, Republicans traditionally follow a non-interventionist philosophy, and are suspicious about the role of government in both investment and the economy in general.

Financial Fiasco: How America's Infatuation With Homeownership and Easy Money Created the Economic Crisis by Johan Norberg

accounting loophole / creative accounting, Alan Greenspan, bank run, banking crisis, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, business cycle, capital controls, central bank independence, collateralized debt obligation, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Brooks, diversification, financial deregulation, financial innovation, Greenspan put, helicopter parent, Home mortgage interest deduction, housing crisis, Howard Zinn, Hyman Minsky, Isaac Newton, Joseph Schumpeter, Long Term Capital Management, low interest rates, market bubble, Martin Wolf, Mexican peso crisis / tequila crisis, millennium bug, money market fund, moral hazard, mortgage tax deduction, Naomi Klein, National Debt Clock, new economy, Northern Rock, Own Your Own Home, precautionary principle, price stability, Ronald Reagan, savings glut, short selling, Silicon Valley, South Sea Bubble, The Wealth of Nations by Adam Smith, too big to fail

In the words he used back then, "It's a heavy tax on your markets and your society if you don't let institutions fail."34 The Second Time as Farce There is a broad consensus that the way was paved for this financial crisis by record-low interest rates, huge deficits, and large-scale, credit-financed consumption. Today, governments across the world are trying to solve the crisis-by means of record-low interest rates, huge deficits, and large-scale, credit-financed consumption. Many people now agree that the Fed's record-low rates in 2001-2005 contributed to the crisis. Many observers now think it was utterly senseless of Alan Greenspan to cut rates drastically without worrying about the credit boom that might ensue.

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We wanted to shut down the possibility of corrosive deflation; we were willing to chance that by cutting rates we might foster a bubble, an inflationary boom of some sort, which we would subsequently have to address.' One percent was the lowest the rate had been in half a century, and in August the Fed promised it would remain at that level "for a considerable period." In December, promises were again made about very low interest rates for a long time to come.' The most ardent defender of the record-low rates was Bernanke. The Fed ended up keeping its benchmark rate as low as 1 percent for a full year; once it finally began edging it upward, it did so in tiny, cautious steps even though the wheels of the economy were by then turning very fast.

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The economic columnist Robert Samuelson suddenly discovered that his wife understood the housing market vastly better than he did. Houses in their neighborhood were being sold for one-fourth more than he thought they were worth, but his wife was not in the least surprised. Americans had started exploiting the low interest rates to take out new and bigger loans. My home was no longer my castle, but my ATM. Since homes were suddenly worth more, their owners could go back to the bank and borrow even more money against the same collateral. In the past, most people used to take out loans that they would actually pay off, but now more and more borrowers were obtaining loan agreements under which they would only have to pay interest or at least would not have to pay back any of the principal until after a decade or so.

I.O.U.: Why Everyone Owes Everyone and No One Can Pay by John Lanchester

Alan Greenspan, asset-backed security, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Monday: stock market crash in 1987, Black-Scholes formula, Blythe Masters, Celtic Tiger, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, diversified portfolio, double entry bookkeeping, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial engineering, financial innovation, fixed income, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, hedonic treadmill, hindsight bias, housing crisis, Hyman Minsky, intangible asset, interest rate swap, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jane Jacobs, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, junk bonds, Kickstarter, laissez-faire capitalism, light touch regulation, liquidity trap, Long Term Capital Management, loss aversion, low interest rates, Martin Wolf, money market fund, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, new economy, Nick Leeson, Norman Mailer, Northern Rock, off-the-grid, Own Your Own Home, Ponzi scheme, quantitative easing, reserve currency, Right to Buy, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, shareholder value, South Sea Bubble, statistical model, Tax Reform Act of 1986, The Great Moderation, the payments system, too big to fail, tulip mania, Tyler Cowen, value at risk

It will suddenly be cheaper for companies to issue new bonds, so existing bonds with higher rates of interest will spike in value. Notice that both these states are, or should be, self-correcting. High interest rates will slow things down and gradually bring inflation down, which in turn will exert downward pressure on interest rates; low interest rates, which governments use to boost the economy, will heat things up in a way which causes inflation and leads to a rise in the interest rate. So the movement is self-correcting in both directions. Stocks and bonds are the two biggest single fields of global investment, reaching into every corner of economic life.

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Greenspan surveyed this landscape, took in the imminence of war and the certainty of sharply spiking oil and commodity prices at a time of what looked like a general slowdown, and made what with the benefit of hindsight was a major mistake: he continued to cut interest rates. This process carried on until June 2003, when the rate hit 1 percent, exceptionally low by historic standards. It stayed at that level way into 2004. The low interest rates meant that it was easy for businesses to raise money cheaply; and also easy for consumers to borrow money; and also easy for construction companies to raise money; and also easy for borrowers to take out mortgages. Bond prices stayed low: by historic standards, very low. I’ve said that this would normally be a self-correcting phenomenon.

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Chinese factories kept down inflation by keeping goods cheap at a time when prices would normally have begun to rise; Chinese investments kept the U.S. government able to borrow money cheaply and spend more, at a time when that borrowing would normally have become more expensive. It bought T-bills, and kept on buying them, at a time when their low yield would normally have kept investors away—which would in turn have driven up the yield that T-bills were paying. So low interest rates were bad for the bond market. But there was one place where they were pure catnip: the housing market. It was cheaper than ever to raise the money to buy yourself a first house, if you didn’t already have one, or a bigger and better house if you already did. It had never been cheaper or easier to borrow money.

Rethinking the Economics of Land and Housing by Josh Ryan-Collins, Toby Lloyd, Laurie Macfarlane

agricultural Revolution, asset-backed security, balance sheet recession, bank run, banking crisis, barriers to entry, basic income, book value, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, collective bargaining, Corn Laws, correlation does not imply causation, creative destruction, credit crunch, debt deflation, deindustrialization, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, foreign exchange controls, full employment, garden city movement, George Akerlof, ghettoisation, Gini coefficient, Hernando de Soto, housing crisis, Hyman Minsky, income inequality, information asymmetry, knowledge worker, labour market flexibility, labour mobility, land bank, land reform, land tenure, land value tax, Landlord’s Game, low interest rates, low skilled workers, market bubble, market clearing, Martin Wolf, means of production, Minsky moment, Money creation, money market fund, mortgage debt, negative equity, Network effects, new economy, New Urbanism, Northern Rock, offshore financial centre, Pareto efficiency, place-making, Post-Keynesian economics, price stability, profit maximization, quantitative easing, rent control, rent-seeking, Richard Florida, Right to Buy, rising living standards, risk tolerance, Robert Solow, Second Machine Age, secular stagnation, shareholder value, subprime mortgage crisis, the built environment, The Great Moderation, The Market for Lemons, The Spirit Level, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, transaction costs, universal basic income, urban planning, urban sprawl, working poor, working-age population

As a result of direct state action to build council homes, by 1939 the percentage of households socially renting had risen to 10% (ONS, 2013b). The interwar period also saw the beginnings of the growth in homeownership that was to continue for the rest of the century. While in 1918 23% of households were owner-occupiers, by 1939 this had increased to 32% (ONS, 2013b). In the 1930s low interest rates, rising living standards and greater availability of affordable mortgages – mainly from mutually owned building societies – created a boom in private sector housing development. This was the period when the speculative model of private house building got going: relatively small-scale builders could buy agricultural land around cities and towns, and develop it as new suburban retail and housing for sale (see Box 4.2 below).

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In fact, once prices had stabilised and both buyers’ and lenders’ appetite had returned, each crash brought prices within reach of a new generation of homeowners. In the mid-1990s, the ratio of house prices to earnings was five, as it had been in 1969 (see Figure 4.3), while the proportion of homeowners had gone from around 50% to nearly 70%. But the fourth price boom that began in the mid-1990s was different. This time, consistently low interest rates and low inflation enabled prices to triple in the ten years up to 2007, sending the price/earnings ratio up to over ten (Jefferys and Lloyd, 2015). The severity of this decline in affordability was masked, for a while at least, by low mortgage rates, which kept monthly repayments within reasonable bounds for those buyers able to find sufficient capital for a deposit (Wilcox, 2006).

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Today nearly one in five households in Britain is reliant on housing benefit,6 despite repeated attempts by government to scale it back. 4.6 Conclusion As a result of these changes to the housing landscape since 2000, two sets of lines on the tenure graph have now crossed. Firstly, the decline of mortgaged homeownership among younger generations, coupled with low interest rates and increased life expectancy among older people, has meant outright ownership has overtaken mortgage-holding. And secondly, private renting has overtaken social renting for the first time since the 1960s (Figure 4.5). Projecting these trends forwards, it would seem that the nineteenth century picture of the land economy is beginning to reassert itself in the twenty-first: sooner or later, the majority will find themselves renting from a small, wealthy minority of property owners.

Saudi America: The Truth About Fracking and How It's Changing the World by Bethany McLean

addicted to oil, Alan Greenspan, American energy revolution, Asian financial crisis, Bear Stearns, buy and hold, carbon tax, Carl Icahn, corporate governance, delayed gratification, Donald Trump, family office, geopolitical risk, hydraulic fracturing, Jeff Bezos, junk bonds, low interest rates, Mark Zuckerberg, Masdar, Michael Milken, oil shale / tar sands, peak oil, Silicon Valley, sovereign wealth fund, Upton Sinclair, Yom Kippur War

The most vital ingredient in fracking isn’t chemicals, but capital, with companies relying on Wall Street’s willingness to fund them. If it weren’t for historically low interest rates, it’s not clear there would even have been a fracking boom. “You can make an argument that the Federal Reserve is entirely responsible for the fracking boom,” one private equity titan told me. That view is echoed by Amir Azar, a fellow at Columbia University’s Center on Global Energy Policy. “The real catalyst of the shale revolution was . . . the 2008 financial crisis and the era of unprecedentedly low interest rates it ushered in,” he wrote in a recent report. Another investor puts it this way: “If companies were forced to live within the cash flow they produce, U.S. oil would not be a factor in the rest of the world, and would have grown at a quarter to half the rate that it has.”

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In 2017, U.S. frackers raised $60 billion in debt, up almost 30 percent since 2016, according to Dealogic. Wall Street’s willingness to fund money-losing shale operators is, in turn, a reflection of ultra-low interest rates. That poses a twofold risk to shale companies. In his paper for Columbia’s Center on Global Energy Policy, Amir Azar noted that if interest rates rose, it would wipe out a significant portion of the improvement in break-even costs. But low interest rates haven’t just meant lower borrowing costs for debt-laden companies. The lack of return elsewhere also led pension funds, which need to be able to pay retirees, to invest massive amounts of money with hedge funds that invest in high yield debt, like that of energy firms, and with private equity firms—which, in turn, shoveled money into shale companies, because in a world devoid of growth, shale at least was growing.

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Another skeptical investor named Jonathan Tepper, who founded a firm called Variant Perception that provides research to hedge funds and family offices, put together a presentation in which likened the dynamics of fracking to the Red Queen’s race in Alice in Wonderland: “The Red Queen has to run faster and faster in order to keep still where she is.” Because the Red Queen’s race requires so much money, it wouldn’t have been possible without the ultra-low interest rate policy that the Federal Reserve has had for the last decade. Amir Azar, a fellow at Columbia’s Center on Global Energy Policy, wrote that by 2014, the industry’s net debt exceeded $175 billion, a 250 percent increase from its 2005 level. But interest expense increased at less than half the rate debt did, because interest rates kept falling.

The AI Economy: Work, Wealth and Welfare in the Robot Age by Roger Bootle

"World Economic Forum" Davos, 3D printing, agricultural Revolution, AI winter, Albert Einstein, AlphaGo, Alvin Toffler, anti-work, antiwork, autonomous vehicles, basic income, Ben Bernanke: helicopter money, Bernie Sanders, Bletchley Park, blockchain, call centre, Cambridge Analytica, Capital in the Twenty-First Century by Thomas Piketty, Carl Icahn, Chris Urmson, computer age, Computing Machinery and Intelligence, conceptual framework, corporate governance, correlation does not imply causation, creative destruction, David Ricardo: comparative advantage, deep learning, DeepMind, deindustrialization, Demis Hassabis, deskilling, Dr. Strangelove, driverless car, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, everywhere but in the productivity statistics, facts on the ground, fake news, financial intermediation, full employment, future of work, Future Shock, general purpose technology, Great Leap Forward, Hans Moravec, income inequality, income per capita, industrial robot, Internet of things, invention of the wheel, Isaac Newton, James Watt: steam engine, Jeff Bezos, Jeremy Corbyn, job automation, job satisfaction, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, John von Neumann, Joseph Schumpeter, Kevin Kelly, license plate recognition, low interest rates, machine translation, Marc Andreessen, Mark Zuckerberg, market bubble, mega-rich, natural language processing, Network effects, new economy, Nicholas Carr, Ocado, Paul Samuelson, Peter Thiel, Phillips curve, positional goods, quantitative easing, RAND corporation, Ray Kurzweil, Richard Florida, ride hailing / ride sharing, rising living standards, road to serfdom, Robert Gordon, Robert Shiller, Robert Solow, Rutger Bregman, Second Machine Age, secular stagnation, self-driving car, seminal paper, Silicon Valley, Silicon Valley billionaire, Simon Kuznets, Skype, social intelligence, spinning jenny, Stanislav Petrov, Stephen Hawking, Steven Pinker, synthetic biology, technological singularity, The Future of Employment, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, universal basic income, US Airways Flight 1549, Vernor Vinge, warehouse automation, warehouse robotics, Watson beat the top human players on Jeopardy!, We wanted flying cars, instead we got 140 characters, wealth creators, winner-take-all economy, world market for maybe five computers, Y2K, Yogi Berra

So, if deficient demand is the normal state of affairs in the AI economy, expansionary fiscal policy does not offer a way out. Ultra-low interest rates would probably be more sustainable but they carry a series of risks and costs. Most importantly, ultra-low rates sustained for a long period would severely distort both financial markets and the real economy. This would potentially impair the economy’s productive potential. Moreover, by boosting asset prices, sustained low interest rates tend to lead to a more unequal distribution of wealth. Similar points apply to a sustained policy of QE. The rate of inflation I frequently come across people who believe that the age of robots and AI is bound to be an epoch of low inflation, or even deflation (i.e., falling prices).

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• There was a hangover of inventions and developments from the 1930s and the war years that had not been put to full commercial use. This, and the drip-feed of new advances, led to a steady stream of technological improvements. • The economy was run at a very high level of aggregate demand and high employment. • Thanks to the above factors, and low interest rates, investment was high. • The international trading system was gradually liberalized, with the result that international trade took off, thereby realizing the gains from specialization that economists from Adam Smith and David Ricardo onward had lauded. Accordingly, it is unsurprising that the years after the Second World War were a boom time for most of the developed world.

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Indeed, the whole robot and AI revolution begins to look like a rerun of what happened to the Western world thanks to globalization and the rise of China. These effectively added a few billion extra workers to the workforce but (initially at least) hardly any extra capital. The results were downward pressure on real wages in the West, lower prices, and a tendency to weak aggregate demand, leading to a regime of extremely low interest rates. This culminated in the Global Financial Crisis (GFC), followed by the Great Recession, the worst downturn since the Great Depression of the 1930s. In fact, it is easy to understand why people thinking along these lines would believe that the robot shock will be worse than the China shock.

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bike sharing, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, export processing zone, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, general purpose technology, Gini coefficient, Glass-Steagall Act, global supply chain, Great Leap Forward, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low interest rates, manufacturing employment, market bubble, means of production, middle-income trap, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, technological determinism, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

During the economic boom of the 1950s in the United States, the top 1 per cent did only a little better than the rest, gaining some 5 per cent of the increased income. But since the Great Recession, the top 1 per cent have accounted for 95 per cent of the income gain, leaving the bottom 99 per cent with just 5 per cent of the gain between them. During recessionary periods, low interest rates make borrowing cheap and drive a recovery which typically boosts stocks. US markets have hit numerous record highs since the 2008 crisis, and such gains predominately go to the half of US households who own stocks. Of the richest 10 per cent of US households, 93 per cent own shares while it’s just 11 per cent among the poorest quintile of households.

