Cheap Money Is Not a Victimless Crime By Jeffrey Snider

This is a global problem, conducted under the auspices of modern monetary thought.

The financial world is meant to be directly linked to the real economic world. In the purist, philosophical sense, finance is supposed to not only reflect economic reality, but to foster productivity within the real world by productively allocating what should be scarce capital through price discovery and signaling.

Six years of zero interest rates is not only a mistake, it compounds the destructive nature of low interest rates enacted in previous episodes of economic and financial engineering. Businesses of every type and size make real decisions based on their perceptions of the cost of money, i.e., interest rates, transmitting these interventions well into the real economy.

Easy access to cash can allow business lines and whole businesses to operate unprofitably longer than they really should, meaning the relative importance of innovation and/or productivity is diminished. Efficiency gets lost in the euphoria of asset prices, as stock prices reflect quantities of money rather than true expressions of value.

Since the price effects of ownership changes are instantaneous, whereas productive projects are a net cost up front and often take many years to bear fruit, the systematic skew toward the short-run favors asset manipulation over operational innovation and improvement. True investment is discarded in favor of financial “investment”.

The fundamental processes that create real wealth, the productive exchange of labor and capital within production (or services), are the fundamental foundation of debt service and repayment. As bad as it was that the debt-fueled growth of the bubble periods was really just borrowed prosperity, the systemic and intentional mispricing of risk and the cost of money assured that payment for that borrowed growth would occur during a period where the ability to pay was significantly diminished. The key to keeping this impoverishing cycle going was the artificial alternative to direct/wage economic circulation – asset inflation and debt. Remove those and the high degree of unsustainability became obvious.

I don’t believe it is coincidence that the rate of innovation has fallen off, especially the dramatic and revolutionary innovation that marked previous periods of economic success. The amount of financial resources diverted to financial management was simply immense, growing to unbelievable proportions in the 2000’s, and that represented a huge opportunity cost to the economy as a whole. Our bloated financial industry is a net cost to the economy since there is no foundation of productive, sustainable activities to support it.

In almost every manner, the Federal Reserve and global central banks engaged in policies that were the exact opposite of what was needed. You cannot simultaneously borrow from the future while eroding the basis for that future. That is the definition of impoverishment, adding the weight of growing obligations on top of a diminishing ability to repay.

Productive investment is a long-term prospect. Central banks are singularly focused on economic activity today. In order to manage the present, central banks sacrificed the future. They thought creating growth through debt would lead to longer-term prosperity because modern economics makes no distinction about the quality of economic activity. But there is a world of difference that plays out in the drama of sustainability and eventual market discipline. Once the artificial channels of circulation inevitably fell apart, the distinction between quantity and quality produced the astounding magnitude of the Great Recession. Central banks cannot solve the problems because they are the problems. 

We cannot keep sacrificing the future for the present. We cannot borrow any more future prosperity for today–that card is maxed out. Money is not in short supply, productive capacity is. Fiscal authorities have tried to fill the gap, but government is not equipped to run the economy.

Someone in a position of authority has to realize (and have the guts to proclaim) that policy has been backwards for far too long, that short-term sacrifice is needed for long-term success, not the other way around. Cheap money is not a victimless crime.