Several years into the post Capital Paradox era, laments of the “recovery” that ain’t continue. In one example, Matt O’Brien at the Washington Post notes where the Federal Reserve has put interest rates, asks “what gives?” — and comes close to a moment of clarity:
What does it mean that the economy “needs” low rates — indeed, negative once you account for inflation — to get to full employment? That shouldn’t happen in a world, like our own, where investments have positive returns. Companies should always want to invest, hiring workers in the process.
Well, the answer is one part psychology and another part supply and demand. People, you see, just might be too scared to invest in anything that doesn’t look super-safe, unless there’s a bubble that looks super-profitable.
But this isn’t just a mental problem. Real rates might also be negative, because there’s more supply of lendable funds but less demand for investment. Or, in English, there’s more money chasing fewer opportunities. (emphasis mine)
In the sense that Matt is describing, control of interest by the central bank essentially functions as a system-wide business subsidy, the point being to make investments more beneficial than they otherwise would’ve been. Without such manipulation, tons of decisions that went one way would have gone the other. The assumption built into this policy, reflected in Matt’s confusion, is that the encouragement of more opportunities leads them to self-perpetuate — investment endlessly begats more investment.
If at this point you’re asking “waitaminute, if they do lead to more investment then why does it have to be nudged to begin with?”, congratulations, you’re a fellow Crank. Reasonable reinvestment is a no brainer, all else being equal, so if reinvestment broadly stalls without steroids then a large chunk of the investments prior are basically bubble chasing & short-sighted boondogglery, a.k.a. malinvestment. The bubbles bursting & outlandish projects being mothballed en masse are what correction to the mean looks like.
Beyond just the actions of the Fed, there have all along been additional incentives provided by the state for investment as well, many of which are so common for so long they’re barely thought of or talked about anymore: various subsidies in the tax code, direct favors to politically connected industry (including resource theft), the monopoly grant that is IP law enshrining huge markups in even relatively simple consumer goods, etcetera. Taken as a whole, the rampant political favoritism to capital, while hampering most of the population in the name of false enrichment, has served as a training program of sorts as well, in that the height of big business has been bred to expect profit to be as easy as falling out of bed. The “need” of negative interest rates is because the system constructed cannot look to natural consumption patterns for survival, due to the wealth concentration that Matt is able to notice. When only a few people have the money to even bother, next to a wide swath of debt craters, of course opportunities shrink!
Reliance on behemoths built on our backs is what got us to this point. Sure, more bubbles can be created, but that is by definition short-term. The condition of the economy is less like having the flu & more along the lines of extreme hypertension with several blocked arteries — the lifeblood isn’t flowing like it needs to. Unfortunately, the ruling class would rather see the patient die than have that happen.
