Mish, thanks. You have spearheaded a great discussion over the last few weeks and helped me understand a crucial point.
I’m slow but this is how I grasp what you are saying:
Assume a system in which:
1) There are fiat currencies (hence new money can be created at zero cost);
2) These currencies can be traded; and
3) An over supply of productive capacity exists (hence advantages accrue to a weak currency).
Question: in such a system, what happens if interest rates in ONE currency go to zero. Answer: Interest rates in all currencies go to zero.
That is, an interest rate of zero in one currency pressures rates in all of them (through arbitrage, carry trades, politics, etc) towards zero.
A zero rate of interest thus becomes an Omega Point for the whole system.
The next question is of course: what happens when the system reaches Omega (and all interest rates are zero)?
Some thoughts:
*Movement towards Omega, and life at Omega, are polar opposites. In the movement towards Omega, finance is everything. (I.e. People get ahead by setting up carry trades, by manipulating paper in huge quantities to take advantage of converging interest rates, etc. etc.) But once Omega is reached, finance is nothing. No differentials exist to exploit. There is nothing to arbitrage.
Now, of course, Omega will never be reached, but if approached, one would expect the importance of finance, of purely paper transactions, to diminish.
*If assumption number 3 above is wrong (and there is not a general state of overcapacity), then we get Russwinter’s scenario of bottlenecks, pressure points, spikes in prices, etc. Surely somewhere down the line, inflation has to rear its head. |
