The Subtle Tyranny of Interest Rates

Interest rates are the price of credit. They are the price of access to capital.

Now, it is obvious that pricing credit is not tyrannical in and of itself. Interest compensates a lender for default risk and the risk of inflation eroding the purchasing power of the money that they lend.

The tyranny I am getting at is subtle. It is the tyranny that Keynes pointed to when he proposed a euthanasia of the rentier. Keynes proposed that low interest rates would:

mean the euthanasia of the rentier, and, consequently, the euthanasia of the cumulative oppressive power of the capitalist to exploit the scarcity-value of capital.

Keynes pointed to an important feature of interest rates: the fact that capital has a cost is not just the result of default risk and the risk of inflation. It is also a result of the scarcity of capital.

Now, that is inevitable in a world where financial capital consists of metal that you dig up out of the ground.

But in our brave new state-backed fiat monetary system, why should capital be so scarce that those who have it can profit from its scarcity?

Obviously, central banks should not print money to the extent that it becomes worthless. But capital availability is absolutely critical to the advancement of society: the investment of capital is how societies become productive. It is how technology improves, and it is the key to wealth accumulation.

What Keynes didn’t specify was what exactly in the interest rate paid was the part that represented the “scarcity value” of capital.

Obviously, it doesn’t include the part that compensates for inflation, which is why we need to look at inflation-adjusted interest rates. And it isn’t the part that compensates for default risk. This is easily calculable too: it is the excess paid over lending to the monetary sovereign.

In the U.S. and Britain, that would be the American and British governments. In the eurozone — for complicated political reasons — there is no monetary sovereign exactly, but we might measure it by looking at it in terms of the spread against German government borrowing, because Germany seems to be the nation calling the lion’s share of the shots.

Here’s the real interest rate on U.S. 10-year government borrowing (I chose the 10-year because it is a benchmark, although I would have preferred to use a harmonized rate from across the yield curve.):


So what are we really seeing? The general trend is that real interest rates on U.S. government borrowing are overwhelmingly positive, with a few periodical exceptions where real rates on borrowing went a bit negative. This bias toward positive real interest rates on lending to the monetary sovereign, I would argue, is the rentier’s profit resulting from the scarcity of financial capital.

Year over year, that is going to compound heavily. It is these rentiers, I would argue, who should be euthanized. Not because they should be resented for doing well out of the system.  No. They should be euthanized because of the opportunity cost of devoting resources to enriching rentiers, resources that could be deployed productively elsewhere.

And how to euthanize the rentiers? Because we have identified what the rentier’s share is, the answer is very simple: making a real interest rate of zero on lending to the monetary sovereign an objective of monetary policy.

Update: After much debate, I have decided that euthanizing rentiers is not a matter for monetary policy, but a matter for fiscal policy. I have written another post discussing this.


Incomprehensible Bullshit

The mathematics professor Alan Sokal famously shamed much of the humanities profession by publishing Transgressing the Boundaries: Towards a Transformative Hermeneutics of Quantum Gravity’  — a paper intended as ambiguous gobbledegook — in the peer-reviewed postmodern cultural studies Journal Social Text in 1996.

Sokal’s paper was a cleverly and artfully constructed piece of trolling. Sokal did it by conforming to the stylistic trappings of postmodernists like Jacques Derrida, Jean Baudrillard and Luce Irigaray — mimicking their dense and obscure verbiage, misusing concepts from science like quantum gravity (of which there exists no widely accepted scientific theory), and shrouding his argument in a great deal of ambiguity. The piece described the notion of a “postmodern science”, one that discarded the notion of objective truth.

The fallout from this paper underlined the divide between science (which seeks objective truth), and postmodernism (which does not seek objective truth). But more than that, it exposed postmodernism and cultural studies as being ambiguous, self-absorbed, and incomprehensible, to the extent that its own journals were tricked into publishing an article intended as nonsense.

Yet this issue — of baffling with incomprehensible bullshit — is not just a problem in postmodernism. Mathematics recently had a Sokal moment (and frankly, it is surprising that it took this long). Via the LRB:

Last month That’s Mathematics! reported another landmark event in the history of academic publishing. A paper by Marcie Rathke of the University of Southern North Dakota at Hoople had been provisionally accepted for publication in Advances in Pure Mathematics. ‘Independent, Negative, Canonically Turing Arrows of Equations and Problems in Applied Formal PDE’ concludes:

Now unfortunately, we cannot assume that

It is difficult, as a non-specialist, to judge the weight of that ‘unfortunately’. Thankfully, the abstract is a model of concision:

Let ρ = A. Is it possible to extend isomorphisms? We show that D´ is stochastically orthogonal and trivially affine. In [10], the main result was the construction of p-Cardano, compactly Erdős, Weyl functions. This could shed important light on a conjecture of Conway–d’Alembert.

Baffled? You should be. Each of these sentences contains mathematical nouns linked by the verbs mathematicians use, but the sentences scarcely connect with each other. The paper was created using Mathgen, an online random maths paper generator. Mathgen has a set of rules that define how papers are arranged in sections and what kinds of sentence make up a section and how those sentences are made up from different categories of technical and non-technical words. It creates beautifully formatted papers with the conventional structure, complete with equations and citations but, alas, totally devoid of meaning.

So mathematicians and mathematics journals are also susceptible to being trolled by their own bullshit, their own conventions, syntax and “rigour”. If a mathematics journal and the peer-review process can be fooled by a meaningless paper spat out by a computer program, how much well-intentioned but bad or meaningless mathematics has also slipped through the peer review process?

And what about the other subjects that have adopted mathematical symbols as their lexicon, like economics?

I have written at length about some of the problems connected to the very great increase of mathematical terminology in economics — and remain highly sceptical of the use of assumptive models in economics.  The social sciences are particularly unsuited to simplified mathematical modelling — unlike the physical sciences, the phenomena they seek to explain tend to be far less linear in observable causation, and so far more susceptible to wildness. No model or theory less than reality itself can fully represent human behaviour and human action; each transaction in an economy is unique, and arises from a different set of circumstances, representing a constantly varying order of human preferences. This tendency toward nonlinear causality is why transparency is critical to bullshit detection in the social sciences. Just as a sheen of ambiguous, obscure and poorly-defined English can make theories incomprehensible and closed-off from scrutiny and understanding, so too can a sheen of obscure and specialised mathematics.

Well-written work — whether in plain language or mathematics — requires comprehensible explanations and definitions, so that a non-specialist with a moderate interest in the subject can quickly and easily grasp the gist of the concepts, the theory, the reasoning, and the predictions. Researchers can use as complex methods as they like — but if they cannot explain them clearly in plain language then there is a transparency problem. Without transparency, academia — whether cultural studies, or mathematics, or economics — has sometimes produced self-serving ambiguous sludge. Bad models and theories produce bad predictions that can inform bad policy and bad investment decisions.  It is so crucial that ideas are expressed in a comprehensible way, and that theories and the thought-process behind them are not hidden behind opaque or poorly-defined words or mathematics.