Just a few notes.
1) Yesterday I wrote a piece explaining why FRFARRPs are not really tightening, but that they probably are part of the tapering which was signaled. Nevertheless, all they do is make the system even more dependent on the Fed Balance sheet. FARPs hook savers and turn potentially productive or bubble inducing capital into lazy capital.
David Beckworth tweeted that he shared my concerns.
I’d like to just point out — because I forgot to mention it in the post — that I’m not necessarily disagreeing with the Fed action here.
I’m kind of, of the opinion that the fed is damned if it does and damned if it doesn’t.
On one hand I agree with Brad Delong that there isn’t necessarily too much of a downside in collateral constraints that result from QE.
The negative repo rates and the collateral shortage that results are arguably a good thing IF YOU BELIEVE THERE ARE STILL PRODUCTIVE INVESTMENTS TO BE MADE.
My position on the collateral shortage is that a) its intensity confirms my suspicions that there aren’t enough productive investments out there and b) it represents the system’s panic attack about the prospect of money and capital going through the looking glass as a result of this. Money now has a negative time value.
The Fed is attempting to pacify savers with FARPs. It’s trying to stop them freaking out, because it knows the alternative — higher yield environment — ain’t gonna be around anytime soon.
Remember Keynes envisaged that in a steady state economy the ideal would be for a dollar’s value to be constant overtime. It’s up to the cbank to just pump in enough new dollars (Monopoly board game pass GO collect 200 style) to ensure that people can keep the game going and are not disadvantaged by that fact that all the assets and capital are positioned in very concentrated hands.
Problem with FARPs steadying the dollar and avoiding negative time value is that the economy probably still needs readjustment and redistribution. It’s too early to freeze the system as it is for all eternity.
Unless matters are taken into the hands of government and/or the fed is prepared to distribute the QE side of the equation more equitably via real money drops or basic income.
In short, hooking the system onto the Fed’s balance sheet is not necessarily a bad thing if there really are no productive investments out there, and if alternative action will be taken to sort out the liquidity draining and velocity slowing nature of this action.
2) I was thinking about Kotlikoff’s early proposal for a “sale of a century” resolution. What would happen if we just started giving stuff away for free?
I’m starting to like this idea. It’s hard to anticipate how the public would react.
For sure it would encourage the sort of restocking that would hopefully stimulate the economy.
If things were free people would initially accumulate like crazy if they thought the free period was only temporary. If it transpired that things would remain free for a long time people would start using shops and retail units as personal storage space. They would take only what they need.
3) if there really aren’t many productive investments left — at least not without the consequences that things simply become free — then it’s understandable why capital will seek refuge in anything that has the means to reverse this equitable process and which once again restores the hierarchies.
* Companies or assets that monopolise distribution of goods and resources. Commodities are attractive because if you own all the commodities you can control who gets them and in that sense retain your relative advantage over everyone.
Same applies to companies that purposefully restrict supply.
Of course, the new economy is defying this repression now (why I disagree with Grantham’s pessimism on this front, because I have a feeling a lot of the bull cycle was the result of unwitting monopolization in the face of a renewable threat).
* Rent seeking opportunities. Anything that has a property right attached to it, is needed and can be rented. Housing and land are the most obvious assets here, but so is any infrastructure that can be rented or charges for use. From utilities to iTunes. (With iTunes Apple transformed itself into a rent-seeker. It keeps out creative content in storage and rents it out on demand. We rent rather than download for free because of convenience and the entanglement burden of not keeping everything Apple when you depend on Apple devices.)
Rent-seeking can only be busted by the dissolution of property rights, the economy’s shift to a collaborative and sharing economy of its own will, because of convenience (things like home swapping etc) or direct government intervention.
* Last and not least, as the economy moves to fee itself from the grip of the above monopolists and rent-seekers, it will do so increasingly by learning how to dispose of stuff.
Our biggest upcoming problem is going to be clutter. Companies that can make clutter go away, ideally in a way that stuff can be repurposed — freeing our dependence on access to fresh commodities — will be the Apples of tomorrow.
We’ve still got a long way to go before this seems overtly appealing though.