In my last post, I noted that I shifted from trying to be neutral in this election to
supporting Clinton over Trump (degree TBD), because of Trump's position on interest rates.
Are interest rates really so important? Given all the other many issues here?
Yes they are, and it is essential that more people start to understand why and how this is true.
Many folks who owe their position to fundamentalist credentials believe that abortion and birth control should be a primary litmus test of Christian values ... but if you go back about 500 years,
even the bureaucratic inheritors of Christian power would find it very peculiar to ignore usury and
to stone or picket women, and call that Christian. For Moslems, the transition has been more recent; it is strange to see how a culture which rated interest rates larger than zero as a major sin has changed so much, simply because of the financial self-interest of the folks who fund a lots of madressas
(both liberal and conservative, enlightened and jihadi) encourages them to just ignore a really fundamental issue in ethics.
So now are our souls more in the hands of economists? Perhaps so.
In a seminal report on energy policy issues circa 1970, the Ford Foundation posed a question:
"What would happen if someone (the devil??) offered you a business opportunity which would double every one's income and revenue for ten years, with the side effect that they would go to zero and all humans would then die at the end of the ten years? At 15% interest rates, would it be rational to accept the deal?" This is serious folks, stuff, and decisions based on interest rates really will be crucial in deciding whether we in fact all die.
Some people say: "Oh, interest rates reflect the values of the people, which are sancrosanct, so we should just leave them alone." Not really. That's not how interest rates are determined. And in any case, if some people had 15% discount rates, and started to implement that proposal, I would argue that any sane human being would resist as best he and she could, whether by deals or by changing the system, whatever it takes for us to survive long-term.
In fact, I wrote in detail about the justification for that in economic theory
(a paper on rational policy objectives, published in Energy, in 1990), and about what sanity tells us as a guide to all kinds of actions and policies (www.Mind_in_Time.pdf, published in Russia but also
posted on my web site).
The key point is this: whenever real interest rates are greater than the rate of growth of productivity, policies and investments are encouraged which assume that future generations do not matter so much as living high on the hog today. That is a very basic expression of real values affecting all of life,
and it violates very basic principles not only of real Islam and Christianity, but of sanity and science as well.
And so, when Donald Trump declares he will get his revenge on Hillary Clinton and make his payback to certain new supporters by clobbering the Federal Reserve, letting interest rates rise 'way high, and curtail the world's money supply, this is no laughing matter. If he is elected he will have the means to do this, and he does not sound like the kind of person who would back off from
these kinds of personality paybacks... even if the consequence is immediate disaster for
all aspects of the real estate industry itself, among others.
In truth, there have been bubbles in real estate, and negative results form money channeled into nonproductive schemes like mortgage securities. In order to understand the reality of modern economies better, above and beyond what any well-trained economist already knows,
I strongly advise reading Paulson's book on Dealing with China. (You can see my review of the book at Amazon simply by searching reviews for pwerbos or paul.werbos; Amazon lets you see all reviews from any reviewers.) It is crucial right now for China that they maintain their own credit expansion, BUT ALSO put in place strong specific controls about what types of real estate investment are admissible. The US, the EU and Latin America all have major unmet opportunities to expand the supply of profit-making private sector investments to better soak up the large money supply now out there.. but choking it back and enforcing myopia would, along with restrictive trade, really repeat the recipe which gave us the Great Depression. We don't need that. I discussed more about why.
The longer-term noncyclic job and inequality problems we face today are due more to the way automation has been phased in that to trade imbalance as such... but Kaine's analysis of TPP was a very exciting unusual display of much-needed technical competence. If we tried to fix TPP as Kaine wants to, would China allow it? Or China committed to creating a world where there is more inequality and more oppression of workers? Well, it's sometimes hard to tell who is really in charge of China. We will see.
One could really write a book about the many reasons why interest rates are important. I won't do that here. But I can give one example, important to policy, politics and investment here and now.
The example is called "Hotelling rent" in serious economics. Whether you know what Hotelling rent is is an important litmus test -- one which I hope everyone will be able to pass someday (certainly anyone who wants to manage the economy of any major nation!).
"Hotelling rent" is the extra premium which oil or any other commodity ought to have in its price, to respect the value it gets because you can hold it for a better time when it may get you a better price.
