Tag Archives: interest rate

CNBC: Dire costs of easy Fed now and later: Jim Grant

This is the fruit of heavy-handed government manipulation of prices…I call it price control. And even that is not the extent of government intervention in capital markets.


Source: CNBC: Dire costs of easy Fed now and later: Jim Grant

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Information Technology Spending, Interest and Unemployment

Over all, people will spend $3.6 trillion on information technology in 2012, the research firm said. This represents a 3 percent increase from 2011, when $3.5 trillion was spent…The increase, while modest, is notable because it is happening in the face of a financial crisis in Europe, slow growth in the United States, and a slowdown in China’s economic growth. – NYT Blog [emphasis added]

To the extent that interest rates are set below the natural interest rate, unemployment will increase as lower rates favor capital investment projects that directly replace labor. Information technology is THE modern form of capital. Like a building with a lifespan of 50 years, an IT project can produce systems/algorithms that will continue functioning (at high speed) for decades.

In theory, there is nothing wrong with capital replacing labor. The Austrian view is that technological advances (in early stages) increase interest rates as firms compete for capital to participate, allocating gains to savers (providers of capital). However, the our economy does not work this way.

An artificially low rate of interest, which might prevail for some time if the Federal Reserve is targeting a low federal funds rate, translates into the business world as longer planning horizons than are justified by people’s actual willingness to save. The policy-induced mismatch between production and consumption activities creates the illusion of prosperity but sets the stage for an eventual market correction, which takes the form of an economy-wide downturn. – Mises.org

Regardless of whether rates are below an unknowable natural rate; gains from these technology projects are not accruing to average, individual savers. Instead, three primary groups are capturing the gains given the current environment (where the Fed has used tools (QE, Twist) beyond simply targeting a low Fed funds rate to satisfy the Taylor rule):

  1. Highly consolidated firms with the scale to profit from high-technology projects and the ability to fund them (via access to cheap credit/equity markets)
  2. Large financial firms participating in quantitative easing and profiting on excess reserves held with the Federal Reserve
  3. Workers (labor) skilled in creating technological capital

The Phillips curve and other similar analyses are insufficient because they focus on the relationship between unemployment and wage inflation instead of the underlying monetary cause that directly effects capital costs and indirectly effects labor costs.

My contention is that an extended duration of below-natural interest rates has resulted in a rate of technological change and adoption that is a major factor in the high structural unemployment visible in the labor force participation rate and the mean duration of unemployment.

Bill Gross, manager of the world’s largest mutual fund, said U.S. unemployment is now a structural, and not cyclical, problem stemming from technology advances and the lack of retraining.

Rather than reducing unemployment, monetary stimulus leads to further substitution of capital for labor while allowing politicians to capture votes from those closest to the ‘spigot’.

Sources and Additional Reading

CNBC: More Jobs Predicted for Machines, Not People (Oct 24, 2011)
NYT Blog: Information Technology Spending to Hit $3.6 Trillion in 2012, Report Says (Jul 9, 2012)
Mises.org: Natural and Neutral Rates of Interest in Theory and Policy Formulation
Wikipedia: Phillips curve, Public choice theory, Rent-seeking, Quantitative Easing, Operation Twist
St. Louis Fed: Excess Reserves of Depository Institutions, Effective Federal Funds Rate, Labor Force Participation, Mean Duration of Unemployment, Unit Labor Cost
Econlib: Phillips Curve

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