Jackson Hole: When Trapped, Obfuscate


An utterly fascinating economic and banking paper was presented at Jackson Hole this week by The Hoover Institution at Stanford; like many such papers it is full of claims that revolve around mathematics, but one need not understand advanced math to obtain the gist — and intent — of the presenter.

The abstract reads:

The United States and most other advanced countries are closing on five years of flat-out expansionary monetary policy that has failed in all cases to restore normal conditions of employment and output. These countries have been in liquidity traps, where monetary policies that normally expand the economy by enlarging the monetary base are ineff ectual. Reserves have become near-perfect substitutes for government debt, so open-market policies of funding purchases of debt with reserves have essentially no eff ect.

Read: QE does nothing of value.

The U.S. economy entered this state because a financial crisis originating in a fi nancial system built largely on real-estate claims came close to collapse when the underlying assets lost value.

Read: The underlying “value” never existed; it was a wide-scale fraud.

Rising risk premiums discouraged investments in plant, equipment, and new hiring. Weakened banks and declining collateral values depressed lending to households and forced their deleveraging.

Read: The leverage was ill-advised and founded on nothing more than hot air; when discovered the lack of sustainability of the lending was exposed and the exponentially-built bubble burst.

The combination of low investment and low consumption resulted in an extraordinary decline in output demand, which called for a markedly negative real interest rate, one unattainable because the zero lower bound on the nominal interest rate coupled with low inflation put a lower bound on the real rate at only a slightly negative level.

Admitted: The real rate of interest, which must always be positive in a stable economic environment such that borrowing to produce is incentivized rather than borrowing as a ponzi scheme as the intent is to never pay off the loan but rather to roll it over at ever-decreasing rates of interest that are negative in real terms, has been the underlayment for the economy over the last 30 years.

As output demand recovers, the lower bound will cease to be an impediment and normal conditions will prevail again.

Read: Wishful thinking.

It’s not often that you get an academic to admit that it has been policy to create asset bubbles and drive the spending of money which one not only doesn’t have now but has no expectation of ever having in the future, relying instead of a permanently negative real rate of interest such that the cost of whatever it is that is being bought can be fraudulently shifted to society generally.

This subsidy is not simply one employed by schools, local, state and federal governments where one can make an argument that it at least benefits everyone (since you get the road, school, library or fire station to enjoy.)  No, it is employed by everyone in the economy when this condition exists, so a business canforce you to pay for its “expansion” through this very same mechanism, robbing you just as effectively as if a gun was shoved up your nose.

Mr. Hall, of course, doesn’t talk about that, and with good reason — Stanford might find itself with a bit of a problem among its students, say much less the general population, where it to be widely understood what is considered “normal” among its academics.

The other amusing piece of the paper comes right near the end where Mr. Hall says the following:

So far, inflation has fallen only slightly and remains in positive territory. Fears in early 2009 that rapid deflation might break out and cause the economy to collapse as in 1929 to 1933 proved unfounded, luckily. I have advanced the hypothesis that rampant price-cutting has failed to appear because businesses are in equilibrium and perceive that price-cutting has bigger costs than bene ts. If the hypothesis is wrong and businesses are finally responding to fi ve years of slack by cutting prices, the generally optimistic tone of this section could be quite mistaken. The bottom could fall out of the economy as it did in the Great Depression.


The solution to high prices is…… high prices.

Why?  Because excess profits lead other competitors to enter the market, which in turn brings lower prices.

Well, this happens in an “ordinary” economy anyway.

But what happens when you have a central bank, or a bunch of central banks, that are repressing the real rate of interest (remember, the central premise is that nobody ever intentionally lends — or otherwise acts economically — at a loss, so the only way this can happen is via intentional intervention by some actor with the ability to use force) in the economy?

Then you can prevent competitive forces from driving down the real cost of goods and services.  But price-cutting is good, not bad.  You want low prices, not high ones.  In other words you, as a consumer, want deflation, not inflation!

So for every WalMart and their “low prices” there must be an Exxon and their ramping prices, and to prevent the public from catching on to the scam that is being run we then must also do things like not count the increase in home prices as “inflation”, instead using intentionally dishonest metrics like “owners equivalent rent”, which is driven lower as negative real rates of interest develop since the cost of financing a house decreases with decreasing couponeven as the price goes higher.

Unfortunately all machinations of this sort have an endpoint because all such attempts to repress wind up expressed as an exponential function.  This is the nature of anything that is rolled over, or compounded, and no amount of mathematical arm-waving can change it.

Mr. Hall learned this in roughly the 7th or 8th grade, like the rest of us.

What he hopes is that you, and the rest of America, forgot it.

Good luck Mr. Hall.

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