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Roosevelt’s US National Industrial Recovery Act of 1933, commonly known as the New Deal, would improve the banking system and transport infrastructure of America, but the amount of government spending or fiscal stimulus injected under FDR’s plan was much smaller than the 11 per cent of GDP or national output Keynes believed was needed. Thus, he was critical of the legislation for putting reform before recovery. Britain was even worse in Keynes’s view. The UK government balanced the budget. Despite the lack of government support, a combination of exchange depreciation and low interest rates brought about a recovery. But it was temporary. In 1937–38, both economies once again fell into sharp recession. Like now, there was a heated debate over what more spending would mean for the budget deficit and high levels of government debt. A budget deficit arises if the government spends more than it receives in a given year.

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The combination of slow growth and low borrowing costs has added a new dimension to the austerity debate. Should governments be taking greater advantage of cheap rates to invest? Should budget deficits and debt be a secondary consideration when economic growth remains sluggish? Investment and low interest rates This question is being asked in both Europe and the US. In America, there is a push for more infrastructure investment, although the Republicans in Congress remain concerned about adding to the fiscal deficit. Of course, Republicans traditionally follow a non-interventionist philosophy, and are suspicious about the role of government in both investment and the economy in general.

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, junk bonds, liquidity trap, London Whale, Long Term Capital Management, low interest rates, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, Navinder Sarao, negative equity, new economy, Northern Rock, obamacare, Phillips curve, price stability, proprietary trading, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, stock buybacks, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

The second stated goal of ultralow interest rates was job creation. “Healthy investment returns cannot be sustained in a weak economy and of course it is difficult to save for retirement or other goals without the income from a job,” Bernanke said at the same press conference. “Thus, while low interest rates do impose some costs, Americans will ultimately benefit most from the healthy and growing economy that low interest rates help promote.” But that healthy and growing economy didn’t happen. So savers were getting hammered for no good reason for the benefit of rich people. By December 2012, the Fed was pumping $85 billion a month into the economy: $40 billion in mortgage-backed securities and $45 billion in Treasuries.

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Though they might not be able to name the Fed as the party rigging the game, their instincts remind them about the old adage: Fool me once, shame on you. Fool me twice, shame on me. As for those mom-and-pop investors who remain in the market, they have little chance of escaping Fed policy because their assets are tied up in expensive and rigid 401(k) plans that emphasize index funds. The Fed’s artificially low interest-rate level has distorted the relationship between stocks and bonds. Rather than one providing cover when the other is in distress, asset classes have increasingly moved in concert. And though portfolio advisers make it sound safe, index investing will prove disastrous when markets finally correct.

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But by August 2003, I was truly alarmed. The greatest real estate market in history, on a tear since 1991, had peaked in July 2003, with annual sales of existing homes reaching a record high of 6.12 million. The Fed’s fingerprints were all over this boom, and not just because of Greenspan’s low interest rates. In 1993, in response to initiatives by the Clinton administration to make housing more affordable for minorities and the poor, the Boston Fed produced a widely circulated paper called “Closing the Gap: A Guide to Equal Opportunity Lending.” “Lack of credit history should not be seen as a negative factor” in obtaining a mortgage, the Boston Fed guide noted.

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Alan Greenspan, Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, bond market vigilante , borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Glass-Steagall Act, green new deal, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, land bank, Leo Hollis, light touch regulation, London Interbank Offered Rate, low interest rates, market fundamentalism, Martin Wolf, mobile money, Money creation, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, Post-Keynesian economics, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

The OECD warned policy-makers several times in 2016 to ‘act now! To keep promises’ – and to expand public spending and investment. In June 2016 the OECD made the sensible case that ‘monetary policy alone cannot break out of [the] low-growth trap and may be overburdened. Fiscal space is eased with low interest rates.’ Governments were urged to use ‘public investment to support growth’.6 But these new, late converts to fiscal expansion may just as well have banged their heads against a brick wall, for all the listening done by the US Congress and by neoliberal finance ministers such as Germany’s Wolfgang Schäuble, Finland’s Alexander Stubb, or Britain’s George Osborne.

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In Spain and Portugal, the recognised losses are already more than 10 percent, but the numbers will almost certainly be higher. Non-performing loans are also rising rapidly in Italy. Germany is an interesting case. The German banking system appears healthy at first sight. It certainly fulfils its function of providing the private sector with credit at low interest rates. But I still find it hard to believe that the German banking system as a whole is solvent.18 Instead, Münchau wrote, regulators ‘pretend not to see the losses, and extend the crisis’. As a result, speculation by the private finance sector was once again unleashed and new asset bubbles created – these inflated the prices of stocks and shares, bonds, property, works of art, and the like.

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The task he set himself in his General Theory of Employment, Interest and Money was to devise a theory of an economy based on a correct understanding of money.10 In it, Keynes’s conclusions about practical policy were vastly different from those of his contemporaries, and from their successors in today’s economic establishment. Keynes recognised that the monetary system should be steered away from serving particular vested or class interests, and be repositioned to serve the needs of society as a whole. This understanding led to policies for permanently low interest rates during the Second World War, near full employment after the war, a thriving private and public sector, financial stability in the post-war period, and the unprecedented narrowing of income distribution. Predictably perhaps, his policies did not endure. And with his policies, went his theory and, once more, the understanding of money.

Limitless: The Federal Reserve Takes on a New Age of Crisis by Jeanna Smialek

Alan Greenspan, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Sanders, bitcoin, Black Lives Matter, blockchain, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, Colonization of Mars, coronavirus, COVID-19, crowdsourcing, cryptocurrency, decarbonisation, distributed ledger, Donald Trump, Fall of the Berlin Wall, fiat currency, financial engineering, financial innovation, financial intermediation, Fractional reserve banking, full employment, George Akerlof, George Floyd, Glass-Steagall Act, global pandemic, Henri Poincaré, housing crisis, income inequality, inflation targeting, junk bonds, laissez-faire capitalism, light touch regulation, lockdown, low interest rates, margin call, market bubble, market clearing, meme stock, Modern Monetary Theory, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nixon shock, offshore financial centre, paradox of thrift, price stability, quantitative easing, race to the bottom, risk tolerance, Robinhood: mobile stock trading app, Ronald Reagan, secular stagnation, short squeeze, social distancing, sovereign wealth fund, The Great Moderation, too big to fail, trade route, Tragedy of the Commons, working-age population, yield curve

New York Times, October 31. Kelly, Kate, Andrew Ross Sorkin, and Jeanna Smialek. 2020. “As Market Convulses, Big Banks Plan to Borrow Funds from Fed.” New York Times, March 16. Kiley, Michael T., and John M. Roberts. 2017. “Monetary Policy in a Low Interest Rate World.” Brookings Institution, March 23. https://www.brookings.edu/​bpea-articles/​monetary-policy-in-a-low-interest-rate-world/. Kornblut, Anne E. 2008. “At Sidwell Friends School, Obamas Will Encounter Parents from Clinton Campaign.” Washington Post, December 12. Krugman, Paul. 2001. “Reckonings; Et Tu, Alan?” New York Times, January 28. Kuttner, Robert. 2020.

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Powell, a man with flawless gray suits and an extra eight or nine inches, evidently fit the mold better. Whether Yellen’s appearance really weighed heavily on the president’s mind is hard to know. It is more clearly the case that Trump liked Yellen but felt from the outset that it would be better to have his own person in the job. At the same time, Trump liked low interest rates: He was a property developer, after all, and real estate was one of the biggest beneficiaries of cheap money. It was hard to find someone with conservative credentials who could match Yellen’s stance on monetary policy. Powell more or less fit that bill. While he was not an unwavering fan of extensive help for the economy—during his early years as a Fed governor, he had internally questioned the Fed’s policy of buying huge quantities of bonds out of concern that it might fuel financial instability—he was mostly aligned with the chair by 2017.

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He could charge less, trade more, and earn bigger profits by leveraging his capital, helping to expand not only his own economic pie but also that of the nation to which he belonged. To unleash that prosperity machine, a country needed a stable banking system that could make large amounts of capital available at relatively low interest rates. It was America’s combination of financial inefficiency and regular meltdowns that helped to spur another attempt at central banking. The catalyst came in 1906, when a massive earthquake tore San Francisco asunder, killing three thousand people, leaving sections of the city in ruins, and touching off instability in global money markets as foreign insurers scrambled for cash so that they could pay claims on California policies.

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, Alan Greenspan, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, full employment, Glass-Steagall Act, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, Les Trente Glorieuses, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, subprime mortgage crisis, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen, Tyler Cowen: Great Stagnation, vertical integration, very high income, winner-take-all economy, zero-sum game

That, as we will see in Chapter Eight, makes good sense if interest rates are close to zero and yet are inducing no strong recovery in demand. Figure 29. Central Bank Short-term Policy Rates (per cent) Source: Thomson Reuters Datastream In brief, Mr Bernanke’s global savings glut would be visible in a combination of two phenomena: weak economies and/or low interest rates. Today, this combination is precisely what we see in the high-income countries: ultra-low interest rates and recessionary conditions, with high unemployment. A global savings glut is also a condition of chronic excess supply. In a provocative recent book, Daniel Alpert, an investment banker, properly calls the present ‘the age of oversupply’.12 The ultra-low short-term interest rates are offered by the central banks.

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It could take many more years to finish an orderly deleveraging in the UK and Spain.’29 In brief, what is needed to handle the debt overhang is a strategy for demand expansion, low interest rates, reconstruction of the financial system, and restructuring and reduction of non-financial debts. Of the big countries, the US has come closest to this combination, though the others have been slowly and painfully following behind. Inevitably, creditors do not like the strategy of low interest rates and debt restructuring. Yet what they want – all borrowers to pay high interest rates in full and punctually – they cannot now have. If a boom has created more credit and debt than can be sustained, the stock of claims, the returns upon them, or both, must be reduced.

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The great nineteenth-century British journalist, Walter Bagehot, describes what happens perfectly: ‘at particular times a great deal of stupid people have a great deal of stupid money … At intervals … the money of these people – the blind capital, as we call it, of the country – is particularly large and craving; it seeks for someone to devour it, and there is a “plethora”; it finds someone, and there is “speculation”; it is devoured, and there is “panic”.’51 As I have noted above, the main feature the deficit countries had in common was the ability to fund large and, in some cases, enormous current-account deficits at very low interest rates. It turned out that it did not make that much difference if the domestic counterpart of these deficits was entirely a huge private-sector financial deficit (as in Ireland and Spain) or a mixture of private and public deficits (as in Greece and Portugal). Italy did not have large external or fiscal deficits: its problems were mainly due to the scale of the public debt accumulated in the 1980s and 1990s, before it joined the euro.

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

Alan Greenspan, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Ben Bernanke: helicopter money, Bretton Woods, business cycle, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, Glass-Steagall Act, income inequality, inflation targeting, It's morning again in America, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, low interest rates, market bubble, market fundamentalism, mass immigration, megaproject, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, Nixon triggered the end of the Bretton Woods system, private sector deleveraging, quantitative easing, reserve currency, risk free rate, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

How much money the Fed prints during 2013 and 2014 will be determined by how much of the government’s budget deficit the private sector is willing to finance at low interest rates. The Fed will have to monetize the shortfall. This question cannot be answered with any degree of certainty. However, one of the lessons that should be understood from the economic crisis in Japan is that when big economic bubbles pop, the private sector has nowhere safe to invest all the money that it made during the bubble years. Therefore, the private sector is happy to invest that money (as well as its large annual cash flow) into government bonds even at very low interest rates. That explains why the Japanese government has been able to increase its level of debt relative to GDP from 60 percent when the crisis began in 1990 to approximately 230 percent at the end of 2011, while the interest rate it pays to borrow money for 10 years is still only around 1 percent a year.

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Over the following five quarters, credit contracted by $936 billion to $51.8 trillion. (See Exhibit 5.1.) It then began to expand again as the result of an extraordinary increase in government debt and an astonishing expansion of the central bank’s balance sheet (which was needed to finance the increase in the government’s debt at low interest rates). At the time of writing, TCMD had not quite expanded to its previous peak. Neither has U.S. GDP. EXHIBIT 5.1 Total Credit Market Debt Not Yet Back to Its Peak Source: Federal Reserve, Flow of Funds Accounts of the United States, second quarter 2011 The federal government expanded its debt by $4.4 trillion (by 83 percent) between mid-2008 and the first quarter of 2011.

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At a time when a large section of American society is demanding that the government spend less, it is crucial for everyone to understand that less government spending means that the U.S. economy will become smaller and that unemployment will rise. The economy no longer functions as it did when gold was money. The Role of the Trade Deficit For 12 years the U.S. current account deficit financed the U.S. budget deficit, and financed it at low interest rates. (The current account is composed primarily of the balance of trade, but also includes the balance of income and current transfers.) As described in Chapter 2, every country’s balance of payments must balance. Therefore, a country with a large current account deficit will also have a large, offsetting inflow of capital on its financial account.

Broken Markets: A User's Guide to the Post-Finance Economy by Kevin Mellyn

Alan Greenspan, banking crisis, banks create money, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, bond market vigilante , Bonfire of the Vanities, bonus culture, Bretton Woods, BRICs, British Empire, business cycle, buy and hold, call centre, Carmen Reinhart, central bank independence, centre right, cloud computing, collapse of Lehman Brothers, collateralized debt obligation, compensation consultant, corporate governance, corporate raider, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency risk, disintermediation, eurozone crisis, fiat currency, financial innovation, financial repression, floating exchange rates, Fractional reserve banking, Glass-Steagall Act, global reserve currency, global supply chain, Home mortgage interest deduction, index fund, information asymmetry, joint-stock company, Joseph Schumpeter, junk bonds, labor-force participation, light touch regulation, liquidity trap, London Interbank Offered Rate, low interest rates, market bubble, market clearing, Martin Wolf, means of production, Michael Milken, mobile money, Money creation, money market fund, moral hazard, mortgage debt, mortgage tax deduction, negative equity, Nixon triggered the end of the Bretton Woods system, Paul Volcker talking about ATMs, Ponzi scheme, profit motive, proprietary trading, prudent man rule, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, rising living standards, Ronald Coase, Savings and loan crisis, seigniorage, shareholder value, Silicon Valley, SoftBank, Solyndra, statistical model, Steve Jobs, The Great Moderation, the payments system, Tobin tax, too big to fail, transaction costs, underbanked, Works Progress Administration, yield curve, Yogi Berra, zero-sum game

Besides the Great Depression, we have the benefit of several smaller B movies—banking implosions limited to one country. (The biggest headliner is the Japanese financial crisis of the 1990s.) Finally, we have the most recent version, the financial market meltdown of 2008, though the shooting is not yet complete. The plot summary goes like this. Download from Wow! eBook <www.wowebook.com> Scene One Low interest rates and easy money encourage overinvestment and speculation that gradually builds into a boom or mania. Usually this is led by one investment type or asset class, such as common stock in the 1920s. But as optimism spreads through the economy, all asset prices go up. There are no bad investments in a boom.

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The first thing that has to happen after a financial meltdown is that banks, which had basically burned through their capital before being rescued by the state, need to make lots of money. They need to rebuild their capital out of earnings before investors feel comfortable buying their shares. And they need to do so safely, since they can’t be seen returning to the casino to restore their fortunes. As I said above, the policy of ultra-low interest rates and massive government borrowing built in a chance to make piles of risk-free money for the big banks that play in the bond market. However, treasury and trading are not big sources of profits at the average regional banks, much less the thousands of smaller institutions. With unemployment high and households buried in debt, lending to consumers was too risky, and banks were under pressure from their regulators to tighten standards even as the politicians demanded they lend.

