Many high-income countries experienced little growth but strong price pressures in the 1970s. Since the mainstream economics said the two were mutually exclusive, a new term had to be created, hence stagflation. Fast forward almost half a century later, and mainstream economists are still having a problem deciphering the linkages between prices and economic activity, such as inflation and employment. Theory needs to accommodate the new facts.
Theory is being challenged in another profound way now. Germany, the world's fourth-largest economy appears to be contracting and experiencing disinflation pressures despite its entire yield curve being below zero. Negative rates have not spurred inflation. It has not bolstered investment. The lower price of money (interest rates) has not spurred demand for it. This is true throughout Europe. Negative rates do not preclude recessions. Nor are they necessarily inflationary as theory might suggest. US and UK inflation is running higher than in the eurozone and Japan, even though the latter have negative interest rates.
Germany, unlike Japan, abhors debt and has, until recently, not been keen to jettison the "black zero" of austerity. Given the debt servicing costs, many officials still seem to think that they can have their cake and eat it too. Spending can be boosted, and taxes cut without taking on greater debt costs. For its part, Japan, which barely grows in the best of times and barely managed to get core CPI (excludes fresh food) to 1% in recent years to say nothing of the 2% target, just raised the tax on consumption.
At last month's initial tranche of targeted long-term refinancing operations, the ECB practically could not give money away. There may have been some technical considerations deterring interest, and stronger demand is expected at the next tranche in December. Still, the point remains unmarred that the experiment with negative nominal rates has not generated the kind of economic outcomes that were expected.
While nominal rates are not negative in the US, depending on how it is calculated, real interest rates are near or below zero. The 10-year yield is near 1.53%, and the 2-year yield is about 1.4%. The US reports September CPI figures on October 10. The headline rate is expected to rise to almost 2%, and the core rate stable around 2.4%. There are a couple market-based measures of inflation expectations. The 10 through 30-year breakevens (the difference between the conventional and inflation-linked yields) are 1.50%-1.60%, and the five-year five-year forward (the expected rate of inflation for five years beginning five years from now) is at 1.90%.
Low and negative interest rates are spurring neither growth nor inflation. With little real or nominal growth, distributional issues come back to the fore. There are national variations on this theme, but it seems to be a common source of the current political populism. Low real and nominal rates are a function of large economic forces, including weaker population growth, slower productivity growth, past technological advances, and a competitive environment for goods production.
Social organization is important. Capital launched an offensive in the face of falling profits and stagflation in the 1970s. The governments of the UK and the US purposely weakened unions, the one institution whose raison d'etre was to boost labor's share of the social product. Capital increased its dominance and took an increasingly bigger share. It was too successful. It has so much money, it does not know what to do, so it gives it back to shareholders in the form of buybacks and/or dividends. One CEO of a large internet company claimed to have so much money that he would need to go into space to spend it. Really? And seriously boosting the compensation of the median employee and/or accepting smaller margins is ideologically unthinkable?
There is a great disparity among companies, but business as a whole in the US is sitting with large savings. This does not mean corporations do not borrow money. Of course, they do, but they do this on the whole, as part of "tax minimization" strategies and other financial considerations. Corporate America is a net creditor. They are a source of capital, not net borrowers. Lenin had it wrong when he said that "the capitalists will sell us the rope with which we hang them." They apparently are hanging themselves. The biggest threat to capitalism and the ability of the social classes to reproduce those relations is the success of capitalists themselves. They have garnered such a surplus that it drives below zero the return on coupon-clipping (passive "risk-free" investment). What Keynes called the "euthanasia of the rentier class," which we seem to be experiencing now, was not at the hands of communists but results of the dynamic of capitalism itself.
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