This post uses an extreme example to illustrate a broader point. The extreme example is in no way a prediction of things to come. Furthermore, the post is more about the US than Europe.
On a plane in New Zealand recently my fellow passenger was reading “When money dies” by Adam Fergusson and published in 1975. She’d heard about the book through wikileaks and had managed to track down a copy through New Zealand’s National Library. It’s been out of print for a while (though copies are available elsewhere).
My interest was piqued by the description of changing social mores in Germany as a result of the inflation that runs right through the book.
…before the war bribery had been almost unknown and a high degree of uncorruptibility was evident in public and private life…The old virtues (were) thrift, honesty and hard work…
But society soon descended into a quasi-apocalyptic world.
It has become common for better and more warmly clad people to be robbed of their clothes in the street, and obliged to go home barefoot.
One woman wrote:
It is the ordinary conditions of our life that make a woman evil.
A British official, Lord D’Abernon reported that corruption was appalling among officials.
There were few in any class of society who were not effected by, or prey to, the pervasive, soul-destroying, influence of the constant erosion of capital or earnings and uncertainty about the future. From tax-evasion, food-hoarding, currency speculation, or illegal exchange transactions – all crimes against the State, each of which to a greater or lesser degree became for individuals a matter of survival…the lower classes…might turn to theft and similar crimes or to prostitution, the middle and upper classes…would resort to graft and fraud.
In the course of the euro-zone crisis it has become common enough to see stereotypes used to address and understand the structural flaws of the euro. I have done it myself. Yet, “When the money dies” clearly illustrates just how important price signals incentivise behaviours. If the stereo-typically uncorruptible Germans can descend into chaos, what does it say for the rest of us?
It shows incentives matter, a lot. Can we be surprised that economies enjoying substantial declines in long-term borrowing costs, changed their long-term behaviour? Remember also that incentives are more than just monetary, they can be political (power based) or geographic, our location influences our behaviour.
As I look around my office floor, I see lots of Greek-Australians, none of whom match the crisis created image of Greeks. Is it because they have abandoned their culture (not in my experience) or are they responding to different incentives?
But, as usuaeach class in Germany thinks that the burden of taxation should fall on some other class or classes.
For all Draghi’s words and the goodwill of European leaders, are the social and political pressures created by a shrinking economic pie surmountable?
But, Europe resolves itself quickly relative (given a breaking point must arrive quickly) to what we’re now seeing in the United States, within the context of this analysis. I have always followed the idea that the US is unique, it’s culturally different, it’s not Japan. But if incentives not culture drive an economy; how has the US not entered a Japanese scenario? Zero rates cause all sorts of poor incentives.
US companies, with de-leveraging and low growth at home, look to offshore markets for growth. Indeed, US managers are becoming the next Mrs Watanabe.
US households are helped to de-leverage by low rates, but building a sustainable pool of savings is hindered by the very same low returns, pushing them to higher yielding offshore opportunities, with greater risk, and continued low consumption.
Finally, the US government and Federal Reserve support fiscal and monetary policy aimed at ensuring bank survival. This is despite falling demand for credit elsewhere in the economy that would otherwise mean some banks go out of business (that is their zombies).
Yes, the US has a faster growing population. Yes, there is strong evidence of a very entrepreneurial culture. But is this enough to conquer the tyranny of zero rates.