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Even doubling the value of the RMB in dollar terms would change none of that. On the other hand, removing Chinese savings and reserves from the global financial economy could be catastrophic. The same politicians who bang on about getting tough with China routinely vote for spending that depends on Chinese purchases of US Treasury debt. The super-low interest rates of the Great Moderation sowed the seeds of the asset-price bubbles that led up to the financial market meltdown of 2008 were in part a reflection of too much Chinese money chasing dollar investments. However, going forward, the lack of Chinese investment flows could prove far more dangerous in the current state of the world.

Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---And Prevented Economic Disaster by Nick Timiraos

"World Economic Forum" Davos, Alan Greenspan, asset-backed security, banking crisis, Bear Stearns, Bernie Sanders, bitcoin, Black Monday: stock market crash in 1987, Bonfire of the Vanities, break the buck, central bank independence, collapse of Lehman Brothers, collective bargaining, coronavirus, corporate raider, COVID-19, credit crunch, cryptocurrency, Donald Trump, fear index, financial innovation, financial intermediation, full employment, George Akerlof, George Floyd, global pandemic, global supply chain, Greta Thunberg, implied volatility, income inequality, inflation targeting, inverted yield curve, junk bonds, lockdown, Long Term Capital Management, low interest rates, managed futures, margin call, meme stock, money market fund, moral hazard, non-fungible token, oil shock, Phillips curve, price stability, pushing on a string, quantitative easing, Rishi Sunak, risk tolerance, rolodex, Ronald Reagan, Savings and loan crisis, secular stagnation, Skype, social distancing, subprime mortgage crisis, Tesla Model S, too big to fail, unorthodox policies, Y2K, yield curve

Productivity growth was on an upswing after a two-decade lull, allowing the Fed to hold off on raising interest rates even as the unemployment rate fell to lower levels. Nonetheless, the idea of the natural rate lived on. More than a decade later, Yellen showed no fears about keeping interest rates low. She was a fierce advocate for Bernanke’s easy-money, low-interest-rate policies. In late 2012, when Powell grew nervous that the risks of continued stimulus were outweighing the benefits, Yellen reminded her colleagues of the promises they had made to support a stronger jobs recovery: “We communicated that we will at least keep refilling the punch bowl until the guests have all arrived and will not remove it prematurely before the party is well underway.”23 As vice-chair and then chair, Yellen had borne the brunt of years of unhappiness with the Fed’s post-crisis policies, including at a testy three-hour congressional hearing in February 2015.

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Trump announced tariffs on China, claiming “trade wars are good and easy to win.” Cohn quit. His departure removed the strongest shield between the White House and the Fed. It was a sobering reminder that the staff could not ultimately shake Trump from what he believed: Tariffs were good. Trade deficits were bad. Low interest rates were good. High interest rates were bad. In April 2018, outgoing New York Fed President William Dudley spoke for most of the FOMC: “I don’t really think a trade war is a winnable proposition.”12 Cohn’s replacement, the courtly TV host Larry Kudlow, also opposed tariffs, but he was eager to be in a White House job after being passed over for one at the start of the administration.

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Trump wasn’t picking up the phone to yell at Powell, but he was effectively doing the same thing through the media—turning what Truman, Johnson, and Nixon had done privately into a public spectacle. “Every time we do something great, he raises the interest rates,” Trump said of Powell in an interview with The Wall Street Journal on October 23. “How the hell do you compete with that?… He was supposed to be a low-interest rate guy. It’s turned out that he’s not.”4 At Oval Office meetings, Trump erupted at Mnuchin for recommending Powell: “I thought you told me he was going to be good.”5 Even Trump’s advisers ignored these initial verbal broadsides. Powell’s first few rate increases had been widely telegraphed and were universally expected by financial markets.

The End of Wall Street by Roger Lowenstein

"World Economic Forum" Davos, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, benefit corporation, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, break the buck, Brownian motion, Carmen Reinhart, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fear of failure, financial deregulation, financial engineering, fixed income, geopolitical risk, Glass-Steagall Act, Greenspan put, high net worth, Hyman Minsky, interest rate derivative, invisible hand, junk bonds, Ken Thompson, Kenneth Rogoff, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Martin Wolf, Michael Milken, money market fund, moral hazard, mortgage debt, negative equity, Northern Rock, Ponzi scheme, profit motive, race to the bottom, risk tolerance, Ronald Reagan, Rubik’s Cube, Savings and loan crisis, savings glut, short selling, sovereign wealth fund, statistical model, the payments system, too big to fail, tulip mania, Y2K

See also credit default swaps premiums on AIG on CDOs purchased by Citigroup premiums on General Electric premiums on Goldman Sachs premiums on Lehman Brothers premiums on Morgan Stanley on mortgage-backed securities premiums on Wachovia insurers, bond. See also specific insurers interest rates adjustable. See adjustable rate mortgages on auto loans Federal Reserve’s on high-yield (junk bond) debt on investment-grade bonds low. See low interest rates short-term for subprime mortgages Internet bubble. See dot-com bubble investing, low interest rates and investment banking death of decline of Ireland Jackson, Michael Japan J.C. Flowers &. Co. Jensen, Michael Jester, Dan Johnson, James Johnson, Lyndon JPMorgan Chase AIG and as banker to Wall Street Bear Stearns and history of Lehman Brothers and Merrill Lynch and Morgan Stanley and subprime mortgages and Washington Mutual and Kaufman, Henry Kelleher, Colm Kelly, Pete Kelly, Robert Keynes, John Maynard Killinger, Kerry Kindler, Robert King, William Kirk, Alex Kohlberg Kravis Roberts Kohn, Donald Korea Korea Development Bank Kovacevich, Richard Kraus, Peter Kronthal, Jeff Kuroyanagi, Nobuo Kyl, Jon Lay, Kenneth Lee, James (Jimmy) Lehman Brothers Alternative-A loans Archstone-Smith Trust and attempt to convert to bank holding company Bank of America and bankruptcy.

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Consumers exhausted their savings and kept on spending (the total of household savings plummeted from 4 percent of the GDP when Clinton took office to negative 4 percent of the GDP by the end of Bush’s first term). Whatever the purpose—a home, a car, a lifestyle enhancement—credit sustained it. If this blissful-seeming period had a downside, it was that investors, who were penalized by low interest rates, which lowered their returns, struggled to find higher-yielding securities. Not just professional investors and corporate CEOs, who routinely complained of a lack of opportunities, but hospital funds, school boards from remote Whitefish Bay, Wisconsin, to those in big cities, university endowments from Harvard’s on down, state pension funds such as California’s—all reached for securities that offered a smidgeon of extra yield.

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Investors did not think of themselves as “reaching,” a term that implies a degree of incaution. They were assured that loans to private equity deals were safe and, certainly, that mortgage pools were safe. But when interest rates are low, the only way for investors as a group to earn more is to assume more risk. The phenomenon of low interest rates was worldwide, but in the search for yield, investors tilted west. China, Japan, Germany and various oil-exporting nations spent less than their income and thus had money to lend. It was their dollars that fueled the credit binge. The United States, the United Kingdom, Spain, and Australia absorbed more than half of the world’s surplus capital; at the manic peak of its borrowing, in the late 2000s, the United States alone sopped up 70 percent.6 The U.S. current account deficit was a perpetual source of worry in international financial circles.

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them by Nouriel Roubini

"World Economic Forum" Davos, 2021 United States Capitol attack, 3D printing, 9 dash line, AI winter, AlphaGo, artificial general intelligence, asset allocation, assortative mating, autonomous vehicles, bank run, banking crisis, basic income, Bear Stearns, Big Tech, bitcoin, Bletchley Park, blockchain, Boston Dynamics, Bretton Woods, British Empire, business cycle, business process, call centre, carbon tax, Carmen Reinhart, cashless society, central bank independence, collateralized debt obligation, Computing Machinery and Intelligence, coronavirus, COVID-19, creative destruction, credit crunch, crony capitalism, cryptocurrency, currency manipulation / currency intervention, currency peg, data is the new oil, David Ricardo: comparative advantage, debt deflation, decarbonisation, deep learning, DeepMind, deglobalization, Demis Hassabis, democratizing finance, Deng Xiaoping, disintermediation, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, energy security, energy transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, eurozone crisis, failed state, fake news, family office, fiat currency, financial deregulation, financial innovation, financial repression, fixed income, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, future of work, game design, geopolitical risk, George Santayana, Gini coefficient, global pandemic, global reserve currency, global supply chain, GPS: selective availability, green transition, Greensill Capital, Greenspan put, Herbert Marcuse, high-speed rail, Hyman Minsky, income inequality, inflation targeting, initial coin offering, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of movable type, Isaac Newton, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, junk bonds, Kenneth Rogoff, knowledge worker, Long Term Capital Management, low interest rates, low skilled workers, low-wage service sector, M-Pesa, margin call, market bubble, Martin Wolf, mass immigration, means of production, meme stock, Michael Milken, middle-income trap, Mikhail Gorbachev, Minsky moment, Modern Monetary Theory, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Mustafa Suleyman, Nash equilibrium, natural language processing, negative equity, Nick Bostrom, non-fungible token, non-tariff barriers, ocean acidification, oil shale / tar sands, oil shock, paradox of thrift, pets.com, Phillips curve, planetary scale, Ponzi scheme, precariat, price mechanism, price stability, public intellectual, purchasing power parity, quantitative easing, race to the bottom, Ralph Waldo Emerson, ransomware, Ray Kurzweil, regulatory arbitrage, reserve currency, reshoring, Robert Shiller, Ronald Reagan, Salesforce, Satoshi Nakamoto, Savings and loan crisis, Second Machine Age, short selling, Silicon Valley, smart contracts, South China Sea, sovereign wealth fund, Stephen Hawking, TED Talk, The Great Moderation, the payments system, Thomas L Friedman, TikTok, too big to fail, Turing test, universal basic income, War on Poverty, warehouse robotics, Washington Consensus, Watson beat the top human players on Jeopardy!, working-age population, Yogi Berra, Yom Kippur War, zero-sum game, zoonotic diseases

History may not repeat itself—but it often rhymes. Signs abound of another Roaring Twenties. Massive monetary, fiscal, and credit stimulus is feeding financial asset bubbles in global markets. The real economy that produces goods and services is poised to boom for a while, fed by debt arising from low interest rates, ample credit, and enormous economic stimulus by governments. The party will go on until reckless speculation becomes unsustainable, ending with the inevitable collapse in bullish sentiment, a phenomenon called a Minsky moment, named for economist Hyman Minsky. It’s what happens when market watchers suddenly begin to wake up and worry about irrational exuberance.

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By dissecting tendencies on the left and the right to pump up budgets before elections, we discovered that such a practice leads to large budget excesses in industrial economies no matter who’s in charge. Since then, these biases have become much more pronounced and rigid. It’s hard to see how borrowers and lenders will break a habit that scratches an irresistible itch. High interest rates used to give borrowers pause. Sustained low interest rates erased until recently the harsh memory of double-digit inflation last seen four decades ago. Few consumers under sixty years old recall such a climate. In 1981, home buyers signed up for mortgage rates pegged at 10 percent. Since those days, amnesia set in. As inflation receded, attitudes toward cheap debt began to echo MAD magazine’s devil-may-care mascot, Alfred E.

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If I lend to a government at 2 percent for ten years when inflation is 1 percent, then the real return on my investment is 1 percent. But if ex-post (after the fact) inflation turns out to be 10 percent the real return is negative 8 percent. Sensitivity to interest rates governs monetary policy. Sitting on top of towering debt with low interest rates restrains the inclination to raise rates, a step that would cause the value of bonds to fall. But those low rates encourage borrowing and reckless leverage, causing a bigger debt problem down the line. Alternatively, policy makers can impose “financial repression.” The mechanism is complex, but the bottom line answers the prayers of politicians who want to raise cash without riling too many voters.

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Big Tech, bitcoin, bond market vigilante , Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, capitalist realism, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, democratizing finance, Donald Trump, emotional labour, eurozone crisis, Extinction Rebellion, extractivism, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, green new deal, Greenspan put, housing crisis, Hyman Minsky, impact investing, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Jeremy Corbyn, job polarisation, junk bonds, Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low interest rates, low skilled workers, market clearing, means of production, Modern Monetary Theory, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Phillips curve, Ponzi scheme, Post-Keynesian economics, post-war consensus, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, Robert Solow, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

The growing attractiveness of monetarism emerged out of Keynesianism’s failure to explain the concurrent increases in inflation and unemployment of the 1970s.18 According to the Phillips Curve, there should have been a trade-off between these two variables — and for most of the post-war period there was — but this relationship broke down in the 1970s. Expanding government spending would have been the solution to rising unemployment, but reducing it would have been the response to inflation — with both happening at the same time, the Keynesians were stuck. Monetarists explained this phenomenon by attributing the rise in inflation to low interest rates and too much government spending. The only way to tackle stagflation was to reduce government spending and raise interest rates to reduce inflation. They argued that, whilst such a course of action might create mass unemployment or cause a recession, this was the price that had to be paid for the greater good of controlling the money supply.

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Some argued that central bank independence was supposed to bring about high interest rates, which would damage industrial capital and promote the interests of finance capital — but under the conditions of financialisation, the situation is much more nuanced. Histori- cally, there has been an assumed dichotomy between the interests of finance capital and those of industrial capital.36 The former has been assumed to prefer high interest rates to maximise the returns on lending, whilst the latter are assumed to prefer low interest rates to allow them to borrow cheaply. But as firms have become financialised, the interests of these two groups have merged.37 Amongst businesses committed to shareholder value, high profits mean high returns for investors, eroding investors’ commitment to high interest rates. Bankers themselves also tend to rely less on high interest rates to make their profits in modern financial systems.

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The guarantee that inflation would be kept relatively low meant that monetary policy could be directed towards inflating asset prices.38 With central bank policy effectively captured by the finance sector, interest rates remained low throughout the 1990s, supporting an expansion in lending and an increase in asset prices. Most commentators agree that low interest rates were a central cause of the dot-com bubble that emerged towards the end of the 1990s, culminating in the crash in the early Noughties. Under financialisation, independent central banks have been able to provide the two macroeconomic conditions that benefitted investors most: low consumer price inflation, and high asset price inflation.

Restarting the Future: How to Fix the Intangible Economy by Jonathan Haskel, Stian Westlake

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Andrei Shleifer, Big Tech, Black Lives Matter, book value, Boris Johnson, Brexit referendum, business cycle, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, Charles Lindbergh, charter city, cloud computing, cognitive bias, cognitive load, congestion charging, coronavirus, corporate governance, COVID-19, creative destruction, cryptocurrency, David Graeber, decarbonisation, Diane Coyle, Dominic Cummings, Donald Shoup, Donald Trump, Douglas Engelbart, Douglas Engelbart, driverless car, Edward Glaeser, equity risk premium, Erik Brynjolfsson, Estimating the Reproducibility of Psychological Science, facts on the ground, financial innovation, Francis Fukuyama: the end of history, future of work, general purpose technology, gentrification, Goodhart's law, green new deal, housing crisis, income inequality, index fund, indoor plumbing, industrial cluster, inflation targeting, intangible asset, interchangeable parts, invisible hand, job-hopping, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, knowledge worker, lockdown, low interest rates, low skilled workers, Marc Andreessen, market design, Martin Wolf, megacity, mittelstand, new economy, Occupy movement, oil shock, patent troll, Peter Thiel, Phillips curve, postindustrial economy, pre–internet, price discrimination, quantitative easing, QWERTY keyboard, remote working, rent-seeking, replication crisis, risk/return, Robert Gordon, Robert Metcalfe, Robert Shiller, Ronald Coase, Sam Peltzman, Second Machine Age, secular stagnation, shareholder value, Silicon Valley, six sigma, skeuomorphism, social distancing, superstar cities, the built environment, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Uber for X, urban planning, We wanted flying cars, instead we got 140 characters, work culture , X Prize, Y2K

As a result, rich countries earn about 25 percent less per capita than they would have earned if twenty-first-century growth had continued at trend rates. Periods of low growth are not in themselves unusual, but our current slump is both protracted and puzzling. It has proved resistant to ultra-low interest rates and a host of unconventional attempts to stimulate the economy. And it coexists with widespread enthusiasm about new technologies and new businesses that exploit them. Inequality. Whether you measure it in terms of wealth or income, inequality has increased considerably since the 1980s and has stayed constant.

