great article, and I agree with your observations.
Yet, the determining factor to me seems debt. With debt-to-GDP at current levels, I don't see a possibility for any major CB to implement a serious "survival constraint" i.e. interest rate over the medium term. I'd bet the FED lowers rates until early 24, otherwise the government is basically insolvent...
Money is always cheap if the return on investment is greater than the interest rate. Things might be a bit different today in that the all-time low cheap interest rates universally inflated valuations across the board (so that there's no housing bubble to buy into following the dotcom bust like there was in 2001). This means sparser investment opportunities, but they are unlikely to disappear.
A quick check of the BLS ( https://www.bls.gov/oes/tables.htm ) shows that "Financial analysts" (code 13-2051) had employment of 228 thousand in 2007 (mean annual wage: $81,700), and 291 thousand in 2021 (mean annual wage: $103,020), which exceeds the population growth rate by quite a bit (not adjusted for age ranges), and misses inflation by about $1,900/year. Not too shabby.
For personal financial advisors (12-2052) this is 132 thousand in 2007 ($89,220) vs 263 thousand in 2021 ($119,960), beating inflation by almost $4,500/year.
In 2007 rates were not only at historical levels (4.6% average), but had been on a gentle up ramp for the previous two years.
"Since the 1980s, the federal funds rate has been trending downward to squeeze out more growth."
Is this actually *the* reason for the rate decreases (first to historic averages from the mid 90s to early 2000s, recovering to historic averages before the Great Recession)? Would not increasing government debt be a factor too (ala post-WWII rate drops)?
I definitely buy that it plays in to it, but financialization is primarily a consequence of legislative, judicial, and some law enforcement choices made over the last 50 years. A decreasing interest rate to historic norms (and then some following the Great Recession) is not a primary cause of financialization. It's just a minor contributing factor that itself has other, more important purposes.
"The thinking behind this strategy, as outlined by Fed Chair Ben Bernanke in 2010, is known as the “wealth effect.”"
Okay, this is news to me and really supports your point. We need to sideline "trickle down" economics. It is a known fact that consumer spending directly drives about 2/3rds of the economy. And it's a known fact that poorer people tend to spend more of their income. It's also known that any stimulatory effect of higher income people spending more because they feel wealthier is a double-edged sword when they immediately start spending less when their wealth drops. Therefore, if you want to consistently raise the GDP, in good times and bad, the best way to do it is to increase incomes of the poorer people in the economy. If instead what you want are boom and bust cycles then sure, inflate the wealth of the higher income earners.
"In his book Permanent Distortion (2022), Nomi Prins argues that there is no real ‘out’ for this new arrangement."
Enforcing existing laws, clawing back various regulatory slack (such as allowing stock buybacks, which used to be regulated as market manipulation), and getting rising-tide economists in the Fed would help.
great article, and I agree with your observations.
Yet, the determining factor to me seems debt. With debt-to-GDP at current levels, I don't see a possibility for any major CB to implement a serious "survival constraint" i.e. interest rate over the medium term. I'd bet the FED lowers rates until early 24, otherwise the government is basically insolvent...
see some back-of-a-napkin calculations here:
https://www.pgpf.org/analysis/2022/12/higher-interest-rates-will-raise-interest-costs-on-the-national-debt
https://fiscaldata.treasury.gov/americas-finance-guide/national-debt/
Money is always cheap if the return on investment is greater than the interest rate. Things might be a bit different today in that the all-time low cheap interest rates universally inflated valuations across the board (so that there's no housing bubble to buy into following the dotcom bust like there was in 2001). This means sparser investment opportunities, but they are unlikely to disappear.
A quick check of the BLS ( https://www.bls.gov/oes/tables.htm ) shows that "Financial analysts" (code 13-2051) had employment of 228 thousand in 2007 (mean annual wage: $81,700), and 291 thousand in 2021 (mean annual wage: $103,020), which exceeds the population growth rate by quite a bit (not adjusted for age ranges), and misses inflation by about $1,900/year. Not too shabby.
For personal financial advisors (12-2052) this is 132 thousand in 2007 ($89,220) vs 263 thousand in 2021 ($119,960), beating inflation by almost $4,500/year.
In 2007 rates were not only at historical levels (4.6% average), but had been on a gentle up ramp for the previous two years.
"Since the 1980s, the federal funds rate has been trending downward to squeeze out more growth."
Is this actually *the* reason for the rate decreases (first to historic averages from the mid 90s to early 2000s, recovering to historic averages before the Great Recession)? Would not increasing government debt be a factor too (ala post-WWII rate drops)?
I definitely buy that it plays in to it, but financialization is primarily a consequence of legislative, judicial, and some law enforcement choices made over the last 50 years. A decreasing interest rate to historic norms (and then some following the Great Recession) is not a primary cause of financialization. It's just a minor contributing factor that itself has other, more important purposes.
"The thinking behind this strategy, as outlined by Fed Chair Ben Bernanke in 2010, is known as the “wealth effect.”"
Okay, this is news to me and really supports your point. We need to sideline "trickle down" economics. It is a known fact that consumer spending directly drives about 2/3rds of the economy. And it's a known fact that poorer people tend to spend more of their income. It's also known that any stimulatory effect of higher income people spending more because they feel wealthier is a double-edged sword when they immediately start spending less when their wealth drops. Therefore, if you want to consistently raise the GDP, in good times and bad, the best way to do it is to increase incomes of the poorer people in the economy. If instead what you want are boom and bust cycles then sure, inflate the wealth of the higher income earners.
"In his book Permanent Distortion (2022), Nomi Prins argues that there is no real ‘out’ for this new arrangement."
Enforcing existing laws, clawing back various regulatory slack (such as allowing stock buybacks, which used to be regulated as market manipulation), and getting rising-tide economists in the Fed would help.
> actual productivity being negative or close-to-negative
I think you mean productivity *growth*, right? Negative productivity would be a pretty extreme scenario!
Not sure economics is your bailiwick.....just saying.