I had forgotten to link Mr. Krugman’s (PK) post on Raghuram Rajan’s ‘Money Magic’. It is here. On top of that, he has taken a pot-shot at the latest recommendation of the Bank for International Settlements (BIS) recommendation that economic growth rate needed to slow. Well, I doubt if they make the point that rates need to go higher. Both are two different things.
I am yet to read the BIS annual report. I shall do so because I make the very same point (that they appear to have made) in my latest MINT column.
PK’s rejoinders to the BIS and to Raghuram Rajan are unsurprising. He belongs to the school that believes in giving more of the same medicine if it did not work the first time or the second time or the third time. It does not matter if, over the medium to long-run, the economic outcomes they seek do not fructify or that they fructify with enormous costs (moral hazard, inflated assets built on massive debt, etc.). That is a long-term problem. In the long-run, we are dead. So, argues the anti-Calvinists, as they claim to be. There is a moral superiority to their tone since they ostensibly root for the working class or the unemployed masses today.
Let us take a closer look at the two charts PK has produced in his blog post. The second chart has a different scale and the y/y change in Unit Labour Costs in the US is around 1%. No sign of wage pressures. In fact, I wonder why rates should always go up when ULC inflation is, say, above 3% or 4%. After all, why not let labour get, at least once in a while, a share of the productivity more than they should?
In fact, that is the question I have, for PK and others: Who are benefiting from the zero interest rate cum loose money policy? Who benefited in 1998-99? In 2001-04 and now in 2007-11? It is an empirical question and the answers need to be found before either pouring more ‘liquidity’ medicine into the mouths of capitalists and speculators or before pouring scorn on those who espouse alternative view points.
If there is excess savings at nominal zero bound and if that means that the US potential GDP growth rate is probably close to 1% rather than 3%, then what the heck is the US stock market doing at 1300 points? Who is propping it up and with what money and is that healthy? Debit balances in the NYSE Members’ Margin account was USD278.5 billions in March 2000 and it went up to 381 billion dollars in July 2007 and it stood at 315 billion dollars in May 2011. We all know what happened after March 2000 and after July 2007. Did that benefit the unemployed for whom the hearts of the anti-Calvinists bleed?
Something for the bleeding hearts to reflect on, here and here. Low interest rates combined with technological changes, compensation practices combined with short-term focus on stock prices by US corporate leaders and financial globalisation have boosted asset prices well beyond levels justified by fundamentals and have made those who are asset-rich, richer. Others have been immiserised. That is the path that America continues to walk on.