Helping or screwing the ‘little guy’ in era of zero interest rates
There is much debate about who benefits from the extremely easy monetary policy the world’s major central banks have accommodated since the Global Financial Crisis.
Some argue that zero interest rate policies and quantitative easing are a giveaway to the rich and powerful, since they push up the prices of stocks, real estate and other assets of which the wealthy own more.
Yet low interest rates also provide cheap funding for governments, which can then better afford expenditures that benefit the general welfare.
As Europe, Japan and China all signalled further easing last week, and the US Federal Reserve debates whether to “normalise” rates at a meeting that concludes on Wednesday, October 28, it is interesting to put this debate into its historical perspective.
Today the excesses of central banks and high government debt loads are the bugbears of the political right, while anti-austerity adherents like Jeremy Corbyn, the recently elected head of Britain’s Labour Party, argue for printing and spending more.
Corbyn is an avowed admirer of Karl Marx, yet interestingly the father of communism rued the day, in 1694, when the Bank of England was founded. The central bank simply turned credit into capital, an artificial product that ever afterwards was used – yes, you guessed it - to exploit the workers.
Nor did Marx have much good to say about government debt. In his day, sovereign bonds were mostly owned by industrialists and the landowning classes. In Britain such bonds often yielded 4 per cent annually, even though inflation was generally zero, if not falling, in this disinflationary period of history.
Marx saw it as a cushy arrangement that benefitted the rich and powerful. The “rentier” class could just sit back and make a good income from the interest, while governments used the borrowed money to finance wars or colonisation.
But as Thomas Piketty chronicles in his opus on inequality, “Capital in the 21st Century,” the tables were turned in the 20th century - when lenders to the government often got taken to the cleaners.
Western governments began piling on large debt as they turned into modern welfare states. Their central banks allowed for inflation, a neat trick that lowers the cost of repaying debt. In short, governments inflated their way out of debt, stiffing the bondholders in a process that John Maynard Keynes called the “euthanasia of the rentier.”
So where do we stand in this, the 21st century? Or to put it another way: who is getting the free ride and who is getting stiffed?
As mentioned, the monetarists, gold bugs and more conservative political observers tend to blame cheap money for hurting the little guy, whether that be driving up rents in London or Hong Kong, or encouraging capital investments in automation technology that will displace workers.
Those on the left suspect conservatives do not like cheap money because it makes it easier for governments to expand. Indeed, the incoming prime minister of Canada, Justin Trudeau, based part of his election campaign on this very tenet, arguing that it makes sense for governments to take advantage of cheap funding to boost growth through spending more.
And what about Piketty, the modern era’s biggest thinker on issues of inequality?
The French economist is not in the austerity camp. But he does think governments need to cut their debt levels. For starters, bondholders no longer merely represent the rich; today there is a very large global middle class who saves for retirement by investing in “safe assets” like bonds, and who shouldn’t be put at risk.
Instead of borrowing so much, Piketty thinks more funding should come from taxation – in particular, a global tax on capital that to his mind is the only solution to prevent the capitalist system from otherwise inevitably slouching towards extreme wealth inequality.
So this is where the historical debate stands as we await for the Fed’s decision – and the possible end of years of zero interest rates. If those on the right are correct, normalisation will help the little guy. If those on the left are right, such a move could hurt the little guy.
And if Piketty is right, the little guy is screwed either way. It’s not monetary policy; it is only tax policy that can achieve redistribution.
Cathy Holcombe is a Hong Kong based financial writer