Yet he doesn’t understand that low interest rates are a message from the price system that opportunity is everywhere. To prove him wrong I must make all Australians very, very rich, very quickly.
This is “Conversations with Tyler”, this is the conversation I want to have with Tyler.
Let’s start with Overrated / Underrated. Tylers ambition is to be the greatest economics educator ever. But if you were going to be an economics educator, wouldn’t you want to first know something about economics. Overrated!
I am going to use the Bloomberg Opinion article of a couple of weeks ago as illustrative. The article is “Economists finally have a good excuse for being wrong”.
the world is headed for a period of little to no economic growth?
This is wrong. It is up to us whether we choose economic growth or not.
I henceforth declare that the low interest rate shall now be known as the Mancur Olson Solution. It will stay until its job is done. There are people in this world who make something people want, let’s call them entrepreneurs because that’s what they are called. The Mancur Olson Solution tells the entrepreneur how much return he will get from making something people want. The more rentseekers win, the more the Mancur Olson Solution rewards risk takers.
I don’t know why it works. Somehow the price system just knows that opportunity is out there. It’s almost like a self healing mechanism. A low interest rate environment is telling everyone that opportunity is out there. Build! Build! Build!
So ‘Progress Studies’ anyone? The Mancur Olson Solution crushes Progress Studies. An ant to a Goliath.
Looking out my window now, the vast bulk of the resources are not being put to their most productive use. It is not an economic issue, it is a political issue. One glaring example, the San Francisco Bay Area is not a population of 50 million people, the immense human suffering because of this is utterly ghastly.
And what about that idea of secular stagnation — the notion that the world is headed for a period of little to no economic growth? The theory was based in part on the premise that global savings were high relative to investment opportunities. Have all those savings gone away? In most places, measured savings rose during the pandemic. Yet the problem of insufficient demand has vanished, and so secular stagnation theories no longer seem to apply.
Why be clear and concise when you can obfuscate.
Money is a primitive database of where our resources are now and which allows for future exchanges between participants. And then we got computer databases. At the beginning of the digital era only the husbands income mattered when getting a mortgage, now, you barely have to have a pulse and you get offered credit. And this is all due to computer databases.
So over the last 70 years everything got financialized. I am using the term financialized to mean the bank will give you money now in return for future cash flows. What was once risky became not risky. As soon as the cashflows for any particular instrument could be predicted with any accuracy. BANG. Financialized.
Back to what Tyler was talking about. I think the issue is using the term “savings”. Forget about savings. If money is a database and computer databases get invented. Then anything that can be financialized will get financialized. That’s what’s happened. There was limited supply of money by banks because it was hard to quantify risk. The computer database got invented. Now there is not a limited supply of money because banks can work out in exquisite detail where the risks are. And lend they do. A once in 4 million years innovation. Not quite sewer systems or Haber–Bosch, but nothing to sneeze at. (Note: This supply of money discussion here is entirely seperate from any central bank discussion of supply of money).