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None of these promises were kept, but the fact that they were made at all strongly indicates the popularity of the idea that we should return to “making things” and the suspicion that a lot of modern economic activity is somehow not genuine. Economies and societies have often gone through periods of unease. But the coexistence of the five problems listed here is particularly puzzling and paradoxical. Economic stagnation has affected us before. But today it coexists with low interest rates, high business profits, and a widespread belief that we live in an age of dizzying technological progress. The rise of material inequality has slowed down, but its consequences and sequelae—inequality of status, political polarisation, geographical divides, blighted communities, and premature deaths6—continue to grow.

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In 1930, when he wrote “Economic Possibilities for Our Grandchildren,” he estimated that GDP would grow eightfold between 1930 and 2030.5 Based on growth to date, even excluding the effect of the COVID-19 pandemic, the UK and US economies have managed to grow by a factor of 5 and 6.4, respectively. But the problem with economic growth is not just that it has slowed down. It has slowed down in a way that has defied many standard economic explanations. The weak growth of the early twenty-first century coexisted with low interest rates and, until the COVID-19 crisis, high corporate valuations. Economists call this phenomenon secular stagnation. We can see those high valuations in figure 1.2: Tobin’s Q (a measure of how optimistic investors are about future corporate profits) is not quite at the dizzying heights of the dot-com boom, but it is way above its 1980s lows.

EuroTragedy: A Drama in Nine Acts by Ashoka Mody

Alan Greenspan, Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, book scanning, book value, Bretton Woods, Brexit referendum, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, fear index, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global macro, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, land bank, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low interest rates, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, precautionary principle, premature optimization, price stability, public intellectual, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Solow, short selling, Silicon Valley, subprime mortgage crisis, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

As could be expected, banks particularly short of capital were the most active in playing this “extend and pretend” game.158 Low interest rates made this cozy “extend and pretend” arrangement especially convenient for “zombie” borrowers, the borrowers who were de facto bankrupt but continued operating simply because their creditors chose not to foreclose on them. Unfortunately, the low interest rates came too late to kick-​start the Japanese economy and, in particular, they did little to revive the zombie borrowers. Such borrowers stayed on life support, happy to have their loans renewed at low interest rates and play along with the fiction that they would eventually repay their debts.

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Dijsselbloem, Jeroen, Olli Rehn, Jörg Asmussen, Klaus Regling, and Werner Hoyer. 2013. “Europe’s Crisis Response Is Showing Results.” Wall Street Journal, October 9. Di Lucido, Katherine, Anna Kovner, and Samantha Zeller. 2017. “Low Interest Rates and Bank Profits.” Liberty Street Economics Blog, Federal Reserve Board of New York, June 21. http://​libertystreeteconomics.newyorkfed.org/​2017/​06/​ low-​interest-​rates-​and-​bank-​profits.html. Dinan, Desmond. 2005. Ever Closer Union: An Introduction to European Integration. 3rd ed. Boulder: Lynne Reinner. Dinmore, Guy. 2012. “Italy Stands Firm in Face of Markets Crisis.”

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The ECB’s focus on price stability was less controversial than the simple fiscal rules were. Some prominent voices, however, did object. Franco Modigliani, an MIT economics professor and Nobel laureate, along with his colleague and fellow Nobel laureate Robert Solow, warned that the ECB’s mandate would make it focus obsessively on keeping inflation low. Interest rates, therefore, would be too high. This, they said, was a problem because European unemployment rates were worryingly high, and a monetary policy that overemphasized price stability would make the unemployment problem worse. They recommended that the ECB follow the Fed and adopt a “dual” mandate so that monetary policy not 90   e u r o t r a g e d y only would reflect inflation concerns but would also proactively (“on an equal footing” with the price-​stability goal) work to increase employment opportunities.

Getting Back to Full Employment: A Better Bargain for Working People by Dean Baker, Jared Bernstein

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, Alan Greenspan, American Society of Civil Engineers: Report Card, Asian financial crisis, business cycle, collective bargaining, declining real wages, full employment, George Akerlof, high-speed rail, income inequality, inflation targeting, low interest rates, mass immigration, minimum wage unemployment, new economy, Phillips curve, price stability, publication bias, quantitative easing, Report Card for America’s Infrastructure, rising living standards, selection bias, War on Poverty

We must defund Head Start, public schools, universities, libraries – not to mention our own employment opportunities. This absurdity is accepted wisdom in today’s fiscal debates, even though the extraordinarily low interest rates at which the government can borrow money would be taken as a signal by any private investor that now is a good time to borrow. If government were run like a business, it would be taking advantage of low interest rates to finance a wide variety of public investments. Franklin Roosevelt did that during the New Deal, undertaking infrastructure projects that still support the economy today. What kinds of work does the federal government need to get done today?

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And it would have prevented the world from recognizing that the economics profession was wrong, since its estimate of the structural rate of unemployment would otherwise never have been tested.[14] As the unemployment rate falls in the years ahead we will face similar controversies. Indeed, prominent voices in the profession claim that the unemployment rates we are now seeing are consistent with the structural rate of unemployment in the economy.[15] From this perspective, efforts by the Fed to boost the economy with low interest rates and quantitative easing, or by Congress to use spending and tax cuts to increase demand, are foolhardy, since they will primarily have the effect of raising the inflation rate while having little impact on output and employment. Their argument is that the downturn represents a fundamental shift in the economy.

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[43] The relationship between interest rates and bond prices can be illustrated with a simple bond calculator such as the one at Smart Money (http://www.smartmoney.com/calculator/bonds/bonds-calculator--bonds--bond-funds-1309988621833/). Since the market value of the bonds issued during the period of low interest rates will fall when interest rates rise, the market value of that portion of the government’s debt will fall, even though the interest burden will be unchanged. If it wanted the government could buy back those bonds, reducing the value of its debt. There would be no real reason to carry through this sort of bond flipping, but if we felt that the value of our debt was an important factor affecting the health of the economy, then buying back bonds at sharp discounts would be a nearly costless way to shave hundreds of billions of dollars off of the national debt

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, false flag, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, general purpose technology, Glass-Steagall Act, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low interest rates, low skilled workers, M-Pesa, market bubble, means of production, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, post-Fordism, Post-Keynesian economics, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Solow, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

The affinities with Marxist theory are evident in the writings of Crotty, Pollin, and Epstein, although the strongest influence has come from Keynes rather than Marx.51 In Keynes’s General Theory the rentier is a parasitical economic entity that extracts profits due to the scarcity of capital, and might thus depress investment and profitability for active capitalists.52 Successful capitalism requires the ‘euthanasia of the rentier’ that could be attained through low interest rates. In Marx’s writings, the rentier makes only fleeting appearances, and there are no clear references to a social stratum of rentiers. However, Marx discusses extensively the character and functioning of ‘monied’ capitalists, a category that is strongly reminiscent of rentiers, as is shown in detail in Chapter 5.

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However, these classification problems do not affect the gist of the analysis. 52 See also Federal Reserve Bulletin, ‘The Use of Checks and Other Noncash Payment Instruments in the United States’, December 2002; Federal Reserve Bulletin, ‘Trends in the Use of Payment Instruments in the United States’, Spring 2005; Federal Reserve, ‘The Future of Retail Electronic Payments Systems: Industry Interviews and Analysis’, Staff Study 175, December 2002. 53 See European Central Bank, ‘Electronification of Payments in Europe’, Monthly Bulletin, May 2003. 54 For further analysis of this point, see Costas Lapavitsas and Paulo Dos Santos, ‘Globalization and Contemporary Banking: On the Impact of New Technology’, Contributions to Political Economy 27, 2008, pp. 31–56. 55 Some replacement has of course taken place, though the extent of it remains empirically unclear; see Willem Boeschoten and Gerrit E. Hebbink, ‘Electronic Money, Currency Demand and Seignorage Loss in the G10 Countries’, De Nederlandsche Bank, 1996; Sheri Markose and Yiing Jia Loke, ‘Network Effects on Cash-Card Substitution in Transactions and Low Interest Rate Regimes’, Economic Journal 113, April 2003; Helmut Stix, ‘How Do Debit Cards Affect Cash Demand?’, Working Paper 82, Oesterreichische Nationalbank, 2003; Gene Amromin and Sujit Chakravorti, ‘Debit Card and Cash Usage: A Cross-Country Analysis’, WP 2007–04, Federal Reserve bank of Chicago, 2007. 56 There is much official concern about this issue, see, selectively, BIS, ‘Security of Electronic Money’, August 1996; BIS, ‘International Convergence of Capital Measurement and Capital Standards’, July 1988; and European Central Bank, Electronic Money System Security Objectives, May 2003. 57 See Mathias Drehmann et al., ‘Challenges to Currency’, Economic Policy, April 2002. 58 The possibility of introducing micro-payments has led to lively exchanges often revealing strong ideological opposition to the rule of money on the internet; see, for instance, Clay Shirky, ‘Fame vs Fortune: Micropayments and Free Content’, 5 September 2003, at shirky.com; and Scott McCloud, ‘Misunderstanding Micropayments’, 11 September 2003, at scottmccloud.com. 59 See Article 1(3) of the European Monetary Institute’s Directive 2000/46/EC, which regulates the issuing of e-money in the European Union.

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Unlike lending to particular enterprises, furthermore, the risk premium attached would tend to be low, reflecting the social character of the creditworthiness of the state. On the other hand, fluctuations of state indebtedness would also typically affect the rate of interest and could induce capital gains for bondholders. A rapid switch to a low-interest rate regime, in particular, could be the cause of sudden escalation of financial profits, and thus of enrichment of state bondholders out of the money income of society as a whole. Even more difficult problems, finally, would emerge for profits relating to financial securities that were the liabilities of workers.

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

Alan Greenspan, Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bond market vigilante , book value, Branko Milanovic, bread and circuses, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, carbon tax, commoditize, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, foreign exchange controls, Fractional reserve banking, full employment, German hyperinflation, Great Leap Forward, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land bank, land reform, liquidity trap, Long Term Capital Management, lost cosmonauts, low interest rates, McMansion, mega-rich, military-industrial complex, Money creation, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, proprietary trading, pushing on a string, quantitative easing, RAND corporation, rent control, rent stabilization, reserve currency, risk free rate, riskless arbitrage, Ronald Reagan, Savings and loan crisis, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, Tax Reform Act of 1986, The Great Moderation, the scientific method, time value of money, too big to fail, Two Sigma, upwardly mobile, War on Poverty, Yogi Berra, young professional

But by then the U.K. held just 3 percent of world gold reserves, setting the stage for the spectacular failure of the gold exchange standard in 1931.38 Still, this conventional conclusion fails to account for what would follow, a tectonic shift to America, which through unsound policy likewise would gradually debase gold during the interwar years. Most observers date the global end of the gold standard at 1931. Actually the United States and Britain merely substituted devaluation (and at least initially sterilization with low interest rates) for the old rules of the game that had demanded a pro-cyclical interest rate policy. This was followed by gold hoarding. From 1925 to 1945 Britain’s central bank gold holdings rose 64 percent, and those of the U.S. Treasury nearly tripled.39 The United States and French sterilization of their abundant gold inflows in particular forced other countries to abandon gold altogether or feel a disproportionate transmission of deflation.

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While the observations of Higgs are trenchant, if one instead views the period through the simpler explanation of Fisher’s debt deflation theory, the recovery from the Great Depression can be explained by economic actors having repaid debt or had debt extinguished through bankruptcy by 1942, making them feel freer to make use of low interest rates and exploit profitable business expansion. In 1942 total debt including federal, state, and household had fallen to less than 160 percent of GDP from a peak of 300 percent in 1932. That low level had not been seen since 1918, well before the roaring twenties. No econometric regression analysis could detect this sort of causation, because in the years leading up to the big turn in the economy decreasing leverage would be coincident with weakening consumer demand and increasing savings.

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And the ideology, mentalité and rhetoric of the gold standard led policy makers to take actions that only accentuated economic distress in the 1930s. 108 ENDLESS MONEY Central bankers continued to kick the world economy while it was down until it lost consciousness.”34 Having gained notoriety for helping to solve the riddle by being one of the several economists who jumped on the exchange rate transmission thesis bandwagon, in 2003 Eichengreen joined forces with another economist, Kris Mitchener, to pen The Great Depression as a Credit Boom Gone Wrong, which sets about to put to bed a competing thesis gaining attention in the wake of the bursting of the Internet bubble at the turn of the millennium. That thesis comes from the Austrian School, which instead squares the blame on the Depression and on the role of cheap (low-interest rate) money encouraging a massive credit bubble that would implode of its own weight. Rearranging regression variables as deftly as Martha Arguerich would play notes in a piano concerto, the duo vainly struggled to produce statistical significance that credit accumulation explicates the Depression, and at best conclude that “the point is evident in the fact that the credit boom indicator explains less than a third of the cross-country variation in the post-1929 slump in economic activity.”35 Case closed: A managed money system beats gold.

Borrow: The American Way of Debt by Louis Hyman

Alan Greenspan, asset-backed security, barriers to entry, big-box store, business cycle, cashless society, collateralized debt obligation, credit crunch, deindustrialization, deskilling, diversified portfolio, financial engineering, financial innovation, Ford Model T, Ford paid five dollars a day, Home mortgage interest deduction, housing crisis, income inequality, low interest rates, market bubble, McMansion, mortgage debt, mortgage tax deduction, Network effects, new economy, Paul Samuelson, plutocrats, price stability, Ronald Reagan, Savings and loan crisis, statistical model, Tax Reform Act of 1986, technology bubble, transaction costs, vertical integration, women in the workforce

For business and religious reasons, during most of Western history, though loans existed, charging interest on them—usury—was a sin, forbidden to most members of society. Our country was born into a world already capitalist, and the authority of our federal government, in one sense, emerged from the need for somebody to deal with the debts incurred during the Revolution. For everyday people, however, usury laws remained, and an untenably low interest rate ceiling restricted the flow of legal cash loans to a trickle. This debt—installment credit, ethnic lending circles, and loan sharks—existed outside the main flows of capital, yet for the borrowers involved—whether from rural Illinois or rural Sicily—access to credit made their lives in the city possible.

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By 1983, stock prices had barely recovered to their pre-1973 crash height, and, after adjusting for inflation, they actually hadn’t. For home owners, the late 1970s were a tremendous boon. Most home owners made a bucket of cash during the 1970s from the rapid inflation. Home owners who borrowed in the late 1960s with low interest rates had enjoyed a decade or more of inflation. Inflation might be bad for creditors, but it is great for debtors. Nominally, the house bought for $25,000 in 1970 would be worth $75,000 in 1985, but the home owner would still only be paying the mortgage on $25,000. The $50,000 just sat there. Though the rising price of houses made for a good “investment,” houses were not investments in the classic meaning of the word.

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While unions struggled to keep jobs in the United States and many American businesses found it hard to get a bank loan, unions and businesses could agree on one thing: credit cards for everyone. In the mid-1990s, the Bank of New York pitched members of the AFL-CIO a special card. Offered through Union Privilege, which negotiated discounts for union members, the card featured the profitable lack of a grace period but had a relatively low interest rate of prime plus 5 percent (13.25 percent in 1996).21 In 1996, for $575 million, Bank of New York sold the union credit card debt—with $3.4 billion in receivables—to the subprime lender Household International, a deal that elevated Household to the seventh largest credit card issuer in the U.S.22 Though the 2.2 million unionists who held the card may have found it difficult to organize for better wages, they could at least be sure of getting a gold card with “free car-rental insurance, roadside emergency auto service, a retail purchase-protection plan, and extended product warranties” that protected them as consumers in a way that Reagan-era unions could not protect them as workers.23 And of course, all those hard-won union pension funds earned a good return by investing in their own members’ debt.

