For those betting on what will prompt massive change, system collapse is undoubtedly the odds-on-favorite. From Larry Lindsey of the Lindsey Group via zerohedge.com:
Negative Rates and the Austrians’ End Game
Our training and bias have always been toward policy activism — that tweaking this or changing the dial on that can always make things better. [But] critics of activism, often lumped into the ‘Austrian School,’ argue that this will inevitably end badly.
Tweaking and dialing are addictive, both to the policymaker and to the governing class. Inevitably, this will lead to an unsustainable amount of tweaking and dialing and an endgame in which policymakers become powerless as the state’s monetary and fiscal dials are no longer functional and the state is, in effect, bankrupt. But as states never go bankrupt, they then must seize the assets under their dominion through either inflation, taxation and confiscation.
Our activist training tends to lead us away from these thoughts until [a] more-worldly individual — in this case, an Italian friend and client (and a history buff) — reminded us of this theme.
The Roman Empire tried all three. The medieval popes had their Jubilee Years in which all debts, particularly their own and those of other sovereigns, were forgiven. Debasement, grinding taxation, and confiscation from disfavored groups (often the Jews) were all part of the process.
So, there is nothing new under the sun that shines in the Policy Activists’ Universe. Negative interest rates sound new and ‘unconventional,’ but they are nothing more than an extension of this nostrum. Undertaken in the name of promoting inflation, they are really nothing more than taxation of (and ultimately confiscation of) liquid wealth. They are ‘unconventional’ only in the context that as time goes on, the policies of state acquisition of wealth must become ever more creative.
A 40- or 50-basis point ‘tax’ on wealth doesn’t sound like much, but in a world in which the ‘normal’ real return on capital might be 2%, this is a tax on income equivalent to 20 to 25%. Add to this a modest ‘inflation tax’ of 1% (below the target of 2%), and the new, effective rate on the normal return on capital becomes 70 to 75%.
Done in ‘moderation,’ inflation, taxation and confiscation can go on for a long time. They persist until the institutions that are the long-term-savings vehicles of a society and provide the investment capital collapse under the burden. How can one offer a pension — except through a Ponzi scheme — when the accumulation of assets is subject to such taxation? Long-term life insurance (as opposed to renewable term insurance) becomes impossible as well.
In the process, the growth of societies trying these schemes diminishes. Long-term capital moves from growth-enhancing productive investment, which dries up as it increasingly gets channeled into the hands of the state. The fibers of the economic morality that drive growth get frayed, particularly the bourgeois impulse to save for a better tomorrow for oneself and one’s children.
To continue reading: Larry Lindsey Warns “Nothing Will Change Until The System Collapses Under Its Own Weight”
