We live in a big cold warehouse, heated by an old furnace. This guy "JPow" controls it.
The lucky ones, they've staked out places for themselves next to the heat vent, surrounded by broken glass and fences made of twisted rebar. Other squatters shiver way over in the corner by the windows. They regularly lose toes to frostbite.
When the squatters really start dying -- mothers wake up to find their babies have turned into frozen meat in the middle of the night -- then "JPow" gives in a little and cranks up the thermostat. The temperature in that far corner of the warehouse might even get above freezing.
But for the heat-lords who've got the good turf, man, it's like a day in the tropics. Shorts, flip-flops, Hawaiian shirts, margaritas. Party on!
Which is why, of course, it's always good news that plebs are starting to die of hypothermia. Because it means "JPow" has to keep 'em warm, and party time continues.
This little parable is, of course, a description of the Cantillon Effect.
NASDAQ is particularly sensitive to interest rates. People say it's because Tech is more future-looking, and when rates are high you want profits now. Or maybe it's sensitive just because that's what everyone believes. Either way, when rates go down, NASDAQ goes up.
It's weird that people celebrate news that the car is slow, because that means the driver is going to hit the gas. But that's how it be.
>This little parable is, of course, a description of the Cantillon Effect.
Except all the proponents of the cantillon effect can't seem to point at where it happens because it happens everywhere in the economy and every single economic actor has their own cantillon effect as anyone who saves demand deposits temporarily destroys money and creates a reverse cantillon effect at every single point in the economy and everyone who spends off their demand deposits causes a forward cantillon effect even if the central bank does nothing, making the whole theory completely useless as a method of blaming the government or central bank. When you consider the fact that commercial banks create commercial bank money and that there's thousands of them competing with each other the cantillon effect becomes more like a conspiracy theory because if the cantillon effect exists, it would be caused by inequality, not the other way around.
I have never seen anyone who points out the "Cantillon Effect" complain about too high banking profitability, for example. The Austrian Economists, who love the Cantillon Effect, always appear to demand higher interest rates which increases banking profitability, which immediately exposes their hypocrisy.
> [C]onsider the fact that commercial banks create commercial bank money and that there's thousands of them competing with each other [...]. [I]f the cantillon effect exists, it would be caused by inequality, not the other way around.
This seems like an interesting point. Let me try to think it through. It seems that, in an unequal society, richer people have more credit, so lending/money-creation gives money disproportionately to them. Thus lending magnifies inequality of access to money. Say everyone can borrow at 1:1, and you have $1. Then you can transform your situation into one in which you instead have $2 and $1 liability. Whereas the guy with $10 can transform his holdings into $20 plus $10 liability. Now if that "1:1" is actually a variable that goes up as interest rates go down, then lowering the rate disproportionately gives dollars (and liability, but that is inflated away) to those who already have them. In the extreme disproportion, one guy has all the money and can buy all the houses (or other real assets).
This then locks in increased consolidation or monopoly power, which can be used to extract rents that pay off the liability.
So I can see how a "distributed Cantillon effect" could both be caused by inequality, and exacerbate it.
This model does depend though on "the interest rate" being a consensus thing, maybe centrally-dictated.
I suppose collusion/rehypothication is another issue. Liability chains are supposed to be acyclic, but if we can somehow cause "forgetting" across one edge of a cycle between ourselves, then we can make "infinite money" and buy up assets before anyone catches on. And then maybe "remember" things later and make the mutual debts all cancel. Maybe this scam is sort of happening in a distributed way...
2.
> The Austrian Economists, who love the Cantillon Effect, always appear to demand higher interest rates which increases banking profitability, which immediately exposes their hypocrisy.
It's weird actually. There's a kind of cranky libertarian strain. On the one hand it blames ZIRP and presumably wants higher interest rates. And on the other there are lots of goldbugs in that school who like... gold... which has a zero interest rate. So that would seem to be a contradiction...
Maybe it's not though. They also don't like fractional reserve banking and want narrow banks. So if gold is a way to put a hard constraint on how much money there is in circulation, then high interest rates are a soft/elastic version of same, within a fractional reserve system.
(Islamic banking seems to have similar principles. More "tracking chains of exchange", less creation of money/banking-liability.)
3.
The one thing we can be sure of is that a regime of falling interest rates continually drives up the prices of earlier bonds, so the people who win are the ones who got in earliest. It has a pyramid flavor but somehow worse, because although ever-increasing exponentials are at least a mathematical object that exists (even if there are real limits), a monotonically-decreasing curve with a lower bound of zero can at most asymptote to zero -- and if you put any bound on the rate of decrease, then you find that you reach zero in finite time. After that, then what?
Because money and (stock) value is not strictly correlated. A business can lose money but their stock can be up because value depends largely on potential unrealised gain in the future. Then theres the fed making depositors whole again which means any negative sentiment against several banks before the feds involvement will recover. Maybe someone more knowledgeable could weigh in on that last part.
Well, if we’re being nitpicky, balance sheet items such as a large net cash position (a derivative of past success or failure) are also relevant factors in the value of a company.
The markets have been high on ZIRP and QE for a decade now, and so when interest rates/inflation increase, the Fed takes action, reducing the price of assets.
Good news (more jobs!) means that the Fed will increase rates more (bad news!).
Hilariously enough, the actions of the government(s) to bail out various banks are regarded as bad news by the markets which mean good news for asset prices.
Yes, it's entirely insane. Welcome to modern capitalism, I suppose.
Because interest rates are the overwhelming determinant of general asset prices and bad news for the economy usually leads the Fed to lower/slow the hike in interest rates.