How Boards Work: And How They Can Work Better in a Chaotic World by Dambisa Moyo

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Airbnb, algorithmic trading, Amazon Web Services, AOL-Time Warner, asset allocation, barriers to entry, Ben Horowitz, Big Tech, bitcoin, Black Lives Matter, blockchain, Boeing 737 MAX, Bretton Woods, business cycle, business process, buy and hold, call centre, capital controls, carbon footprint, collapse of Lehman Brothers, coronavirus, corporate governance, corporate social responsibility, COVID-19, creative destruction, cryptocurrency, deglobalization, don't be evil, Donald Trump, fake news, financial engineering, gender pay gap, geopolitical risk, George Floyd, gig economy, glass ceiling, global pandemic, global supply chain, hiring and firing, income inequality, index fund, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jeff Bezos, knowledge economy, labor-force participation, long term incentive plan, low interest rates, Lyft, money: store of value / unit of account / medium of exchange, multilevel marketing, Network effects, new economy, old-boy network, Pareto efficiency, passive investing, Pershing Square Capital Management, proprietary trading, remote working, Ronald Coase, Savings and loan crisis, search costs, shareholder value, Shoshana Zuboff, Silicon Valley, social distancing, Social Responsibility of Business Is to Increase Its Profits, SoftBank, sovereign wealth fund, surveillance capitalism, The Nature of the Firm, Tim Cook: Apple, too big to fail, trade route, Travis Kalanick, uber lyft, Vanguard fund, Washington Consensus, WeWork, women in the workforce, work culture

Management might opine, for example, on upcoming interest-rate hikes that could increase the company’s cost of operation, inflationary pressures that threaten to raise the costs of wages and production, and economic growth improvements that could improve the trajectory of the company’s revenue. One illustration of how macroeconomic shifts can create threats, opportunities, and crucial decision points can be seen in boards’ responses to the historically low interest rates that have persisted in the United States and Europe since the 2008 global financial crisis. These low rates have forced boards to decide whether they should borrow cheaply to invest in growing the business through innovation or entering new markets. However, given the unusual economic circumstances that companies have faced in this period—including the dim prospects for global growth and unsustainable levels of government borrowing—boards were obliged to think long and hard about the wisdom of borrowing so aggressively, knowing full well that their corporations could soon face higher tax bills from overstretched governments.

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Taking this information into account, board members must also discern whether a business unit is of long-term strategic value to ensure that the company remains profitable through economic cycles. For example, universal banking is a business model where banks maintain both retail and corporate clients, allowing them to make profits through periods of both high and low interest rates. In periods of high rates, individuals tend to borrow less, taking out fewer loans and mortgages and spending less on credit cards. The retail arm suffers as a result. However, high rates tend to produce higher M&A activity, as stronger companies acquire weaker ones, to the benefit of investment banks.

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If a government simply imposes too many restrictive conditions, competition in a local market can become untenable. Google effectively shut down its Chinese search engine in 2010 after a cyberattack from within the country targeted it and dozens of other companies. The increasingly siloed world also threatens how companies fund themselves. A “carry trade” is a strategy of borrowing at low interest rates in developed countries and investing in higher-yielding emerging markets. It is a strategy that many businesses engage in, but it may become increasingly untenable in the years ahead. The climate of global retrenchment has led to rising capital controls, which can hamper a company’s ability to move money to its business units in other countries and repatriate any profits to pay its shareholders.

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

"there is no alternative" (TINA), "World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, barriers to entry, battle of ideas, behavioural economics, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Great Leap Forward, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low interest rates, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

Lenders somehow thought that the elimination of exchange-rate risk meant the elimination of all risk. This was reflected in the low interest rates that these countries had to pay to borrow. By 2005, the risk premium on Greek bonds (relative to German bonds—that is, the amount extra that had to be paid to compensate for market participants’ perception of the higher risk of Greek bonds) fell to a miniscule 0.2 percent; on Italian bonds, it also dropped to 0.2 percent; on Spanish bonds, to 0.001 percent.34 The low interest rates at which funds were available in Spain (combined with the euro-euphoria, the belief that the euro had opened up a new era of prosperity and stability) helped create a real estate bubble; in the years before the 2008 crisis, more homes were constructed in Spain than in France, Germany, and Ireland combined.35 The real estate bubble distorted the Spanish economy.

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But the individual US states differ markedly—there are agricultural states and industrial ones; there are those that are helped by a fall in oil prices and those that are hurt; there are states that are chronically borrowing from others and some that are net lenders. These differences give rise to major differences in perspectives about economic policy: states that are net debtors and in which manufacturing is important typically argue for low interest rates, while the creditor states, with a large financial sector, argue for high interest rates. There is a long-standing distinction between Wall Street and Main Street. So while similarity might be sufficient for the success of a currency area, it is hardly necessary. There are three important adjustment mechanisms within the United States that enable the single-currency system to work.

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There could be a requirement, too, that, except when the economy is in recession, any increase in debt over a certain level be subject to a referendum within the country. The position of some in Europe against such mutualization—claiming that Europe is not a transfer union—is wrong on two counts: 1. It exaggerates the risk of default, at least the risks of default if debt is mutualized. At low interest rates, most of the crisis countries should have no trouble servicing their debts. Of course, in the absence of debt mutualization, there is a serious risk of partial default (which has already happened in the case of Greece). The irony is that existing arrangements may actually lead to larger losses on the part of creditor countries than a system of well-designed mutualization. 2.

How to Kick Ass on Wall Street by Andy Kessler

Andy Kessler, Bear Stearns, Bernie Madoff, buttonwood tree, call centre, collateralized debt obligation, eat what you kill, family office, fixed income, hiring and firing, invention of the wheel, invisible hand, London Whale, low interest rates, margin call, NetJets, Nick Leeson, pets.com, risk tolerance, Silicon Valley, sovereign wealth fund, time value of money, too big to fail, value at risk

The neat thing about derivatives is that no one but the person who created them knows what they’re worth, so you can sell them at huge markups. Woo-hoo. Huge departments were created and staffed up all over Wall Street to securitize anything that moved. This is why over half of Princeton’s graduating classes in the mid 2000’s ended up on Wall Street. With the Fed forcing low interest rates, the higher the yield of these funky new securities, the better. Sub-prime home mortgages, because of higher risk (ooh, don’t say that word) had high yields and moved to the top of the list. When not enough of these loans could be bought from banks, firms like Bear Stearns and Lehman set up entire loan origination subsidiaries, and in true Wall Street style, were aggressive and quickly rose to the top of the market share tables.

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What the heck do you do with $700 billion and still make 70% margins on revenues (with that 50-20 employee-shareholder split)? Their customers were making great money buying Wall Street’s derivatives. Why should banks and pension funds and hedge funds have all the fun? What a perfect use for all that capital on their huge balance sheets and cheap financing from low interest rates. Wall Street, en masse, just bought these high yielding derivatives for their own account. Ate their own dog food, if you will. This, of course, was a major dumb shit move. The sausage maker, who knows what goes into the sausage, never eats his own sausage. * * * It was the easy trade.

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Momentum investing. I’ll invest in Pets.com because dotcom stocks only go up (because there wasn’t much liquidity and every growth fund piled in). I’ll make take on another sub-prime loan derivative in my portfolio because home prices can’t go down, (because the Fed is so accommodative with low interest rates and this whole housing finance monstrosity is too big to fail, or so went the thinking.) Momo-ism almost always leads to losses. As efficient as markets are, there are always misallocation all over the place. You can always find political entrepreneurs who create attractive profits even though they are killing the economic engine.

The Making of Global Capitalism by Leo Panitch, Sam Gindin

accounting loophole / creative accounting, active measures, airline deregulation, Alan Greenspan, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Bear Stearns, Big bang: deregulation of the City of London, bilateral investment treaty, book value, Branko Milanovic, Bretton Woods, BRICs, British Empire, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon credits, Carmen Reinhart, central bank independence, classic study, collective bargaining, continuous integration, corporate governance, creative destruction, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, democratizing finance, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, Kickstarter, land reform, late capitalism, liberal capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, military-industrial complex, money market fund, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, proprietary trading, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, scientific management, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, stock buybacks, structural adjustment programs, subprime mortgage crisis, Tax Reform Act of 1986, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, vertical integration, very high income, Washington Consensus, We are all Keynesians now, Works Progress Administration, zero-coupon bond, zero-sum game

Despite the sheer tenacity of the view, going back to the theories of imperialism a century earlier, that overaccumulation is the source of all capitalist crises, the crisis that erupted in the US in 2007 was not caused by a profit squeeze or collapse of investment due to general overaccumulation in the economy.54 In the US, in particular, profits and investments had recovered strongly since the early 1980s. Nor was it caused by a weakening of the dollar due to the recycling of China’s trade surpluses, as so many had predicted. On the contrary, the enormous foreign purchases of US Treasuries had allowed a low-interest-rate policy to be sustained in the US after the bursting of the “new economy” stock bubble at the beginning of the new century. While this stoked an even greater real-estate bubble, after a brief downturn economic growth and non-residential investment resumed. Indeed, investment was growing significantly in the two years before the onset of the crisis, profits were at a peak, and capacity-utilization in industry had just moved above the historic average.

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Moreover, since unemployment caused by deflation increasingly provoked popular resistance, proclamations by governments that they would adhere to the gold standard no longer evoked confidence from capital itself.31 This contradiction between capitalism and democracy was aggravated by the uncertainties created by the shift in the hierarchy of capitalist states, as the US replaced Britain as the world’s creditor, as well as by the seemingly never-ending negotiations over World War I reparations payments.32 There were tariff adjustments to allow for European imports to the US, but these “were never low enough for the continental countries to manage their balance of payments without serious deflationary consequences”; and the private bank loans that were encouraged and indeed orchestrated by the American state certainly “helped the Europeans to make ends meet until 1929,” but they were not structured in such a way as “to guarantee reproductive investment.”33 In this context, speculation on exchange rates became more common, and economies were consequently left more vulnerable to destabilizing capital outflows. After 1926 the Federal Reserve kept US interest rates low, in order to support sterling following Britain’s return to the gold standard; yet the main effect of low interest rates was to shift funds from bonds to further speculation in already overheated US stock and real-estate markets. Then, when in 1928 the Fed undertook a relatively modest interest-rate increase to dampen this down, it triggered a massive diversion of funds away from foreign loans, with immediate deflationary effects abroad.

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The doubling of productive capacity during the war—and the seven-fold increase that was achieved in machine-tool production—involved many goods and components that could be readily converted to civilian production (from military trucks and airplanes to cars, civilian aircraft, and household appliances). The transition was further aided by easy access to investment funds from banks with wartime savings to lend at low interest rates. By the beginning of 1947 the President’s Report to Congress proudly announced that “profits in most lines of industry and business have been highly rewarding.”63 But since real disposable income had fallen between 1945 and 1947, and increased government expenditures on civilian items compensated for only 11 percent of the decrease in the military budget, the question arose of how the economy’s enormous productive capacity could be sustained.

Extreme Money: Masters of the Universe and the Cult of Risk by Satyajit Das

"RICO laws" OR "Racketeer Influenced and Corrupt Organizations", "there is no alternative" (TINA), "World Economic Forum" Davos, affirmative action, Alan Greenspan, Albert Einstein, algorithmic trading, Andy Kessler, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, bank run, banking crisis, banks create money, Basel III, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Black Swan, Bonfire of the Vanities, bonus culture, book value, Bretton Woods, BRICs, British Empire, business cycle, buy the rumour, sell the news, capital asset pricing model, carbon credits, Carl Icahn, Carmen Reinhart, carried interest, Celtic Tiger, clean water, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency risk, Daniel Kahneman / Amos Tversky, deal flow, debt deflation, Deng Xiaoping, deskilling, discrete time, diversification, diversified portfolio, Doomsday Clock, Dr. Strangelove, Dutch auction, Edward Thorp, Emanuel Derman, en.wikipedia.org, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Fall of the Berlin Wall, financial engineering, financial independence, financial innovation, financial thriller, fixed income, foreign exchange controls, full employment, Glass-Steagall Act, global reserve currency, Goldman Sachs: Vampire Squid, Goodhart's law, Gordon Gekko, greed is good, Greenspan put, happiness index / gross national happiness, haute cuisine, Herman Kahn, high net worth, Hyman Minsky, index fund, information asymmetry, interest rate swap, invention of the wheel, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", job automation, Johann Wolfgang von Goethe, John Bogle, John Meriwether, joint-stock company, Jones Act, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, laissez-faire capitalism, load shedding, locking in a profit, Long Term Capital Management, Louis Bachelier, low interest rates, margin call, market bubble, market fundamentalism, Market Wizards by Jack D. Schwager, Marshall McLuhan, Martin Wolf, mega-rich, merger arbitrage, Michael Milken, Mikhail Gorbachev, Milgram experiment, military-industrial complex, Minsky moment, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, Naomi Klein, National Debt Clock, negative equity, NetJets, Network effects, new economy, Nick Leeson, Nixon shock, Northern Rock, nuclear winter, oil shock, Own Your Own Home, Paul Samuelson, pets.com, Philip Mirowski, Phillips curve, planned obsolescence, plutocrats, Ponzi scheme, price anchoring, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, quantitative trading / quantitative finance, Ralph Nader, RAND corporation, random walk, Ray Kurzweil, regulatory arbitrage, Reminiscences of a Stock Operator, rent control, rent-seeking, reserve currency, Richard Feynman, Richard Thaler, Right to Buy, risk free rate, risk-adjusted returns, risk/return, road to serfdom, Robert Shiller, Rod Stewart played at Stephen Schwarzman birthday party, rolodex, Ronald Reagan, Ronald Reagan: Tear down this wall, Satyajit Das, savings glut, shareholder value, Sharpe ratio, short selling, short squeeze, Silicon Valley, six sigma, Slavoj Žižek, South Sea Bubble, special economic zone, statistical model, Stephen Hawking, Steve Jobs, stock buybacks, survivorship bias, tail risk, Teledyne, The Chicago School, The Great Moderation, the market place, the medium is the message, The Myth of the Rational Market, The Nature of the Firm, the new new thing, The Predators' Ball, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, trickle-down economics, Turing test, two and twenty, Upton Sinclair, value at risk, Yogi Berra, zero-coupon bond, zero-sum game

Watanabes now wielded similar influence in currency markets. Professional traders, hedge funds, and banks followed Mrs. Watanabe’s actions and mimicked them via the yen carry trade—investors borrowed in yen at low interest rates, converted it into foreign currencies and invested the money at higher rates. Investors enjoyed the carry—the difference between the income (high interest rates in the foreign currency) and the cost of borrowing (low interest rates in yen). Investors played these games with borrowed money. Larry the Liquidator in the film Other People’s Money confesses that he loves one thing more than money: other people’s money.

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In 2007, U.S. citizens were falling behind in payments on their mortgages in record numbers in Gravity Iowa; Mars, Pennsylvania; Paris, Texas; Venus Texas; Earth, Texas; and Saturn, Texas. Since 2000, housing prices in the United States had increased dramatically, driven by a combination of low interest rates, a strong and growing economy, and an innate desire for home ownership. U.S. President George Walker Bush, a former investment banker, set out his administration’s agenda for “an ownership society in America” clearly on December 16, 2003: “We want more people owning their own home. It is in our national interest that more people own their own home.

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You don’t own the tickets but you think that ticket prices will fall before you have to deliver them. If they do, then you buy the ticket for say $160 before the week is out and deliver to the person who bought it for $200, making $40. The carry trade entails borrowing in a currency that has low interest rates. The Japanese yen is a perennial favorite as interest rates there have been close to an anorexic 0.00 percent for many years. You take the money and invest it in something earning more than the interest rate you pay and pocket the difference. You can lose—that’s risk. The thing that you thought would go up comes down, and the thing you thought would come down goes up.

