Can I Peak Your Interest?

Well, may be I've got the spelling off. But may be not. The point of this essay is to debunk the conventional theory of interest, which asserts that interest is paid because savers want to be paid for the use of "their" money, and that they determine what the "real interest" rate is. Bunk.

What really determines the "real" (and I use those quote marks because no one in the economics field knows what's "real", so far as determining an absolute measure of interest; not the rate, but the definition used to derive the rate, that gets into weighing de/in-flation and other factors) is physics, not savers' time preference. Moreover, the world's banking systems subvert the process with many levels of intermediation (see, for example, this about the opposite).

The current Great Recession (and it ain't over, not by a long shot) dates back to Reagan and the PATCO strike; thus began the Long March to removing the middle class; at least, the non-financial sector employed middle class, what some refer to as the blue-collar middle class. For the True Right Wingnuts, a blue-collar middle class is an abomination, a pariah on society. Reagan began the policies in earnest. Alan Greenspan (remember him?) carried them out. It was under BushII that Greenspan caved interest rates, and thus set up the scenario of Your Home (Equity) is Your ATM^©. This was necessary, as the decline in median income and the shift in taxes from the few to the many, was well underway. Without the Home ATM, consumption could not continue. Without consumption, the USofA enters its Japan Period. Now we have, and Obambi the patsy can take the blame. Returning to the policies which caused The Great Recession isn't going to end The Great Recession. It's not a coincidence that the only prosperous period since Reagan was Clinton, who throttled back. Couldn't last, not with a Right Wingnut Supreme Court.

So, what, then, does determine the rate of interest, and why is it important?

The latter first: economic growth, which is to say society wide growth as opposed to Corporation XYZ growth, is solely determined by physics. If the totality of the economic engine produces more from period to period, then growth has occurred. Otherwise, not. Without growth in production, growth in population can't be sustained. And, just to be clear: growth in production means more widgets, not just more cash from selling widgets. As Adam Smith, the real one, said money is not goods and services rather, "Labour was the first price, the original purchase - money that was paid for all things. It was not by gold or by silver, but by labour, that all wealth of the world was originally purchased." I wonder how many Right Wingnuts would still call Adam Smith their Mentor if they knew? Further, the production which matters is that which sustains the society; credit default swaps, not so much.

There's another problem. The monetary growth of an economy isn't, by definition, sufficient to sustain population growth. If all that an economy produces is banking services, for example, those services don't supply food, clothing, and shelter to the population. Some monetary equivalencing takes place to value the services against physical goods. Not to mention the fact that the physical goods aren't produced in the economy, but must be imported. The calculus has quickly gotten out of hand.

The IMF, the World Bank, the Great Gaggle of Bondholders (as exemplified by Skull & Bones) decide how much an American Dollar is worth relative to a Euro or Renminbi. Whoever controls international exchange rates (if that's a sovereign country) gets to tilt the playing field to its advantage. The USofA had that advantage for two decades after WWII, in the form of the Bretton Woods convention: "The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to the U.S. dollar...". In 1973, OPEC (really, the Arabs in retaliation for the USofA's support for Zionism, which one may deny exists, but is quite real to Arabs), demonstrated that this system was no longer in control. Oil was in control.

And so it has been ever since. The fall and rise of Russia is built on oil. The rise of Brazil, and to a lesser extent Venezuela, so too. The American response, beginning with Carter, was to monetize the economy. Most don't remember, or weren't born yet, but Carter began the assault on Government. It wasn't in full stride until Reagan, but Carter started the ball rolling: "The Carter Administration submitted 11 reorganization plans to Congress to streamline the federal government. All but one, a plan to create a Department of Natural Resources, went into effect. The largest of the plans was revamping the civil service system." Carter ended up politicizing public service, the kind that regular folks choose to do, not the figurehead nonsense of Special Ambassadors and such. Reagan just took the anti-government, and by implication anti-intellectual, cudgel and beat the rest of the middle class with it. It was, and is, no secret that the Federal government employs a lot of highly educated people; the enemies of the Right Wingnuts, whether they knew it or not.

We have two positive feedback efforts at work: the attack by the few upon the many, and the financialization of the economy. The former results in policies which move income and wealth to the .1%-ers and the latter moves capital from physical production to monetary gambits. Taken together, the society regresses.

Where we are now. The American economy has devolved from making things to making deals. When an economy makes things, flation in either direction is merely an inconvenience; trading one thing for another is just barter with currency being the oil for the machinery. When an economy stops making things, and just deals, then currency becomes not just the oil, but the machinery. And therein lies the problem. When the world ran on specie money (chiefly, gold), flation was determined by new gold finds; how stupid is that? Studies of 19th American economy note that it was almost wholly de-flationary, and for the simplest of reasons: real production expanded as the population did and territory did (it was taken from the native inhabitants), but without new currency, prices for all goods and services fell. There was, not coincidentally, recurring recession over the century. Not a bit of history the Right Wingnuts and Goldbugs want you to know about. From a macro-economic point of view, the 19th century was anarchy.

The root cause of the Continuing Recession is two fold: the monetization of economic activity and a massive shift of that money from the many to the few. Fixing it will likely not happen, because to do so requires punishing those who engineered the collapse, and those folks remain in control of monetary policy. When I was a kid, one of my tasks as soon as I could walk and count, was to trek to the corner store and get The Parents cigarettes, $.25/pack. Mother stuck with Viceroy, Father switched among a few brands. One of those was Old Gold, and it's still in production, although now a discount brand. Well, the American Dollar is New Gold. You saw the flight to the dollar on those days when the Euro looked to crash. That will continue. And it's not because the USofA makes all the shiny bits that make other countries need dollars to get them. No, it's because the Right Wingnuts are determined to keep the dollar's value stable no matter how badly doing so disrupts growth and equality. Unlike the period of Bretton Woods, Americans don't get any benefit. Well, the .1%-ers do, of course, but not the rest of us. For the .1%-ers, all that matters in currency; each a Little Goldfinger.


[UPDATE]
This just in.

The biggest nutbag is, of course, Ron Paul. He is both a .1%-er and a goldbug. Here's from today's news:
Economists note that Paul's long-standing proposal to return the dollar to a gold standard would force the United States to relinquish control of its currency.

"We would still have monetary policy - it would be set by gold miners in South Africa and Uzbekistan, rather than bureaucrats in Washington," said Michael Feroli, chief U.S. economist with JPMorgan Chase.

"If you like what OPEC means for oil prices, you'd love what the gold standard would do to financial markets."