Must-read on interest rates and Keynes rationale of euthanizing the rentier. It's short and to the point, so I won't try to summarize it.
Azizonomics
The Subtle Tyranny of Interest Rates
John Aziz | economics and business correspondent at TheWeek.com, and an associate editor at Pieria.co.uk
5 comments:
Excellent link. Aziz draws an interesting conclusion. I want to think about it a while.
Aziz was complaining about his mental problems a week ago on Twitter. For some reason I told him that Warren Mosler (and Milton Friedman) favored a system under which the state incurred no debt, with the only liability issued by the state being base money on which no interest was paid.
Within 48 hours he sprung back into life and now says he has re-discovered his interest in economics.
Clearly MMT reaches the parts that other beers don't reach (to quote the advert for Pilsner lager)
That's because 'base money on which no interest is paid' is essentially a zero interest permanent bearer bond.
So it's all the same thing.
Notes are replaced with new notes. Bonds with new bonds. And reserves just hang around clearing things.
Way too much obsession with interest rates amongst the economic set.
Aziz: "But in our brave new state-backed fiat monetary system, why should capital be so scarce that those who have it can profit from its scarcity?"
The scarcity of capital is not the same thing as the scarcity of the medium of exchange. In a world in which the various forms of capital are privately owned and there is a desire on the part of those who don't own some of those forms to access them and make use of them, there will be markets for capital, and the owners of capital will profit from those markets - very handsomely for forms of capital that are much wanted but in relatively low supply. You can't euthanize the rentiers through monetary policy alone.
Look at it this way:
Suppose inflation is 0% and the nominal rate of interest for borrowing money is also 0% (whether due to monetary policy or other more market-based conditions). Does that mean that any one of us can borrow ten million dollars for any investment project of our choice? No of course not. How much you can borrow depends on how much collateral you have - in other words, how much capital you already possess - and on the credibility and expected rate of return on your investment project.
Suppose the project you want to invest in requires a lot of steel, tractors and other machinery. If those materials are in any way artificially scarce and pricey due high concentration of ownership, then their owner/sellers will be able to extract capitalist rents. They get the same price whether you borrow the money at 0% or 10%.
So, simplifying, there are three parties:
A - the party lending money
B - the party borrowing money
C - the party selling the capital goods
The money rate of interest determines how the returns from the investment project are divided between A and B, but have nothing to do with whether or not C is extracting rents.
But what about that relationship between A and B? Are there rent extractions taking place there? And don't low interest rates necessarily mean lower rents? Not necessarily. Capital comes in different forms. One of those forms is an organized productive enterprise that is capable of mobilizing labor and other forms of capital inputs to generate real added value. Suppose we live in a world in which there are a lot of available capital inputs, with widely distributed ownership, but very, very few firms capable of making use of those inputs - say as a result of monopolistic behavior so that the number of firms is "artificial". Then those firms will be able to borrow capital inputs at a very low real rate of interest, because the owners of the inputs have no other options for investing them. (They might even be able to command a negative rate of interest if that rate is at least higher than the loss rate due to depreciation of the non-utilized inputs.)
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