Why Your World Is About to Get a Whole Lot Smaller: Oil and the End of Globalization by Jeff Rubin

addicted to oil, air freight, banking crisis, Bear Stearns, big-box store, BRICs, business cycle, carbon footprint, carbon tax, collateralized debt obligation, collective bargaining, creative destruction, credit crunch, David Ricardo: comparative advantage, decarbonisation, energy security, food miles, Ford Model T, hydrogen economy, illegal immigration, immigration reform, Intergovernmental Panel on Climate Change (IPCC), invisible hand, James Watt: steam engine, Jevons paradox, Just-in-time delivery, low interest rates, market clearing, megacity, megaproject, North Sea oil, oil shale / tar sands, oil shock, peak oil, profit maximization, reserve currency, South Sea Bubble, subprime mortgage crisis, the market place, The Wealth of Nations by Adam Smith, trade liberalization, work culture , zero-sum game

When low-income workers were getting approved for subprime mortgages, regular folks with better-paying jobs were already getting preapproved credit cards in the mail with twice the spending limit of their existing cards. These types of extravagances exist only in a credit bubble, which in turn requires very low interest rates to finance. Record low interest rates were not only essential to the supply of subprime mortgages, but also in generating the demand for such mortgages in financial markets. The attraction from exotic derivative instruments like CDOs, funded by subprime mortgage payments, were created by the record low interest rates that government securities like Treasury bills were paying. The low inflation dividend from globalization and cheap oil was great if you were a borrower, since it meant you could buy your house with a minimal down payment.

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In Australia, the ratio rose even more dramatically, soaring from just under 100 percent in 2000 to almost 160 percent by 2008, while in Canada, the ratio leapt from just under 100 percent to over 130 percent. In all four countries, not only did household debt grow measurably against income, it did so at an unprecedented pace. And the one thing that all these countries shared in common was a combination of record low interest rates and easy credit. Consumer spending is good for the economy. That’s why governments around the world are begging people to go out and buy fridges. But the thing about high oil prices is that while they raise the price of everything, they transfer those trillions of dollars of new money out of the oil-importing countries, where people spend their entire paychecks each month, to the oil-exporting countries, particularly OPEC countries, where savings rates are as high as 50 percent.

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We saw in the last chapter how cheap energy means cheap transportation, which in turn gives Western consumers access to cheap labor. And that means little inflation. It was cheap oil and the trade negotiators, not the central bankers like Allan Greenspan, that actually wrestled inflation to the ground. Low interest rates come from low inflation, and low inflation comes from globalization. But globalization requires cheap transport costs, and hence cheap oil. As globalization expunged the world of inflation, central banks were free to bring down interest rates, which they quickly did. In that way, not only did falling inflation boost your purchasing power, it also fundamentally boosted your borrowing power.

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

affirmative action, Affordable Care Act / Obamacare, airline deregulation, Alan Greenspan, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, behavioural economics, Berlin Wall, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, electricity market, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, Glass-Steagall Act, Great Leap Forward, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Bogle, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low interest rates, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, Paul Volcker talking about ATMs, payday loans, Phillips curve, price stability, profit maximization, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, search costs, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, stock buybacks, subprime mortgage crisis, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, Tragedy of the Commons, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

We’ve already mentioned some, but there are many others: taking advantage of asymmetries of information (selling securities that they had designed to fail, but knowing that buyers didn’t know that);10 taking excessive risk—with the government holding a lifeline, bailing them out and assuming the losses, the knowledge of which, incidentally, allows them to borrow at a lower interest rate than they otherwise could; and getting money from the Federal Reserve at low interest rates, now almost zero. But the form of rent seeking that is most egregious—and that has been most perfected in recent years—has been the ability of those in the financial sector to take advantage of the poor and uninformed, as they made enormous amounts of money by preying upon these groups with predatory lending and abusive credit card practices.11 Each poor person might have only a little, but there are so many poor that a little from each amounts to a great deal.

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So too, stronger unions and better education might mitigate the consequences of skill-biased technological change. And it’s not even inevitable that technological change continues in this direction: making firms pay for the environmental consequences of their production might encourage firms to shift away from skill-biased technological change to resource-saving technological change. Low interest rates may encourage firms to robotize, replacing unskilled jobs that can easily be routinized; so alternative macroeconomic and investment policies could slow the pace of the deskilling of our economy. So too, while economists may disagree about the precise role that globalization has played in the increase in inequality, the asymmetries in globalization to which we call attention put workers at a particular disadvantage; and we can manage globalization better, in ways that might lead to less inequality.

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While it is not inevitable that policy makers will respond to the deficiency in demand brought about by the growth in inequality in ways that lead to instability and a waste of resources, it happens often. How the government’s response to weak demand from inequality led to a bubble and even more inequality For instance, the Federal Reserve responded to the 1991 recession with low interest rates and the ready availability of credit, helping to create the tech bubble, a phenomenal increase in the price of technology stocks accompanied by heavy investment in the sector. There was, of course, something real underlying that bubble—technological change, brought about by the communications and computer revolution.

The Asian Financial Crisis 1995–98: Birth of the Age of Debt by Russell Napier

Alan Greenspan, Asian financial crisis, asset allocation, bank run, banking crisis, banks create money, Berlin Wall, book value, Bretton Woods, business cycle, Buy land – they’re not making it any more, capital controls, central bank independence, colonial rule, corporate governance, COVID-19, creative destruction, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, Deng Xiaoping, desegregation, discounted cash flows, diversification, Donald Trump, equity risk premium, financial engineering, financial innovation, floating exchange rates, Fractional reserve banking, full employment, Glass-Steagall Act, hindsight bias, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, if you build it, they will come, impact investing, inflation targeting, interest rate swap, invisible hand, Japanese asset price bubble, Jeff Bezos, junk bonds, Kickstarter, laissez-faire capitalism, lateral thinking, Long Term Capital Management, low interest rates, market bubble, mass immigration, means of production, megaproject, Mexican peso crisis / tequila crisis, Michael Milken, Money creation, moral hazard, Myron Scholes, negative equity, offshore financial centre, open borders, open economy, Pearl River Delta, price mechanism, profit motive, quantitative easing, Ralph Waldo Emerson, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, risk-adjusted returns, Ronald Reagan, Savings and loan crisis, savings glut, Scramble for Africa, short selling, social distancing, South China Sea, The Wealth of Nations by Adam Smith, too big to fail, yield curve

Changes in the value of the yen had become particularly important at this time because it was the main source of something called ‘carry’. In the age of free capital flows, which had dawned through the 1980s, it was possible to borrow in one currency to invest in the assets of another. This form of investment is known as ‘carry’ and it manifests itself primarily through investors borrowing in currencies with low interest rates to invest in currencies with high interest rates. The investor earns more income than they have to pay in interest, but of course is very vulnerable to loss should the exchange rate of the currency they borrow in appreciate relative to the currency they invest in. For many investors such a form of investment would be classified as too dangerous.

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The consequence was a steady decline in inflation and the BOJ was reducing interest rates in an attempt to bolster economic growth and reverse a recent deflation. For many investors the aggressive scale of this monetary response was likely to continue and as Japanese interest rates declined well below US interest rates, the yen was likely to fall relative to the US dollar. This created an opportunity to borrow yen at very low interest rates and invest them in US dollar-denominated assets and pick up the extra income as profit with limited prospects of currency losses. As long as the yen declined relative to the US dollar, these investors would also secure capital gains from the currency adjustment. What surprised investors was that the yen could weaken while the carry trade also reversed.

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However, the fact that this rally pushed interest rates higher in Thailand, as the local authorities intervened to prevent the capital exodus pushing the baht down relative to the US dollar, should have served as a warning to investors still seeking to profit from the Asian economic miracle. If ‘the miracle’ relied upon low interest rates creating high economic growth, just a change in the direction of capital flows was evidently capable of pushing interest rates higher. The rise in the yen was not the only catalyst that could trigger a reverse of capital flows and tighter monetary policy in Asia. Capital losses on the investments that carry traders held in Asia could also quickly wipe out any profits from an investment that was largely funded by debt.

The Bitcoin Standard: The Decentralized Alternative to Central Banking by Saifedean Ammous

"World Economic Forum" Davos, Airbnb, Alan Greenspan, altcoin, bank run, banks create money, bitcoin, Black Swan, blockchain, Bretton Woods, British Empire, business cycle, capital controls, central bank independence, Charles Babbage, conceptual framework, creative destruction, cryptocurrency, currency manipulation / currency intervention, currency peg, delayed gratification, disintermediation, distributed ledger, Elisha Otis, Ethereum, ethereum blockchain, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, George Gilder, Glass-Steagall Act, global reserve currency, high net worth, initial coin offering, invention of the telegraph, Isaac Newton, iterative process, jimmy wales, Joseph Schumpeter, low interest rates, market bubble, market clearing, means of production, military-industrial complex, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Paul Samuelson, peer-to-peer, Peter Thiel, price mechanism, price stability, profit motive, QR code, quantum cryptography, ransomware, reserve currency, Richard Feynman, risk tolerance, Satoshi Nakamoto, scientific management, secular stagnation, smart contracts, special drawing rights, Stanford marshmallow experiment, The Nature of the Firm, the payments system, too big to fail, transaction costs, Walter Mischel, We are all Keynesians now, zero-sum game

The constant monetary and fiscal management would naturally lead to the fluctuation of the value of national currencies, resulting in imbalances in trade and capital flows. When a country's currency is devalued, its products become cheaper to foreigners, leading to more goods leaving the country, while holders of the currency seek to purchase foreign currencies to protect themselves from devaluation. As devaluation is usually accompanied by artificially low interest rates, capital seeks exit from the country to go where it can be better rewarded, exacerbating the devaluation of the currency. On the other hand, countries which maintained their currency better than others would thus witness an influx of capital whenever their neighbors devalued, leading to their currency appreciating further.

…

When it comes to investment, sound money creates an economic environment where any positive rate of return will be favorable to the investor, as the monetary unit is likely to hold onto its value, if not appreciate, thus strengthening the incentive to invest. With unsound money, on the other hand, only returns that are higher than the rate of depreciation of the currency will be positive in real terms, creating incentives for high‐return but high‐risk investment and spending. Further, as increases in the money supply effectively mean low interest rates, the incentive to save and invest is diminished while the incentive to borrow increases. The track record of the 46‐year experiment with unsound money bears out this conclusion. Savings rates have been declining across the developed countries, dropping to very low levels, while personal, municipal, and national debts have increased to levels which would have seemed unimaginable in the past.

…

As the central bank manages the money supply and interest rate, there will inevitably be a discrepancy between savings and loanable funds. Central banks are generally trying to spur economic growth and investment and to increase consumption, so they tend to increase the money supply and lower the interest rate, resulting in a larger quantity of loanable funds than savings. At these artificially low interest rates, businesses take on more debt to start projects than savers put aside to finance these investments. In other words, the value of consumption deferred is less than the value of the capital borrowed. Without enough consumption deferred, there will not be enough capital, land, and labor resources diverted away from consumption goods toward higher‐order capital goods at the earliest stages of production.

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , Bretton Woods, British Empire, business cycle, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, Goodhart's law, Greenspan put, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, junk bonds, Kenneth Rogoff, Kickstarter, labour market flexibility, Les Trente Glorieuses, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market clearing, Martin Wolf, Minsky moment, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, Suez crisis 1956, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce, zero-sum game

In his book The Death of Inflation, economist Roger Bootle cites the cost of a taxi ride, or Hackney carriage, as it was then known.2 In 1694, the same year the Bank of England was founded, the cost was set at one shilling (a twentieth of a pound) a mile. Two centuries later, the rate was at the same level. In 1932, the average level of prices in Britain was slightly below what it had been in 1795, during the Napoleonic Wars. Low inflation also meant low interest rates. In 1888, George Goschen, the British Chancellor of the Exchequer, converted Consols (then the name for government debt) paying 3 per cent into bonds paying 2.5 per cent, reducing the government’s interest bill. In 1896, while William Jennings Bryan was leading his campaign for debtors on the other side of the Atlantic, the yield on Consols fell to its lowest level in history – 2.2 per cent.3 Creditors had no inkling of the problems to come in the twentieth century; they would never be so complacent again.

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And when investors buy the government bonds of another country, their primary motivation may be the soundness of the government’s finances, rather than the likely exchange-rate movement. For those who are depositing money in a foreign bank, or investing very short term, the level of interest rates is likely to be the primary consideration. In the early days of floating exchange rates, low interest rates were associated with strong currencies, and high interest rates with weak ones. That was because high interest rates were usually needed to cope with high inflation and, on a PPP basis, one would expect high inflation currencies to depreciate. The high interest rates were thus needed to compensate investors for the risk of depreciation.

…

The penalties designed under the Stability and Growth pact were not applied, not least because the big countries like France and Germany also broke the rules. The ‘one size fits all’ monetary policy led to interest rates that were too low for some countries, creating property booms in both Ireland and Spain. These booms were part of the bubble process that we shall explore in the next chapter. Low interest rates encouraged asset prices to rise in many countries. They created a feeling of euphoria that may have made economic performance look better than it was by masking underlying problems of competitiveness. Crucially, the euro area lacked any mechanism to put pressure on countries that were running a trade deficit.

Stakeholder Capitalism: A Global Economy That Works for Progress, People and Planet by Klaus Schwab, Peter Vanham

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 3D printing, additive manufacturing, agricultural Revolution, air traffic controllers' union, Anthropocene, Apple II, Asian financial crisis, Asperger Syndrome, basic income, Berlin Wall, Big Tech, biodiversity loss, bitcoin, Black Lives Matter, blockchain, blue-collar work, Branko Milanovic, Bretton Woods, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, car-free, carbon footprint, carbon tax, centre right, clean tech, clean water, cloud computing, collateralized debt obligation, collective bargaining, colonial rule, company town, contact tracing, contact tracing app, Cornelius Vanderbilt, coronavirus, corporate governance, corporate social responsibility, COVID-19, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, cuban missile crisis, currency peg, cyber-physical system, decarbonisation, demographic dividend, Deng Xiaoping, Diane Coyle, digital divide, don't be evil, European colonialism, Fall of the Berlin Wall, family office, financial innovation, Francis Fukuyama: the end of history, future of work, gender pay gap, general purpose technology, George Floyd, gig economy, Gini coefficient, global supply chain, global value chain, global village, Google bus, green new deal, Greta Thunberg, high net worth, hiring and firing, housing crisis, income inequality, income per capita, independent contractor, industrial robot, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Khan Academy, Kickstarter, labor-force participation, lockdown, low interest rates, low skilled workers, Lyft, manufacturing employment, Marc Benioff, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, Martin Wolf, means of production, megacity, microplastics / micro fibres, Mikhail Gorbachev, mini-job, mittelstand, move fast and break things, neoliberal agenda, Network effects, new economy, open economy, Peace of Westphalia, Peter Thiel, precariat, Productivity paradox, profit maximization, purchasing power parity, race to the bottom, reserve currency, reshoring, ride hailing / ride sharing, Ronald Reagan, Salesforce, San Francisco homelessness, School Strike for Climate, self-driving car, seminal paper, shareholder value, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, social distancing, Social Responsibility of Business Is to Increase Its Profits, special economic zone, Steve Jobs, Steve Wozniak, synthetic biology, TaskRabbit, The Chicago School, The Future of Employment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the scientific method, TikTok, Tim Cook: Apple, trade route, transfer pricing, Uber and Lyft, uber lyft, union organizing, universal basic income, War on Poverty, We are the 99%, women in the workforce, working poor, working-age population, Yom Kippur War, young professional, zero-sum game

But if low growth does remain the new normal, which seems likely, there is no easy mechanism for countries to repay their historical debt. Looking away certainly will not solve this problem. Low-Interest Rates and Low Inflation There was one life buoy for low growth and debt until now: low interest rates. Having a low interest on your loan, as many homeowners or student borrowers know, is a blessing. It allows you to pay back your debt without having to worry about the debt load getting larger. Since the financial crisis, central banks have ushered in an era of low lending rates, giving governments, companies, and consumers low interest rates as a form of relief. The goal is to, ultimately, restore higher growth as people consume more, companies invest more, and governments spend more.

…

High-quality debt is typically paid back over time—and can likely even provide a return on the investment. Such projects should be encouraged. By contrast, low-quality debt, such as deficit spending to boost consumption, generates no returns, even over time. This type of debt should be avoided. Overall, it is safe to say low-quality debt is on the rise. In part, this is because low interest rates in the West incentivize lending, which discourages borrowers from being careful with their spending. For governments, deficit spending has become the norm in recent decades, rather than the exception. The COVID crisis that erupted in the early months of 2020 hasn't made that picture any rosier.

