A Simple Rate Tweak Should Do It

Last week, the Federal Reserve and others lowered interest rates in an attempt to counteract the effects of COVID-19 on the economy. Also last week, The Economist optimistically wrote that a recession is unlikely but not impossible:

Yet there is an uneasy feeling that a flurry of rate cuts may not be the solution to this downturn. In part that reflects the fact that they are already so low.

Lowering the prime rate has no effect because it’s not the banks who don’t have enough money: it’s the people. Maybe rate changes would have an effect if the banks changed the interest rate on consumer credit from 25% to -25%, but they won’t. It’s thoroughly irritating how some commentators say there’s too much money in the system when the problem is not how much there is but who has it. We’ve needed a helicopter drop of cash or a debt jubilee for a decade, and a basic income for a century.

In the United States, “full” employment is not having an effect on wages because it’s not full. The labor market is global, or was until yesterday, and global unemployment is roughly 50%, so real wages are still going down. Because employment only counts paid labor–and bears only a passing relation to what work needs to be done–employment is constrained by employers. And there aren’t enough employers, again because of the distribution of money, but also because of a tendency to monopoly: how many paperclip maximizers do we really need? Meanwhile, none of that matters because the system isn’t designed for the public good–or, if you prefer, it’s not designed to maximize marginal benefit for all market participants. Finance capitalism thrives on greed: the world can go to Hell; I’ve got mine.

Besides, it’s not just households who are over-leveraged. Everyone is.

One way the virus hurts the economy is by disrupting the supply of labour, goods and services. People fall ill. Schools close, forcing parents to stay at home. Quarantines might force workplaces to shut entirely. This is accompanied by sizeable demand effects. Some are unavoidable: sick people go out less and buy fewer goods. Public-health measures, too, restrict economic activity. Putting more money into consumers’ hands will do little to offset this drag, unlike your garden-variety downturn. Activity will resume only once the outbreak runs its course.

Then there are nasty spillovers. Both companies and households will face a cash crunch. Consider a sample of 2,000-odd listed American firms. Imagine that their revenues dried up for three months but that they had to continue to pay their fixed costs, because they expected a sharp recovery. A quarter would not have enough spare cash to tide them over, and would have to try to borrow or retrench. Some might go bust. Researchers at the Bank for International Settlements, a club of central banks, find that over 12% of firms in the rich world generate too little income to cover their interest payments.

Many workers do not have big safety buffers either. They risk losing their incomes and their jobs while still having to make mortgage repayments and buy essential goods. More than one in ten American adults would be unable to meet a $400 unexpected expense, equivalent to about two days’ work at average earnings, according to a survey by the Federal Reserve. Fearing a hit to their pockets, people could start to hoard cash rather than spend, further worsening firms’ positions.

https://www.economist.com/finance-and-economics/2020/03/05/a-recession-is-unlikely-but-not-impossible

The Economist longs for Bretton Woods while they chart some of the attempted remedies. It’s quite possible, however, as some commentators have noted since at least the turn of the century, that the global economy is now too complexly intertwined to be centrally managed, if it ever could have been, or ever could be.

May you live in interesting times.

A New Kind of Credit Card?

A while back Apple announced plans to launch the Apple Card. It launched.

A new kind of credit card. Created by Apple, not a bank.

Issued by Goldman Sachs Bank USA, Salt Lake City Branch.

Apple Card completely rethinks everything about the credit card.

It represents all the things Apple stands for. Like simplicity, transparency, and privacy.

And it’s the first card that actually encourages you to pay less interest.

https://www.apple.com/apple-card/

What’s that again? Less interest? Tell me more!

Variable APRs range from 12.99% to 23.99% based on creditworthiness. Rates as of August 2, 2019.

https://www.apple.com/apple-card/#footnote-4

Weird. That sounds exactly like every other credit card I’ve ever had.

The Apple Card app in the Wallet does have some nifty features, such as math and pretty pictures, to help you estimate and plan payments on the card. This is novel. And the card itself is physically satisfying.

But the Apple Card feels like a missed opportunity to make a significantly different credit card. Like many decisions of the Tim Cook era this one is safely pretending to be radical. A truly new kind of credit card would have the following features

  • Low interest, such as one percentage point over the prime rate, for everybody.
  • Provide a ladder out of debt, not just a shovel to make the hole bigger.

I’m sure this card will be profitable.

For All Debts, Public and Private

As a young man with few dollars, I used to spend some time admiring the engraving on those few I had. I’ve long been struck by the phrase printed on Federal Reserve Notes: “This note is legal tender for all debts, public and private.”

It is somewhat odd that some think dollars, or other currency, has value in and of itself, when the value the currency has is only in relation to the demand of others for it. By others, we mean primarily the entity printing the currency: They demand it in taxes.

Consider a schoolyard bully who is satisfied with anything I have in my pockets. Any of those things may be used to pay for his protection. But suppose that one day he decides that he will only accept Hershey’s chocolates. This gives Hershey’s chocolates a special value in the schoolyard, and trade of those chocolates between children may result. Further suppose that the bully gives his friends special tokens of affection, and will not pummel those who hold them. These tokens would also have value, and may be exchanged for Hershey’s chocolates, or for other goods. In time, the bully may decide that he no longer likes chocolate, and will only protect those who have his favors.

Economic Stimulus Package: No Taxes

The bank just sent a summary statement of the escrow account we use to pay the local and school property taxes. One achieves a certain distance from the taxation by letting someone else manage it for you. It was a big number, but not as big as the amounts I’m paying in other taxes.

If the Federal government finds it necessary to spend money to stimulate aggregate demand, and doesn’t want to just hand me the $1 million previously suggested, then I would appreciate a tax holiday. That would increase our available cash by quite a bit.