In a free-market economy prices act as signals to efficiently adjust supply and demand for goods and services. Likewise, interest rates are the price of money - if they are allowed to fluctuate freely. But today they are not.
Ever since the Great Recession of 2007-10 Western central banks have engaged in massive QE operations, culminating in the ongoing panicky deluge brought on by the pandemic. Short-term interest rates are at zero, or even negative, meaning that money is literally being given away for free. Just think of the trillions already sent to Americans as “unemployment” payments. Money for nothing, literally.
If money was a “regular” commodity its low price would raise demand and eventually its price (interest rates) would go up, particularly at the long end of the yield curve. But, the Fed is constantly creating new money via the monthly $120 billion bond purchases, so even long term interest rates are kept artificially low. Therefore, interest rates are now useless as pricing signals for money, arguably the most important “commodity” in a free-market economy. Ergo, the broader economy is also operating without its most important signal.
We are living in The No Signal Economy. You want proof? How about NFTs of an empty box going for $15.000, or SPACs that do not reveal what they intend to invest in, or meme stocks of near bankrupt companies that trade at astronomical valuations? How about 12 year olds who claim they are the equivalent of Warren Buffett, or even smarter? Or 20 year olds who drop out of college because they “know” they can become millionaires trading cryptos? I can go on and on.
Here’s something to ponder: how is today’s No Signal Economy different from the Soviet Five Year Plan Economy? Where toilet paper was impossible to find, but a committee had decided to produce a million extra tractors to join those already rusting in the nearly abandoned collective farms.
Today, our No Signal Economy is expending enormous amounts of electrical energy to produce cryptos because a committee (the FOMC, in this case) has decided that they are more “valuable” than, say, building a renewable hydrogen plant. Or more high speed trains. Or a robust electricity grid so that 600.000 people don’t have to go without power for a week after a storm.
Yup, when all is said and done the No Signal US is not so different from the FiveYear Plan USSR. Why? Because when prices are as grossly manipulated as they are today they create a grave mis-allocation of resources/capital, leading to the hollowing out of the economy which will then collapse from the inside.
We urgently need to re-start the money pricing mechanism before it’s too late.
sort of the problem is we don't actually want a real pricing mechanics.... too few people are of any real value ... you want them to face that reality.... nah...
ReplyDeleteI’m not as pessimistic as you AKOC 😄, I believe everyone has real value. But in order to quantify it properly, we need a real price discovery mechanism.
DeleteIn a true price discovery mechanism, you may be able to hire the top 25% of china (or more realistically the top 70 to 95 percentile) for the cost of the bottom 25% of the US population... do we really want to discover that... =)
Delete... and that's where a realistic yuan FX rate comes in.. right now the Chinese currency is still priced way too low against the dollar.
Deleteif China lifted currency controls, would that solve our problems? .... laugh. given the number of rich people who want to get their money out, lifting currency controls would likely cause the Yuan to go down rather than up...
Deletebut on another level you are right. it would be nice to phrase the problem as that of the Chinese workers being too underpaid... it is truly horrifying... but most people don't think of themselves as underpaid. Yes, life is hard but it used to be worse... not really a basis for revolution eh...
Hi Hell, you really got me thinking... are Chinese workers too poor or American workers too rich. I would argue the latter.
DeleteLet us think of it in terms of world resources. If everyone was to attain the American standard of living, the world would surely burn. I am not even sure if we can sustain everyone at China's standard of living. Thus, if we want a realistic pricing mechanism that is non suicidal, it would indicate that American standard of living be lowered to the China standard with pay being proportional to output.
For 95% of Americans, this would mean something like $5 a day. They would probably come in at the bottom 1% of Chinese workers, people that no one in their right mind would hire.
And here lies the reality gap; more like reality gulf... do we really want reality?
think this says it quite well:
Deletehttps://www.youtube.com/watch?v=2f2kGHcdJYU
US standard of living….. I’m not so sure it’s as high as advertised (propagandize), or at least as high as Americans who haven’t experienced daily life in, say, Sweden, Denmark, Canada, or even Italy and Spain, think it is.
DeleteI read someplace that the US is actually a third world country sandwiched between two slivers of extreme wealth. From my experience in Deepest America, it rings true.
I dun really know much about Deepest America... is it so much worse than in the city? When I traveled the country, I always felt its development was relatively even... unlike the true third world (or even China), where the standard of living literally drops off a cliff when you get a few miles outside the city...
DeleteBut that is really an outsiders perspective... can tell us more about it? Why dun people just move to the city then?
P.S about the original point, even if my estimates are off, I think it is at least an order of magnitude adjustment, both socially and economically... which I think is impossible... For the U.S. I think it needs to clearly and deliberately build and unfair system with respect to the rest of the world and fair internally.... The challenge is how to frame such a system.
Deepest America starts as little as 50 miles outside of a large city. For example, for NYC if you drive due West for a couple hours it’s like being in another country - relatively speaking. In Seattle, going East for an hour or two puts you square in farmland, etc etc. And if you go to the Dakotas, it’s ranch and farm land for as far as the eye can see..
DeleteBut, Deepest America can also be found inside cities. Ever heard of South Bronx, South Side in Chicago, the whole of Detroit? Etc etc
I guess deepest America refers to the poor in America... the guys living on the streets... the guys living in slums... yes, I have always avoided those places... can't say I know much about living in them...
DeleteNow that you mention it, there seems to be a different type of poverty in America... almost a psychological poverty... I dun know how to put it better... Like people who seem to have given up on life and just drift by... The opportunities are definitely there and yet the people just don't seem to want it.... like some kind of psychological disease...
I almost feel like Elon derives from this same branch... I feel that about the research community as well.... like I can explain and explain and everyone says yes, yes, yes, and nothing happens.... Its sort of like the global warming problem ... we all understand yet insist on walking straight into disaster....
Something is wrong.... something deep and dark...
Perhaps the problem is people don't really want wealth. They want something that makes them feel important... and in may ways the welfare state takes this away from them.
DeleteThe father slaving away at a job may seem unhappy... but if it is needed to keep his children alive, in a way it is meaningful and makes him important.... if the state says nah...., I will keep your children alive anyway,... than all that low wage daily drudgery has no more meaning... and his life has no meaning either...
why work so hard to make another dollar... is it important?... nope.... why not drift... and drift..... and drift.......