…

Historically, interest rates and inflation tended to be inversely correlated, and central banks used their power to set interest rates as a tool to either curb inflation or stimulate it. By setting high interest rates, central banks gave people, companies, and governments an incentive to save money rather than spend it, easing upward pressure on prices. By setting low interest rates, they gave people the reverse incentive, namely to spend money and push up prices, since saving it wouldn't yield interest anyway. Since about a decade, however, this inverse correlation has all but ceased to exist in the West, with the situation particularly dire in Europe and Japan. Despite years of near-zero interest rates, inflation often remained close to zero as well.

Stakeholder Capitalism: A Global Economy That Works for Progress, People and Planet by Klaus Schwab

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, 3D printing, additive manufacturing, agricultural Revolution, air traffic controllers' union, Anthropocene, Apple II, Asian financial crisis, Asperger Syndrome, basic income, Berlin Wall, Big Tech, biodiversity loss, bitcoin, Black Lives Matter, blockchain, blue-collar work, Branko Milanovic, Bretton Woods, British Empire, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, car-free, carbon footprint, carbon tax, centre right, clean tech, clean water, cloud computing, collateralized debt obligation, collective bargaining, colonial rule, company town, contact tracing, contact tracing app, Cornelius Vanderbilt, coronavirus, corporate governance, corporate social responsibility, COVID-19, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, cuban missile crisis, currency peg, cyber-physical system, decarbonisation, demographic dividend, Deng Xiaoping, Diane Coyle, digital divide, don't be evil, European colonialism, Fall of the Berlin Wall, family office, financial innovation, Francis Fukuyama: the end of history, future of work, gender pay gap, general purpose technology, George Floyd, gig economy, Gini coefficient, global supply chain, global value chain, global village, Google bus, green new deal, Greta Thunberg, high net worth, hiring and firing, housing crisis, income inequality, income per capita, independent contractor, industrial robot, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, Khan Academy, Kickstarter, labor-force participation, lockdown, low interest rates, low skilled workers, Lyft, manufacturing employment, Marc Benioff, Mark Zuckerberg, market fundamentalism, Marshall McLuhan, Martin Wolf, means of production, megacity, microplastics / micro fibres, Mikhail Gorbachev, mini-job, mittelstand, move fast and break things, neoliberal agenda, Network effects, new economy, open economy, Peace of Westphalia, Peter Thiel, precariat, Productivity paradox, profit maximization, purchasing power parity, race to the bottom, reserve currency, reshoring, ride hailing / ride sharing, Ronald Reagan, Salesforce, San Francisco homelessness, School Strike for Climate, self-driving car, seminal paper, shareholder value, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, social distancing, Social Responsibility of Business Is to Increase Its Profits, special economic zone, Steve Jobs, Steve Wozniak, synthetic biology, TaskRabbit, The Chicago School, The Future of Employment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the scientific method, TikTok, Tim Cook: Apple, trade route, transfer pricing, Uber and Lyft, uber lyft, union organizing, universal basic income, War on Poverty, We are the 99%, women in the workforce, working poor, working-age population, Yom Kippur War, young professional, zero-sum game

But if low growth does remain the new normal, which seems likely, there is no easy mechanism for countries to repay their historical debt. Looking away certainly will not solve this problem. Low-Interest Rates and Low Inflation There was one life buoy for low growth and debt until now: low interest rates. Having a low interest on your loan, as many homeowners or student borrowers know, is a blessing. It allows you to pay back your debt without having to worry about the debt load getting larger. Since the financial crisis, central banks have ushered in an era of low lending rates, giving governments, companies, and consumers low interest rates as a form of relief. The goal is to, ultimately, restore higher growth as people consume more, companies invest more, and governments spend more.

…

High-quality debt is typically paid back over time—and can likely even provide a return on the investment. Such projects should be encouraged. By contrast, low-quality debt, such as deficit spending to boost consumption, generates no returns, even over time. This type of debt should be avoided. Overall, it is safe to say low-quality debt is on the rise. In part, this is because low interest rates in the West incentivize lending, which discourages borrowers from being careful with their spending. For governments, deficit spending has become the norm in recent decades, rather than the exception. The COVID crisis that erupted in the early months of 2020 hasn't made that picture any rosier.

…

Historically, interest rates and inflation tended to be inversely correlated, and central banks used their power to set interest rates as a tool to either curb inflation or stimulate it. By setting high interest rates, central banks gave people, companies, and governments an incentive to save money rather than spend it, easing upward pressure on prices. By setting low interest rates, they gave people the reverse incentive, namely to spend money and push up prices, since saving it wouldn't yield interest anyway. Since about a decade, however, this inverse correlation has all but ceased to exist in the West, with the situation particularly dire in Europe and Japan. Despite years of near-zero interest rates, inflation often remained close to zero as well.

Walk Away by Douglas E. French

Alan Greenspan, Bear Stearns, behavioural economics, business cycle, Elliott wave, forensic accounting, full employment, Home mortgage interest deduction, loss aversion, low interest rates, McMansion, mental accounting, mortgage debt, mortgage tax deduction, negative equity, New Journalism, Own Your Own Home, Richard Thaler, risk free rate, Robert Shiller, Savings and loan crisis, Tax Reform Act of 1986, the market place, transaction costs, unbiased observer, wealth creators

A hot land market will dictate short escrows of 90 to 180 days, whereas in a typical market, escrows of a year or more are not uncommon. A key factor in how much is offered in price for the land is the interest rate to be paid on the loan used to purchase the parcel. Low interest rates allow the developer to pay higher prices. Low interest rates also allow for the developer to take on more political and development risk. The political risk is the uncertainty that the builder will obtain the zoning necessary to build the number and type of units contemplated when the land was being considered for purchase.

…

Horizontal development costs can change dramatically during this process, as city hall may impose improvements that hadn’t been contemplated as well as cost increases caused by increased demand for dirt moving, utility trenching, and street paving. And since most of the costs of developing finished building lots is financed, low interest rates make more projects feasible than high interest rates, not only from a cost standpoint but also from a time standpoint. The interest for development and construction projects is financed—it is borrowed—just like the soft and hard costs associated with the development, thus the lower the interest rate, the longer the project has before it must be converted to a consumer good.

An Economic History of the Twentieth Century by J. Bradford Delong

affirmative action, Alan Greenspan, Andrei Shleifer, ASML, asset-backed security, Ayatollah Khomeini, banking crisis, Bear Stearns, Bretton Woods, British Empire, business cycle, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, centre right, collapse of Lehman Brothers, collective bargaining, colonial rule, coronavirus, cotton gin, COVID-19, creative destruction, crowdsourcing, cryptocurrency, cuban missile crisis, deindustrialization, demographic transition, Deng Xiaoping, Donald Trump, en.wikipedia.org, ending welfare as we know it, endogenous growth, Fairchild Semiconductor, fake news, financial deregulation, financial engineering, financial repression, flying shuttle, Ford Model T, Ford paid five dollars a day, Francis Fukuyama: the end of history, full employment, general purpose technology, George Gilder, German hyperinflation, global value chain, Great Leap Forward, Gunnar Myrdal, Haber-Bosch Process, Hans Rosling, hedonic treadmill, Henry Ford's grandson gave labor union leader Walter Reuther a tour of the company’s new, automated factory…, housing crisis, Hyman Minsky, income inequality, income per capita, industrial research laboratory, interchangeable parts, Internet Archive, invention of agriculture, invention of the steam engine, It's morning again in America, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, land reform, late capitalism, Les Trente Glorieuses, liberal capitalism, liquidity trap, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, means of production, megacity, Menlo Park, Mikhail Gorbachev, mortgage debt, mutually assured destruction, Neal Stephenson, occupational segregation, oil shock, open borders, open economy, Paul Samuelson, Pearl River Delta, Phillips curve, plutocrats, price stability, Productivity paradox, profit maximization, public intellectual, quantitative easing, Ralph Waldo Emerson, restrictive zoning, rising living standards, road to serfdom, Robert Gordon, Robert Solow, rolodex, Ronald Coase, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, Simon Kuznets, social intelligence, Stanislav Petrov, strikebreaker, structural adjustment programs, Suez canal 1869, surveillance capitalism, The Bell Curve by Richard Herrnstein and Charles Murray, The Chicago School, The Great Moderation, The Nature of the Firm, The Rise and Fall of American Growth, too big to fail, transaction costs, transatlantic slave trade, transcontinental railway, TSMC, union organizing, vertical integration, W. E. B. Du Bois, Wayback Machine, Yom Kippur War

v=HZCcSTz1qLo. 27. Lawrence Summers, “The Age of Secular Stagnation,” Foreign Affairs, March/April 2016, www.foreignaffairs.com/articles/united-states/2016-02-15/age-secular-stagnation. 28. See Olivier J. Blanchard, “Public Debt and Low Interest Rates,” American Economic Association, January 4, 2019, www.aeaweb.org/webcasts/2019/aea-presidential-address-public-debt-and-low-interest-rates. 29. Barack Obama, “Remarks by the President in State of the Union Address,” White House, President Barack Obama, January 27, 2010, https://obamawhitehouse.archives.gov/the-press-office/remarks-president-state-union-address. 30.

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The world’s governments, with their national economies, were all poorer than they had been in 1914, but the urge to spend was strong. The right did not dare resist it. The left did not have enough of an electoral mandate to make the rich pay. Financiers did not have the confidence to fill the gap by holding the resulting debt at low interest rates. The result was that the fiscal theory of the price level came into play—and inflation. From a narrow economists’ perspective, inflation is simply a tax, a rearrangement, and a confusion. It is a tax on cash, because your cash becomes worth less between when you acquire it and when you spend it.

…

Fourth, divide the current payout of the asset—its bond coupon or stock dividend payment—by the adjusted yield factor. This gives the price the asset should sell for. Americans in the 1920s who bothered to do all four steps did so with presumptions that told them the asset’s price had to go up. The result was widespread faith in the permanent “new era” of low risks, low-interest rates produced by successful macroeconomic stabilization, rapid growth produced by new technology, and confidence that in the future, depressions would be few and small. Concretely, this meant very high prices for financial assets, especially stocks, and especially stock in high-tech companies. Monetary economist (and Prohibition enthusiast) Irving Fisher ruined his reputation as an economic forecaster for all time with his late-1929 declaration that “stock prices have reached what looks like a permanently high plateau.”

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

"World Economic Forum" Davos, affirmative action, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, behavioural economics, Berlin Wall, biodiversity loss, Black Swan, Bretton Woods, business cycle, capital controls, carbon credits, carbon tax, Cass Sunstein, central bank independence, classic study, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial engineering, financial innovation, floating exchange rates, foreign exchange controls, full employment, Gini coefficient, Glass-Steagall Act, global macro, global reserve currency, global village, high net worth, high-speed rail, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), inverted yield curve, invisible hand, Just-in-time delivery, Kenneth Rogoff, Long Term Capital Management, low interest rates, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, military-industrial complex, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, precautionary principle, price stability, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Ronald Reagan, Savings and loan crisis, sovereign wealth fund, special drawing rights, subprime mortgage crisis, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Tragedy of the Commons, Washington Consensus, Westphalian system, WikiLeaks, women in the workforce, yield curve

Joshua Mendelsohn believes that Canada’s economy is showing clear signs of recovery that will continue. Canada has benefitted from having a stronger banking system than the United States and has avoided reckless property lending. The Canadian household sector is less leveraged than US households. Home sales rose sharply in early 2010 because of record low interest rates. Canada is also in a far better fiscal position than the United States. After several years of the government running fiscal surpluses, the public debt share of GDP fell to 21.7 percent in 2008, which is the lowest of any OECD (Organization for Economic Cooperation and Development) country.

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When these factors converge, they generate network effects in which the greater the number of people that are using the currency, the more beneficial it becomes for the users, and the more dominant it becomes. He thinks that the euro is not fully competitive with the dollar because there is no market for European government debt. Instead, investors have to choose between the debts of individual nation-states, of which the largest debtor is Italy. The yen suffers from the low interest rates in Japan and growing investor concern about the credit quality of Japanese government debt. The public debt will soon exceed 200 percent of GDP, and massive fiscal deficits will loom in the future. Greenwood does not regard the Special Drawing Rights (SDR) as a serious alternative to the dollar because there is no market for SDR securities.

…

South African output has slumped while China, Australia, and other African countries have been producing more, but total output has been static. There are three factors that will determine the intermediate-term outlook for the gold price. The first will be how long central banks restrain interest rates to promote economic recovery. Low interest rates have traditionally been positive for gold. The second factor will be investor confidence in the dollar. Investors will be very concerned about how the United States resolves the problem of its fiscal deficits and how the Fed conducts monetary policy. The third factor will be Chinese demand for gold.

Arguing With Zombies: Economics, Politics, and the Fight for a Better Future by Paul Krugman

affirmative action, Affordable Care Act / Obamacare, Alan Greenspan, Andrei Shleifer, antiwork, Asian financial crisis, bank run, banking crisis, basic income, behavioural economics, benefit corporation, Berlin Wall, Bernie Madoff, bitcoin, blockchain, bond market vigilante , Bonfire of the Vanities, business cycle, capital asset pricing model, carbon footprint, carbon tax, Carmen Reinhart, central bank independence, centre right, Climategate, cognitive dissonance, cryptocurrency, David Ricardo: comparative advantage, different worldview, Donald Trump, Edward Glaeser, employer provided health coverage, Eugene Fama: efficient market hypothesis, fake news, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, frictionless, frictionless market, fudge factor, full employment, green new deal, Growth in a Time of Debt, hiring and firing, illegal immigration, income inequality, index fund, indoor plumbing, invisible hand, it is difficult to get a man to understand something, when his salary depends on his not understanding it, job automation, John Snow's cholera map, Joseph Schumpeter, Kenneth Rogoff, knowledge worker, labor-force participation, large denomination, liquidity trap, London Whale, low interest rates, market bubble, market clearing, market fundamentalism, means of production, Modern Monetary Theory, New Urbanism, obamacare, oil shock, open borders, Paul Samuelson, plutocrats, Ponzi scheme, post-truth, price stability, public intellectual, quantitative easing, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, secular stagnation, Seymour Hersh, stock buybacks, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, trade liberalization, transaction costs, universal basic income, very high income, We are all Keynesians now, working-age population

Rents rose much more slowly than prices: the Bureau of Labor Statistics index of “owners’ equivalent rent” rose only 27 percent from late 1999 to late 2004. Business Week reports that by 2004 the cost of renting a house in San Diego was only 40 percent of the cost of owning a similar house—even taking into account low interest rates on mortgages. So it makes sense to buy in San Diego only if you believe that prices will keep rising rapidly, generating big capital gains. That’s pretty much the definition of a bubble. Bubbles end when people stop believing that big capital gains are a sure thing. That’s what happened in San Diego at the end of its last housing bubble: after a rapid rise, house prices peaked in 1990.

…

But some economists, led by John Maynard Keynes, argued that the failure had much shallower causes than, say, Marxists insisted—that they were fairly narrow and had what amounted to technocratic solutions. “We have magneto [alternator] trouble,” he insisted, not a defunct engine. He also declared that his analysis was “moderately conservative” in its implications. Slumps could be fought with appropriate government policies: low interest rates for relatively mild recessions, deficit spending for deeper downturns. And given these policies, much of the rest of the economy could be left up to markets. Indeed, this position—call it free-market Keynesianism—became more or less the standard view of U.S. economists, especially after the publication of Paul Samuelson’s groundbreaking textbook in 1948.

…

A complete cynic might have expected economists who denounced budget deficits and easy money under a Democrat to suddenly reverse position under a Republican president. And that total cynic would have been exactly right. After years of hysteria about the evils of debt, establishment Republican economists enthusiastically endorsed a budget-busting tax cut. After denouncing easy-money policies when unemployment was sky-high, some echoed Trump’s demands for low interest rates with unemployment under 4 percent—and the rest remained conspicuously silent. What explains this epidemic of bad faith? Some of it is clearly ambition on the part of conservative economists still hoping for high-profile appointments. Some of it, I suspect, may be just the desire to stay on the inside with powerful people.