About ten years ago, there was a fierce debate started by people who wanted government action to force down the price of world oil (much higher then than now, well over $100/barrel). They argued that the actual cost of producing that oil -- even by the highest cost market producer -- was only half or less of the world oil price back then. When the cost of producing it is half the current market price, doesn't that prove monopoly distortion or worse?
No, not really. In an EFFICIENT market, it is well known that Hotelling rent will also be added,
even by rational competitive producers, who rightly account for the future in their calculations.
For example, if they have a choice between selling a barrel today, versus selling it 5 years from now,
economics says they should simply compare the price they would get today, versus the price they expect 5 years from now minus the cost of storage (if it applies) minus interest charges. For oil production, one can usually just keep it in the ground, so it comes down to interest charges.
Bottom line: when the real interest rate is zero, you simply compare the value of the oil for people today, versus how much more or less future people will want or need the oil. When it is much higher, the financial world gives orders to people to make all decisions based on "to hell with future generations, we don't care about them."
(This is not a small violation of the most fundamental principles of Christianity. Before writing this, I even downloaded a copy of Aristotle's Nichomachean Ethics... but I didn't immediately see passage there which made an impression on me when I was young. Ironically, I saw more than I expected of the kind of thing Von Neumann talks about... When I searched the web, it seemed to suggest that the passage which impressed me was in a different book by Aristotle which I never read... a minor curiosity I may or may not bother to track down.)
In the analysis of Al Qaida by Scheuer (CIS's former lead analyst on that subject, who wrote before under the name "anonymous"), he asserted that Al Qaida was not dedicated to destroying the West, but only to securing the alleviation of three great wrong -- one of them being the way in which Western oil companies, backed up by their governments, use force to force Islamic countries to pump their oil as fast as they can, as if there were no tomorrow, not saving it as the precious resource it is for future generations. And also not getting as much value for it as it is truly worth.
This is not at all a small issue in terms of Islamic principles. If radical Islam were only as extreme
as Scheuer's picture, there would be hope of calming things down a bit... but of course ISIS
and the Moslem Brotherhood have taken different positions, with different goals requiring more fundamental adjustments.
In many ways, economics supports this particular grievance of Al Qaida. Without political biases, caused in part by greedy people wanting to raise interest rates ("and to hell with the future") to get more short-term return from particular types of assets and to squeeze out anyone else they can squeeze, and in part by various types of ignorance... the world oil price should never have dropped in 2008 as it did, due to the economic collapse which was itself another form of stupid market failure.
If I have time this week, I may go to www.themp.org and post the slides I gave to a world futures conference in Azerbaijan a few years ago, held under the auspices both of the Azerbaijan government and of the Mllennium Project (themp, get it?). The key question I addressed was: "what is the real Pareto optimum, the win-win solution, for the game between oil producers and oil consumers which
is quietly eating us alive and threatening the very existence of the human species?"
From the viewpoint of economics, it was clear: we should allow a great rise in the price of world oil and gas (respecting its true Hotelling rent value, under ethical interest rates) COMBINED WITH joint actions to make sure that the world economy doesn't go into recession or depression as a result,
actions like improving transportation technology and electricity generation such that a smaller quantity of oil production at higher price is sustainable.
(After all, today's low oil price is in great part a simple decision by Saudis who saw what the high oil price of 2008 did to the world economy, and to the value of their overall portfolio, and realized that that was not working out so well. They knew enough economics to see the connection between oil prices, gasoline prices, mortgage default rates and the rest. It is curious that one year in Harvard graduate school, I inherited the room of a former friend of mine named Yamani who had moved on -- Yamani, son of the Saudi oil minister. Yes, they knew some economics.)
Unfortunately, high oil prices also resulted in lots of money going to folks like the bin Ladn family and many others, not just in Saudi Arabia but in Qatar and even Turkey, which was the rerouted to other things. A true Pareto optimum would have to consider that dimension as well, and try to make sure that a higher price of oil and gas does not translate into money spend to degrade the future of the human species (and degrade the spiritual level both of Islam and Christianity, for example through madressas which act as a kind of serf factory).
If any of these players really understood what is happening with H2S (as often posted on this blog),
they would realize we all have a common interest in overcoming these problems, in agreeing to some way to phase in much higher prices for oil and gas, and in holding down interest rates. Don't sane people care about survival? Well, at least we try to muddle through, through the complex swamp we are really in, and not in the fantasyland castles of the florid minds we see so often on TV...