A Song of Ice and Fire
May 27, 2019·13 comments
Central banks have spent a decade assuming that lower interest rates work the same way at 0.5% as they do at 5%. But something changes when the price of money gets cold. Rational investors stop building factories and start buying back stock. The theory that guides policy says this shouldn't be happening. The economy suggests otherwise.
- The linear assumption is breaking. Central bankers expected ultra-low rates to spur risk-taking and inflation the way lower rates always had. Instead, each rate cut is met with the same result: nothing moves.
- Behavior flips when rates approach zero. Investors who would rationally borrow and spend at 4% stop doing so at 0.5%. They're not being irrational. They're responding to what zero rates actually signal about growth and the future.
- The economy has shifted to financialization instead of production. Stock buybacks, profitless revenue, and oligarchification have replaced investment in property, plant, and equipment. This isn't a market choice. It's the rational response to a broken theory.
- A macro theory of money is running into the limits of how it works. Like the physics of water itself, money has properties that don't follow the expected rules at extreme conditions. Macroeconomics can't see them because it operates at the wrong scale.
- The gap between what policy assumes and what actually happens is widening. Until the underlying theory changes, central banks will keep lowering rates and keep wondering why nothing works. What breaks first: the theory or the economy?
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