Schmelzing Down the House: The Power of Capital and Convenience of Straight Lines. A Three-Part Series - Mine Digital
February 14, 2020
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Schmelzing Down the House: The Power of Capital and Convenience of Straight Lines. A Three-Part Series

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Thomas Kuhn, CFA

Operations and Trading Manager

Part Two: 700 Years of Convenient Interest Rates

Part Two: 700 Years of Convenient Interest Rates

An interesting report came out in the last week written by Yale Economist, Paul Schmelzing who had been seconded at the Bank of England. In it, Schmezling promoting an idea that real interest rates descend historically. As Fortuna would have it, we had been looking at interest rates the day that the report came out and found the conclusions inconsistent with what we had been looking at the same day.

Schmelzings figures are as follows.

There are three kinds of of lies: lies, damned lies, and statistics

The impressively named study, ‘Eight Centuries of Global Real Interest Rates and the ‘Suprasecular’ decline 1311-2018′ is a study in conformity to the status quo, where Schmelzing justifies current rates and policy in his explicit attempt to bail out central banks ‘This down-ward trend has persisted throughout the historical regimes and long preceded the emergence of modern central banks‘. He also takes aim at Thomas Piketty’s work ‘Capital in the Twenty-First Century’, labelling Piketty’s methods ‘peculiar’.

Schmelzing implies a deflection of criticism aimed at modern central banks in mentioning that the phenomenon ‘long preceded the emergence of modern central banks’. It would not be necessary to say so otherwise. Likewise, his mention of Piketty’s work – which could not be parsed from Pikettys suggestion of capital having a gravity to itself – is ironic, it is specifically Schmelzing’s type of conceptualisation of reality that manifests this phenomenon.

Another Schmelzinger! Guess which part of this chart of the S&P 500 coincides with the monetarist economics being defended in his piece

It does not escape us that these conclusions are all in the documents abstract – the man sets out to prove a specific point as a disciple of Capital. The high-level objective is to mount a defense of modern central banks and to discredit Thomas Piketty. A defense of Capital, for Capital. In the most detached and mundane rationalisation to achieve this simple goal, Schmelzing speaks power to power and dramatically reiterates Piketty in his attempts of rebuff.

In an ‘eight century’ study on real interest rates, Schmelzing directly approaches todays current narrative of ‘secular stagnation’ in his abstract! Suggesting that these narratives are ‘entirely misleading‘ and that ‘real rates could soon enter permanently negative territory‘. ‘Policy implications advanced by Piketty (2014) are in consequence equally unsubstantatiated by the historical record‘. It seems baffling to propose these conclusions from a large and spurious data set over so much time and his choice of data representation is also baffling. We will set out to underline that further.

What is in operation here is dangerous in such ethereal tasks as managing monetary policy, where chicken littles sky has not perceptibly fallen viewed from the lofty heights of public policy institutions. But how could you explain the conclusion to children, born into a world with massively inflated asset prices, a world without yield and where progress comes through technology and with the resistance of the capital owning class.

We establish an environment where the necessary flux for commercial advancement can only come through social and cultural revolution rather than the proper function of public institutions. We should be so lucky that technological advancements have been exponential to have already avoided drastic consequences of this gaming of the political and managerial structure towards narrow interests. It is already the 11th hour – the liberal democracies social and cultural mechanism of correction against this elitist system maintenance has already emerged in the election of Donald Trump and the communist Bernie Sanders as likely Democrat frontrunner in the United States. (But a financial solution is also fully evident in the technology of Bitcoin.). How does a proletariat condemn the tyranny of the aristoracy in Latin – is it still ‘Sic Semper Tyrannis’?

Schmelzing the Yale Economist nailed one aspect of his conclusions though, saying in an interview with a Dutch newspaper that ‘economists must review their theories’.

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