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There are groups of people that, through no fault of their own, are less productive. Maybe they are young and inexperienced just out of school, maybe they are o

There are groups of people that, through no fault of their own, are less productive. Maybe they are young and inexperienced just out of school, maybe they are older and have lower stamina, maybe they are rooted in a region where it is costlier and more difficult for businesses to operate, maybe they are a visible minority and are made less efficient by other people’s discriminatory treatment, maybe they have a difficult family situation affecting them at work, maybe they only have experience in industries where margins are thin because of foreign competition or maybe they are innately just not good at the type of activities that are profitable in today’s world. Central banks affect job creating investment through interest rates. It may seem like small interest rate changes wouldn’t make a big difference for anyone once the effect propagates and is diluted across the whole economy. However, looking at it through the lens of cost of capital where businesses decide to do projects or not based on the expected profitability relative to borrowing costs, it is easy to see that the effect is highly unequal. This type of calculation implies a threshold, a cutoff where activities under a certain level of profitability are completely stopped. The fact that interest rates act as a threshold with regards to investment entails shutting down all lower margin activities, those that tend to be manned by people that are naturally disadvantaged. This means that when central banks tighten too much, some workers may be afflicted moderately by a more difficult labor market but whole segments of the less productive and more vulnerable, may be completely cutoff from having a job. The investment in equipment and buildings necessary to perform their work disappears. Major projects get cancelled in isolated and disadvantaged rural areas. Entry level positions that would be manned by the less experienced disappear. Jobs that require less education also go away. People who, in good times are already paid less and have little capacity to bear a fall in revenue, don’t just bear a proportionate drop but a complete fall to zero with often only meager government welfare to fall back on. On top of the hit to dignity, it atrophies their skills and makes them further disadvantaged and vulnerable. In the next cycle, they’re likely to again be the first to be cutoff. It’s difficult to overstate the utter cruelty of monetary mismanagement.

jdietrich 8y ago
>This means that when central banks tighten too much, some workers may be afflicted moderately by a more difficult labor market but whole segments of the less productive and more vulnerable, may be completely cutoff from having a job. Europe has been running rock-bottom interest rates since the 2008 crash. The ECB are charging 0% on MRO lending and offering -0.4% on deposits. The BoE have just increased rates from 0.25% to 0.5% in late 2017 due to rising inflation. Both banks have spent most of the last decade flooding the markets with money through QE. It's hard to see what more they could do.
- BenoitEssiambre 8y ago
  Zero is not rock bottom. A lot of stores of value have negative returns. Zero is high in a lot of contexts. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources. While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century.
stephen_g 8y ago
What we're seeing in this map I think is not just your everyday failure of monetarism (trying to control and balance out complex economies with only a single variable which is also an extremely heavy, blunt tool - interest rates). I think the problem is deeper, being a combination of a) misguided treaties based on bad economics (some would call it 'neoliberalism') like the so-called "Stability and Growth Pact" (which actually restricts member state's ability to deal with financial crises) and the way the ECB has been set up to not make fiscal transfers between states (or the equivalent, directly buying bonds from member states), and b) the madness of fixed exchange rates between the member states, by having a common currency without a federal budget. It mostly comes down to the Euro - what we see with countries with flexible exchange rates is that their economies don't have to internally devalue with changes in inflation, terms of trade, etc. because the exchange rates changes and just balances it out. But in Europe with the common currency, compared to Germany's economy the Euro is weak, meaning their exports are more competitive, and compared to the weaker economies the Euro is strong, which means imports are cheap but exports uncompetitive. This is self-propagating, so Germany has been able to massively increase its trade surplus at the cost of the weaker countries' increasing trade deficits and increasing unemployment, because they are internally devaluing to compensate. There are two ways to solve this - either do what the US does for its states with a federal taxing and spending Government (meaning fiscal transfers from the stronger economies to the weaker ones to balance this out), or abandoning the Euro and having individual currencies with flexible exchange rates. Business as usual will see Spain, Portugal, Italy and eventually France in the same boat as Greece...

jdietrich 8y ago

>This means that when central banks tighten too much, some workers may be afflicted moderately by a more difficult labor market but whole segments of the less productive and more vulnerable, may be completely cutoff from having a job. Europe has been running rock-bottom interest rates since the 2008 crash. The ECB are charging 0% on MRO lending and offering -0.4% on deposits. The BoE have just increased rates from 0.25% to 0.5% in late 2017 due to rising inflation. Both banks have spent most of the last decade flooding the markets with money through QE. It's hard to see what more they could do.

BenoitEssiambre 8y ago
Zero is not rock bottom. A lot of stores of value have negative returns. Zero is high in a lot of contexts. Historically, negative real returns on stores of value were the norm. Before financial systems existed, almost all investments had negative returns if you didn’t put work and energy into them. To store value, you had to accumulate stuff, buildings or land. Most options either had high maintenance costs, were subject to risk of damage from natural causes and theft, were very volatile or required hard labor to get production out of. Even in societies with financial systems, getting low risk, hassle free, liquid, positive real returns has been difficult for most of history. This just reflects the natural laws of thermodynamics that tell us that everything tends to decay without a constant supply of work and energy. In general, most things require maintenance to keep their worth. The 20th century was probably the most notable exception. Because of unprecedented demographic and technological growth, positive risk free real returns were easy to find. The recency effect probably explains some of the confusion people have about this. It is possible that under favorable conditions, wealth can have positive returns and even compound into very good long run returns but it is not a guarantee and there is nothing natural about it. It may not continue forever, particularly amidst an aging and retiring population in a world no longer as rich in easy to exploit natural resources. While people are used to get negative returns on very short term purchases, you buy fresh vegetables at the supermarket, even if they degrade over time, many can’t seem to accept the normalcy of negative returns on longer term assets. In nature, squirrels’ nut caches have a certain percentage of losses from theft and spoilage. Real returns tending towards the negative is natural even if they can seem unusual for people just out of the 20th century.

stephen_g 8y ago

What we're seeing in this map I think is not just your everyday failure of monetarism (trying to control and balance out complex economies with only a single variable which is also an extremely heavy, blunt tool - interest rates). I think the problem is deeper, being a combination of a) misguided treaties based on bad economics (some would call it 'neoliberalism') like the so-called "Stability and Growth Pact" (which actually restricts member state's ability to deal with financial crises) and the way the ECB has been set up to not make fiscal transfers between states (or the equivalent, directly buying bonds from member states), and b) the madness of fixed exchange rates between the member states, by having a common currency without a federal budget. It mostly comes down to the Euro - what we see with countries with flexible exchange rates is that their economies don't have to internally devalue with changes in inflation, terms of trade, etc. because the exchange rates changes and just balances it out. But in Europe with the common currency, compared to Germany's economy the Euro is weak, meaning their exports are more competitive, and compared to the weaker economies the Euro is strong, which means imports are cheap but exports uncompetitive. This is self-propagating, so Germany has been able to massively increase its trade surplus at the cost of the weaker countries' increasing trade deficits and increasing unemployment, because they are internally devaluing to compensate. There are two ways to solve this - either do what the US does for its states with a federal taxing and spending Government (meaning fiscal transfers from the stronger economies to the weaker ones to balance this out), or abandoning the Euro and having individual currencies with flexible exchange rates. Business as usual will see Spain, Portugal, Italy and eventually France in the same boat as Greece...