Dear friends,
It seems to me, interest rates should be a reflection of the coefficient of opportunity in an economy, not some random arbitrary level set by an elitist brainiac. Speaking of elitist brainiacs, Janet Yellen will be making her semi annual report to congress today about the Federal Reserve’s policies. She will be explaining if the Fed will continue to tighten interest rates or go back to zero interest rate policy due to the recent market rout. The rate at which a person or institution has to pay to use someone else’s money, is supposed to be a reflection of the time value, inflation, risk and opportunity value. Today that equation is totally out of whack due to the world wide recession and currency war raging across the planet.
Taken in the traditional definition of interest rates, what they really are, boiled down, are a reflection of the opportunity in a country. When the rate is set below the opportunity coefficient, the economy heats up, bubbles form and inflation ramps up. When the rate is above the coefficient of opportunity the economy goes into a slump, demand drops off, wages stagnate and if kept up long enough economic depression happens. The coefficient of opportunity however, is not dependent on the interest rate, it stands on it’s own as the measure of opportunity to make money in the free market.
The opportunity coefficient is a term I have coined to describe the opportunity in an economy. It depends on many things, the level of economic repression in the form of regulations, taxation, pernicious incentives, corruption and cronyism. You might be thinking cronyism and corruption are the same, and in one sense you are right, but in the sense I mean they are different. Corruption in this example means private corruption, the protection racket, pyramid schemes, price manipulation, monopolies, cartels, etc.. for example, while cronyism in this context is government corruption like, bribery, the need for political connections, graft, rent seeking, etc. All of the economic repression in the aggregate subtract from the opportunity coefficient.
Put in the simplest of terms, the opportunity coefficient is the ease at which someone can make money in an economy. During the early days of the US republic, the opportunity coefficient was so high labor couldn’t be found at any price. This was because there was so much opportunity for the average person to make money no one wanted to labor for another. In the early days of the republic all the dominoes lined up, virtually no corruption, cronyism, regulations, extremely low taxes and a virtuous people. The coefficient of opportunity was very high. In the years since then the elite have corroded the coefficient of opportunity to the point where even negative interest rates as in Europe and Japan are still above the coefficient of opportunity.
If the opportunity coefficient is sufficiently low a zero interest or even a negative rate doesn’t create runaway inflation. This is what is often referred to by economists as pushing on a string. An economy can be stopped in it’s tracks by increasing the interest rate but it cannot be driven to be more efficient or faster growing by lowering interest rates. That is because, while the interest rate can be arbitrarily set by bureaucrats, the opportunity coefficient cannot. Bureaucrats only lower the opportunity coefficient. The coefficient of opportunity changes over time, it was very high in the nineteen twenties and very low in the nineteen thirties. In both cases the economic policies of the government was the arbiter of the coefficient of opportunity.
So today Janet Yellen will be reporting whether or not the federal reserve will be raising the interest rate or lowering it. She won’t mention the coefficient of opportunity but she will be talking about it the whole time she speaks. The elephant in the room will be the fact that the elite, including the people she will be reporting to, have so lowered the coefficient of opportunity that even negative interest rates are above it! That means there is almost no way to make money in this market without government connections. Savers are being pummeled today, if you save money and forgo the opportunity to spend it today, suffer the reductions due to inflation and take the risk you will not be paid back, you have to pay the borrower! Entrepreneurs are being crushed, workers are seeing lower wages compared to the cost of living, investors are being scalped by high frequency trading and business people are seeing a drop in demand. The coefficient of opportunity is indeed low.
Sincerely,
John Pepin
