But European austerity also reflected willful misdiagnosis of the situation. In Europe as in America, the excesses that led to crisis overwhelmingly involved private rather than public debt, with Greece very much an outlier. But officials in Berlin and Brussels chose to ignore the evidence in favor of a narrative that placed all the blame on budget deficits ..
.. Indeed, Mr. Draghi’s heroic efforts to provide liquidity to nations facing speculative attack almost surely saved the euro from collapse.
Interfluidity: Rational regret
Suppose that you have a career choice to make:
- There is a “safe bet” available to you, which will yield a discounted lifetime income of $1,000,000.
- Alternatively, there is a risky bet, which will yield a discounted lifetime income of $100,000,000 with 10% probability, or a $200,000 lifetime income with 90% probability.
The expected value of Option 1 is $1,000,000. The expected value of Option 2 is (0.1 × $100,000,000) + (0.9 × $200,000) = $10,180,000. For a rational, risk-neutral agent, Option 2 is the right choice by a long-shot.
.. At a macro level, I do worry that we are evolving into a society where many, many people will experience painful regret in self-perception — and also judgments of failure in others’ eyes — for making choices that ex ante were quite reasonable and wise, but that simply didn’t work out.
Interfluidity: Depression is a choice
Usually, economists are admirably catholic about the preferences of the objects they study. They infer desire by observing behavior, listening to what people do more than to what they say. But with respect to national polities, macroeconomists presume the existence of an overwhelming preference for GDP growth and full employment that simply does not exist. They act as though any other set of preferences would be unreasonable, unthinkable.
.. But the preferences of developed, aging polities — first Japan, now the United States and Europe — are obvious to a dispassionate observer. Their overwhelming priority is to protect the purchasing power of incumbent creditors. That’s it. That’s everything
.. The median influencer in these economies is not a billionaire, but an older citizen of some affluence who has mostly endowed her own future consumption. She would like to be richer, of course. But she is content with her present wealth, and is panicked by the prospect of becoming poorer. For such a person, the depression status quo is unfortunate but tolerable. The risks associated with expansionary policy, on the other hand, are absolutely terrifying.
Interfluidity: Some thoughts on QE
On the one hand, I think most of the developed world has fallen into a “hard money” trap, in which we are prioritizing protection of existing nominal assets over measures that would boost real economic activity but would put the existing stock of assets at risk.
.. As assetholders get richer on paper, they spend more money, contributing to aggregate demand. As debtors become less underwater, they become less thrifty and prone to deleveraging. Financial asset prices are also the inverse of long-term interest rates, so high asset prices can contribute to demand by reducing “hurdle rates” for borrowing and investing. Lower long term interest rates also reduce interest costs to existing borrowers (who refinance) or people who would have borrowed anyway, enabling them spend on other things rather than make payments to people who mostly save their marginal dollar. Whether the channel is wealth effects, cheaper funds for new investment or consumption, or cost relief to existing debtors, QE only works if it makes asset prices rise, and it is only conducted while it makes those prices rise in real and not just nominal terms.
.. Under a laissez-faire system the level of employment depends to a great extent on the so-called state of confidence. If this deteriorates, private investment declines, which results in a fall of output and employment (both directly and through the secondary effect of the fall in incomes upon consumption and investment). This gives the capitalists a powerful indirect control over government policy: everything which may shake the state of confidence must be carefully avoided because it would cause an economic crisis.
.. The only way to improve the circumstances of the un- or precariously employed is to first make the rich richer. The poor become human shields for the rich: if we let the price of stocks or houses drop, you are all out of a job.
.. QE survives in American politics the same way almost all other policies that help the weak survive. It mines a coincidence of interest between the poor (as refracted through their earnest but not remotely poor champions) and much wealthier and more powerful groups. Just like Walmart is willing to stump for food stamps, financial assetholders are prone to support QE.
.. If you are Austrian-ish (as I sometimes have been, and would like to be again), if you think that central banks have ruined capital pricing with sugar, then, perhaps uncomfortably, you ought to advocate means of protecting the “least of these” that are not washed through capital asset prices or tangled with humiliating bureaucracy