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Tag Archives: money
This video is a great summary, although it omits any mention of the even-less-well-understood role “shadow banking” (mostly repurchase agreements) plays in currency creation.
Mike sits with Ron Paul and Steve Forbes after the credits roll.
But it is JPMorgan’s Michael Cembalest who frames it the best, “I am reminded of the following remark from late MIT economist Rudiger Dornbusch: ‘Crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.'”
ZeroHedge: On The World’s Reserve Currency: What’s Past Is Epilogue (Jan 3, 2012)
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):
- 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)
- Large financial firms participating in quantitative easing and profiting on excess reserves held with the Federal Reserve
- 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
The first is the shifting relationship between ambitious young people and money. There’s a reason the Lower 99 currently lack leadership: Anyone with the ability to organize large numbers of unsuccessful people has been diverted into Wall Street jobs, mainly in the analyst programs at Morgan Stanley and Goldman Sachs. Those jobs no longer exist, at least not in the quantities sufficient to distract an entire generation from examining the meaning of their lives.
Our Wall Street friends, wounded and weakened, can no longer pick up the tab for sucking the idealism out of America’s youth.
Bloomgberg: Michael Lewis: Advice From the 1%: Lever Up, Drop Out (Dec 4, 2011)