Reinventing Capitalism in the Age of Big Data by Viktor Mayer-Schönberger, Thomas Ramge

accounting loophole / creative accounting, Air France Flight 447, Airbnb, Alvin Roth, Apollo 11, Atul Gawande, augmented reality, banking crisis, basic income, Bayesian statistics, Bear Stearns, behavioural economics, bitcoin, blockchain, book value, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, Cass Sunstein, centralized clearinghouse, Checklist Manifesto, cloud computing, cognitive bias, cognitive load, conceptual framework, creative destruction, Daniel Kahneman / Amos Tversky, data science, Didi Chuxing, disruptive innovation, Donald Trump, double entry bookkeeping, Elon Musk, en.wikipedia.org, Erik Brynjolfsson, Evgeny Morozov, flying shuttle, Ford Model T, Ford paid five dollars a day, Frederick Winslow Taylor, fundamental attribution error, George Akerlof, gig economy, Google Glasses, Higgs boson, information asymmetry, interchangeable parts, invention of the telegraph, inventory management, invisible hand, James Watt: steam engine, Jeff Bezos, job automation, job satisfaction, joint-stock company, Joseph Schumpeter, Kickstarter, knowledge worker, labor-force participation, land reform, Large Hadron Collider, lone genius, low cost airline, low interest rates, Marc Andreessen, market bubble, market design, market fundamentalism, means of production, meta-analysis, Moneyball by Michael Lewis explains big data, multi-sided market, natural language processing, Neil Armstrong, Network effects, Nick Bostrom, Norbert Wiener, offshore financial centre, Parag Khanna, payday loans, peer-to-peer lending, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price mechanism, purchasing power parity, radical decentralization, random walk, recommendation engine, Richard Thaler, ride hailing / ride sharing, Robinhood: mobile stock trading app, Sam Altman, scientific management, Second Machine Age, self-driving car, Silicon Valley, Silicon Valley startup, six sigma, smart grid, smart meter, Snapchat, statistical model, Steve Jobs, subprime mortgage crisis, Suez canal 1869, tacit knowledge, technoutopianism, The Future of Employment, The Market for Lemons, The Nature of the Firm, transaction costs, universal basic income, vertical integration, William Langewiesche, Y Combinator

Central banks in many nations responded to economic woes by lowering interest rates, and as rates hit rock bottom, banks in some countries even charged negative interest for deposits. Savers were not the only ones affected. In practice interest rates on deposits cannot be lowered much beyond zero (negative rates are highly unpopular and may lead to withdrawal of deposits). These low interest rates also reduce the interest spread—the difference between the rate banks pay their creditors and the rate they charge their customers—and thus banks’ margins. Banks were already suffering from the increased competition that has shrunk banks’ margins in the United States from almost 5 percent (in 1994) to around 3 percent (in 2016).

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To remedy this, a whole ecosystem of new loan providers has sprung up that not only ingests, but also provides, a lot of information. For example, SoFi, a fintech start-up, which originally focused on student loans, factors many data points into its prediction of creditworthiness, allowing it to offer low interest rates to individuals with limited credit history; Kabbage offers a similar service to small businesses. Shifting from conventional credit scores to a risk model that analyzes more numerous and diverse data points is like moving from money-based markets to data-rich markets: in both cases, we abandon the idea of condensing complexities and instead use technology and automation to guide decisions based on comprehensive and rich data sets from a wide variety of sources.

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If entry is very difficult, regulatory action may be in order. The scale effect once presented a huge hurdle for new entrants in markets like manufacturing or chain retailing, in which scale matters. In these markets, achieving scale traditionally required prohibitive initial investments. But with the rise of venture capital and low interest rates, raising funds has gotten easier, enabling start-ups to grow swiftly in both scale and scope. Moreover, thanks to the plummeting cost of information processing and storage, especially through cloud computing, the initial investment necessary for start-ups is often much lower than it was in the industrial age.

Who Needs the Fed?: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank by John Tamny

Airbnb, Alan Greenspan, Apollo 13, bank run, Bear Stearns, Bernie Madoff, bitcoin, Bretton Woods, business logic, buy and hold, Carl Icahn, Carmen Reinhart, corporate raider, correlation does not imply causation, cotton gin, creative destruction, Credit Default Swap, crony capitalism, crowdsourcing, Donald Trump, Downton Abbey, Fairchild Semiconductor, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, Glass-Steagall Act, Home mortgage interest deduction, Jeff Bezos, job automation, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kickstarter, Larry Ellison, liquidity trap, low interest rates, Mark Zuckerberg, market bubble, Michael Milken, Money creation, money market fund, moral hazard, mortgage tax deduction, NetJets, offshore financial centre, oil shock, peak oil, Peter Thiel, Phillips curve, price stability, profit motive, quantitative easing, race to the bottom, Ronald Reagan, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Solyndra, Steve Jobs, The Wealth of Nations by Adam Smith, too big to fail, Travis Kalanick, Uber for X, War on Poverty, yield curve

The page’s editors marveled at how Swift taught them “a good lesson about intellectual property rights—and the danger of taking on a woman who knows what she’s worth.”1 Swift also provided the world with a great lesson about credit. Economists frequently act as though cheap credit can be decreed through an announcement from the Fed of a “low” interest rate. Swift’s pointedly open letter to Apple was a reminder that when it comes to credit there’s always and everywhere a buyer and a seller. Apple learned in embarrassing fashion that which doesn’t seem to concern central bankers, who are apparently less sensitive to ridicule. It’s one thing to declare from the commanding heights of government the supply of a market good inexpensive, but it’s the height of folly to assume that those in possession of that market good will give it to buyers for nothing.

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Credit is, again, real resources created in the real economy. At best the Fed’s machinations distorted where certain resources went, but as this chapter will argue, this did not occur nearly as powerfully as is commonly thought. With respect to the housing boom, recent economic history reveals that the low-interest-rate argument offered up by Woods and many others is a poor one. It also signals that something separate from a low fed funds rate was the source of a growth-sapping rush into housing consumption. Indeed, if a low fed funds rate had driven housing health in the 2000s, then the 1970s, when the rate soared from under 4 percent to more than 17 percent by the close of the decade, would surely have been a disaster for housing.4 Yet housing skyrocketed in the 1970s, thus raising the question about what really drives housing vitality.

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In response to a fairly rapid decline in the price of oil, credit for oil-exploration companies became more expensive. The Dallas Morning News report about a rapidly rising “cost to borrow” was the newspaper correctly reporting the obvious. What is also notable about the rising cost of credit for the energy sector was how toothless the Fed’s policies of low interest rates were. While it was holding its fed funds rate at “zero” in order to allegedly keep credit “easy,” those with credit on offer had different opinions about the oil patch. With the price per barrel at $54, credit for oil exploration companies would be expensive no matter what. The Fed was thankfully irrelevant.

Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

Alan Greenspan, balance sheet recession, banking crisis, basic income, Bear Stearns, Bernie Sanders, Bretton Woods, business climate, business cycle, carbon tax, Carmen Reinhart, central bank independence, circular economy, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, degrowth, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, Ford Model T, forward guidance, full employment, G4S, general purpose technology, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low interest rates, low skilled workers, Martin Wolf, mass incarceration, military-industrial complex, Modern Monetary Theory, Money creation, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, ocean acidification, paradox of thrift, Paul Samuelson, planned obsolescence, Post-Keynesian economics, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Solyndra, Steve Jobs, stock buybacks, systems thinking, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, Tragedy of the Commons, transaction costs, trickle-down economics, universal basic income, vertical integration, very high income

The financial crisis exposed the uncomfortable truth that much of the apparently benign growth which had occurred in the previous decade did not in fact represent a sustainable expansion of productive capacity and national income. Rather, it reflected an unprecedented increase in household and corporate debt (see Figure 2). Low interest rates and lax lending practices, particularly for land and property, had fuelled an asset price bubble which would inevitably burst. In this sense the pre-crisis growth of output can be judged only alongside its post-crisis collapse. Figure 1: Percentage of countries experiencing a banking crisis (1945–2008) (weighted by their share of world income) Note: Sample size includes all countries that were independent states in the given year.

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Criticising the inadequate response of European Union policy-makers to the slow recovery after the financial crash, the authors propose a five-year investment stimulus package based on additional lending by the European Investment Bank (the EU’s state investment bank). Taking issue with the orthodox economic view that public investment will ultimately ‘crowd out’ private, they argue that at very low interest rates, with a glut of capital looking for returns, the opposite is in fact the case: public investment will leverage greater private capital. They use a macroeconomic model to compare their investment package to ‘business as usual’: they find that not only would it increase European growth rates and employment, it would also reduce public deficits more rapidly.

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Lerner, ‘The economic steering wheel’, University of Kansas Review, June 1941; ‘Functional finance and the federal debt’, Social Research, vol. 10, no. 1, 1943, pp. 38–51; The Economics of Control, New York, Macmillan, 1944; The Economics of Employment, New York, McGraw Hill, 1951. 3. Understanding Money and Macroeconomic Policy L. RANDALL WRAY AND YEVA NERSISYAN Introduction MACROECONOMIC POLICY is not working. The best part of a decade after the financial crisis, developed economies have still not returned to anything like normal conditions. Unprecedentedly low interest rates, continuing high deficits, weak growth in most countries and anxieties over the risks of deflation indicate painfully that policy-makers have not been successful in restoring their economies to health. Yet it is not for want of trying. Though initially governments reacted to the crisis by introducing fiscal stimulus packages, these were short-lived.

The Theft of a Decade: How the Baby Boomers Stole the Millennials' Economic Future by Joseph C. Sternberg

Affordable Care Act / Obamacare, Airbnb, Alan Greenspan, American Legislative Exchange Council, Asian financial crisis, banking crisis, Basel III, Bear Stearns, Bernie Sanders, blue-collar work, centre right, corporate raider, Detroit bankruptcy, Donald Trump, Edward Glaeser, employer provided health coverage, Erik Brynjolfsson, eurozone crisis, financial engineering, future of work, gig economy, Gordon Gekko, hiring and firing, Home mortgage interest deduction, housing crisis, independent contractor, job satisfaction, job-hopping, labor-force participation, low interest rates, low skilled workers, Lyft, Marc Andreessen, Mark Zuckerberg, minimum wage unemployment, mortgage debt, mortgage tax deduction, Nate Silver, new economy, obamacare, oil shock, payday loans, pension reform, quantitative easing, Richard Florida, Ronald Reagan, Saturday Night Live, Second Machine Age, sharing economy, Silicon Valley, sovereign wealth fund, Steve Bannon, stop buying avocado toast, TaskRabbit, total factor productivity, Tyler Cowen, Tyler Cowen: Great Stagnation, uber lyft, unpaid internship, women in the workforce

“Responsible” fiscal policy following a tax increase in 1993 allowed the Federal Reserve, now led by Alan Greenspan, to keep the federal funds rate, the key interest rate set by the Fed at its meetings eight times a year, at around 5 percent for years at a time, a virtually unprecedented level of stability. The economy boomed. But Washington was still focused on maintaining unusually low interest rates as the best (and maybe only) way to stimulate productive investment. The Clinton era saw the same divergence between high taxes on corporate profits and personal incomes (the fruits of productive investment and hard work) versus low taxes on capital gains that were more prone to unproductive gamesmanship.

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In 1989, only 1 in 230 buyers made a down payment of 3 percent or less. By 2003, it was 1 in 7 and on the eve of the crisis in 2007, it was just less than 1 in 3.34 Those pro-debt policies lit a fire under the housing market, and the Federal Reserve poured on the accelerant. The 1990s was the era of Rubinomics and unusually low interest rates from the Alan Greenspan–run Federal Reserve—a policy that was supposed to stimulate more business investment to bolster the Boomer job market. But the short-term rate the Fed sets is intended to serve as a benchmark for all other interest rates, and sure enough the low federal funds rate in this era filtered through to the housing market one way or another.

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But precisely because those two generations were in such dire personal financial straits, Boomers in Washington obsessed over saving the housing market for those who already owned homes. No one spared a thought for the rising generation of Millennial first-time buyers who would hit the market in the following decade. And sure enough, subsequent research has found that while low interest rates and quantitative easing did boost mortgage lending, most of that was for refinancing, not new purchases. In the depth of the crisis, lending for both new purchases and refinancing plunged, but after the crisis, only refinancing recovered significantly.49 That phenomenon created many unintended consequences for Millennials.

Panderer to Power by Frederick Sheehan

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, book value, Bretton Woods, British Empire, business cycle, buy and hold, California energy crisis, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, Glass-Steagall Act, Greenspan put, guns versus butter model, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, junk bonds, low interest rates, margin call, market bubble, Mary Meeker, McMansion, Menlo Park, Michael Milken, money market fund, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, Robert Solow, rolodex, Ronald Reagan, Sand Hill Road, Savings and loan crisis, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stock buybacks, stocks for the long run, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War, zero-sum game

Deregulation of the industry permitted a panorama of investment classes that had previously been forbidden. William Seidman, who had interviewed Greenspan before his Council of Economic Advisers appointment, learned that “S&Ls could raise nearly unlimited amounts of funds through brokered deposits at low [interest] rates because the money was insured by the government. They could … make their profit on the spread between the low and high rates of interest.”16 Charles Keating needed money. He needed yield from the securities bought by Lincoln. He needed capital gains from the trading of land and securities.

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Greenspan was living for the moment: “I believe that equity extractions from homes will continue to be a source of positive growth in personal consumption expenditures.”36 Greenspan then extolled some Fed model (Greenspan ignored them, blamed them, cited them, or cited and then dismissed models as opportunities to salvage a hypothesis as his reputation arose) that calculated 20 percent of personal consumption came from consumers cashing out their “wealth.” Rising house prices were essential to America’s continuous shopping spree. Through the summer and fall meetings, some members of the FOMC worried about low interest rates. This was often expressed as a concern about house prices. Federal Reserve Governor Edward Gramlich described his growing fears. At the August 13 meeting, he was “uncomfortable that the refinancing of housing should be the source of so much of the support for our recovery.”37 Greenspan was having none of that: “You sound like a true conservative.”38 House-flipping stories grew more bizarre.

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Awakened to this moneymaking market, Wall Street looked for other opportunities it might exploit. The Community Reinvestment Act was revised in 1995.38 Banks now had an “affirmative obligation” to meet the housing needs of the poor. By 2000, U.S. banks had committed $1 trillion for inner-city and lowincome mortgages.39 36 Martha Irvine, “Sold! Low Interest Rates Affording Savvy 20somethings Their Piece of the American Dream,” Associated Press, January 17, 2003. 37 Gloria Irwin, “Nonprofit Group Helps Disadvantaged Home Buyers Get Federal Loans,” Acron Beacon Journal, August 24, 2003; survey conducted by U.S. Department of Housing and Urban Development.

How to Stop Brexit (And Make Britain Great Again) by Nick Clegg

Berlin Wall, Boris Johnson, Brexit referendum, collapse of Lehman Brothers, Dominic Cummings, Donald Trump, eurozone crisis, Fall of the Berlin Wall, Francis Fukuyama: the end of history, Jeremy Corbyn, low interest rates, offshore financial centre, sceptred isle, Snapchat, Steve Bannon

The dominance of the German economy meant that the interest rate set by the European Central Bank tended to respond to the rhythm of the German economy, while ignoring the weaknesses and the overheating in others. A weak euro meant that Germany, as a major exporter, could sell more successfully to the rest of the world, and low interest rates helped to keep the value of the currency down. But in a currency union the same interest rate has to apply across every participating country. So low interest rates in Germany meant excessively low interest rates in Spain, Portugal and Ireland. And when those countries’ economies started to overheat, their governments suddenly realised that one of their most important levers – the ability to cool the froth by raising interest rates – was no longer available to them.