Part Three: Correlation is not Causation
The relationship Schmelzing focuses on in his study is real interest rates on a pro-rata basis to GDP for his numbers. Time is on the x-axis to denote progress in his theory of naturally declining interest rates.
Lending books should be related to their risk and not the GDP of the country they exist in. Time is a peculiar focus in understanding interest rates, to borrow a word. It is with financial innovation, larger loan-books, with more sophisticated methods that risk can be more easily managed. If he were trying to do the job properly this is the direction Schmelzing’s paper must have ventured into. The proposition that financial innovation eventually creates negative interest rates is highly peculiar!
And so essentially ignoring financial innovation in his conclusions, Schmelzing goes on to ignore efficient markets, loan book size and complexity to suggest that he demonstrates that there is no ‘virtual stability’ of capital returns by understanding this relationship as being real interest rate to GDP and that figure to time. Time! Is the function through which we gain progress for Schmelzing in his dramatic blur of reality.
Let us ignore that Rome lended at 8 1/3% and Byzantines at 7% nominal rates, according to Princeton Economics; his fantastic approach is an inbred type of thinking, a product of already-existing conditions justified for reasons other than the discovery of the truth. It is of fantastic convenience that consumers should naturally lose money on their cash deposits because of his conclusions, and of a remarkable coincidence that massively inflated asset prices from Greenspans and Bernanke’s Economics experiments should further benefit from them. And not just that! Directly approach narratives from today, one by Thomas Piketty to tax global capital 2% and one of secular stagnation are both disproven where todays monetarist Economics experiment, conceived in theory and executed with gusto is proven by a 700 yr old straight line! It is no longer a matter of efficient markets that push capitalism forward but carefully selected data!
In fact the most accurate and sensible way to interpret his data is as a set of Epoch’. It is not out of the question that we have already been in a new epoch as of 1971’s Nixon shock.
We are somehow happy and capable of ignoring the historical novelty of the fiat currency systems over the last 50 years. A system-by-default born of the failure of Bretton Woods, an unplanned arrangement that has encouraged the phrase to describe its decision-making as ‘to kick a can down the road’.
In fact the Economics experiment has become a cultural and social experiment, where children born today without capital are equivalent to Russian Serfs, or French Peasants (before the revolution). This career-advancing rationalism IS Piketty’s ‘endless inegalitarian spiral’.
The whole report is a deflection in favour of the controlled fiat currency system (of which nominal interest rates have been in perpetual decline after initially spiking to Mesopotamian-like levels) and monetarist economics, through which asset prices are boosted and the power of capital is allowed to run roughshod over all culture and society. Poor people will have their savings destroyed and must spend. Banks will allow or disallow people wanting to avoid this mother of all rat races and join the capital owning class, through which you can purchase a massively inflated asset price such as equities at 1.75% yield from politically connected billionaires (about half of equities worldwide are 50% owned by the top 3 shareholders) on a long term average of 4.33% mean and 4.27% median (unfortunately, or conveniently depending on your portfolio or lack thereof, asset yield never goes negative).
And so Qui Bono? Does it escape us, that a bank with a 10% reserve ratio can lend $1, 9 times, and even if it lends at a negative rate, end up with 8 more dollars at the end of the loan period?
This academic, near-millennia revelation of biblical, Yale-like proportions occurs at the same time that the Fed has stopped reporting its monetary base. Why, in the middle of monetarist Economic experiments are we no longer reporting on the key features of the theory? It seems a bizarre decision at the critical moment of monetarist economics, right before half a trillion dollars was pledged to markets as ‘liquidity’.
And finally, all of this in such peculiar timing – the information had been compiled seemingly as a response to Thomas Piketty’s new book ‘Capital and Ideology’, a 1,232 page behemoth released September 2019, leaving enough time to organise this by January 2020 where it explored the ideas that have justified inequality down the ages, such as this one employed by Schmelzing.
Written By: Thomas Kuhn, CFA
Thomas is a 12-year veteran of financial markets working to bring digital assets into the fold of traditional financial markets. With an interest in fundamental analysis with a technical overlay, Thomas actively takes positions in the markets he covers. As well as producing education for traders, Thomas writes for Mine Digital, CFA Asia-Pacific Research Exchange and Hackernoon.
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