Blimey, you’d have thought he would understand Marx

Or even diminishing returns?

What, I suggest, is that this chart shows something quite staggering. I call it the death of interest. The trend is long-term and inexorable, in my opinion. The simple fact is that the so-called ‘risk-free’ interest rate is disappearing.

I stress, this does not mean that interest will not be charged in the future, but to understand this it has to be appreciated that the interest rate charged on most loans is made up of two components. One is the cost of money, and since for most banks the cost of money is little different to the ‘risk-free’ interest rate this charge is tending towards zero over time. That’s precisely because, as modern monetary theory explains, there is no cost to creating money and as a consequence there is no cost to lending it, meaning that its price should, in fact, be nothing. That is a fundamental reason why, overall, interest rates remain low now, on average, when compared to long-term norms when different money creation arrangements prevailed.

The second component is not really an interest charge at all: it is a risk premium to cover the chance that the borrower will default upon their loan obligation, and leave the lender with a bad debt. This is, of course, why many loans still carry quite exceptional interest rates when official rates are almost non-existent.

Marx pointed out that profit rates would decline as the amount of capital increased. You know, what we call diminishing returns? There’s more capital around these days – the price paid to borrow something in greater supply falls. This is not an oddity.

Note that he also fails to understand that the interest rate spread pays for the bank. And we are going to have banks – even if they are nationalised – which will cost something to run. Interest ain’t going away.

There is another reason for this redundancy: if interest rates decline so does inflationary risk.

Yes, he really does say that.

The risk-free interest rate is declining in the UK and wholly unsurprisingly so too are oscillations in inflation rates, especially if war and the world crashing out of the gold standard and the UK leaving other exchange rate mechanisms (such as the ERM) are taken out of the trend, they being the only real explanation for significant inflation hikes since the 1860s.

I have already suggested today that monetary policy now seems to be a wholly irrelevant mechanism for economic policy control, but so too, I suggest is inflation targeting. The reason is common between two: if interest rates are tending toward zero, and I think they are, then inflation is inevitably going to tend in the same direction, external shocks apart, which can never be corrected by monetary policy.

The time to bury monetarism really has arrived. And in that case the day of the independent central bank is also over.

Low interest rates deliberately engineered as monetary policy by a central bank show that monetary policy and central banks are just so over.

7 comments on “Blimey, you’d have thought he would understand Marx

  1. I’m surprised the guy can tie his shoelaces to be honest. What’s hilarious is he seems unable to even follow his train of thought between different posts within the same week. Wasn’t he bemoaning the fact that QE had accrued massive gains to ‘holders of existing assets’. Yet the fact that inflation is concealed across a series of asset bubbles (in areas of which he has no understanding admittedly) does not mean it had gone away and the odds are it will come back with a vengeance if his ideas around people’s QE were ever implemented….

  2. The risk free rate is not the same thing as the rate of profit, is it?
    Nor is it a market determined rate.
    The rate of profit – if you use say ROA / ROI as a measure – is historically quite high, isn’t it?

  3. Ritchie today “The more people save the less economic activity there is in the UK.”

    Ritchie of course spends fuck all money, other than on divorces (no flash cars, no foreign holidays unless to a concentration camp, etc).

    Go on you hypocritical cunt, spend for the sake of the economy.

  4. “There’s more capital around these days – the price paid to borrow something in greater supply falls. This is not an oddity.”

    Cheap money in great supply chases a limited stock.

    Your plan to increase chitties isn’t going to have quite the effect you hope.

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