Friday, November 18, 2011

Most things don't matter

The nominal interest rate in the US is near zero.  Your banked money is losing value as the interest earned is less than inflation's erosion. Borrowing money (if you're big enough) is almost free, since you get to pay back in dollars and interest worth less than you borrowed.

Sounds like another deal that's bad for the general public and good for corporations and the uber-wealthy.

But really, why should we care?

The answer, I fear, 
is blowing in the blogo-sphere.  

I'm hearing an echo of economist Karl Smith at Modeled Behavior:
"... most things don’t really matter, but some things do. That is to say, when dealing with a robust evolutionary-designed equilibrium systems like a capitalist economy, or the human body, or the human social network, most of the things you do to it are not going to make a difference precisely because it has evolved many layers of feedback and buffering.
However, evolution leaves little holes where certain shocks can make a massive difference. That’s why you can put an animal through all kinds of physical abuse – for some worms, even chop them into pieces – they will heal and you can barely tell the difference. But, the tiniest, microscopic drop of a neuro-inhibitor will kill the whole organism within seconds.
Same thing with an economy. Smack it around. Impose a bunch of taxes. In the case of Japan, literally carpet bomb the whole thing, launch an actual nuclear strike, slaughter millions of people and annihilate the capital stock. What’s the long run effect?
Basically nothing. Within 10 years its growing at a double digit pace. Within 25 years it’s the second largest economy in the world.
However, let nominal interest rates get to zero and the whole thing keels over in a 20+ year paralysis that shows no signs of ending anytime soon.
Most things don’t matter, but some things do."

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