In 1789 Marie Antoinette said 'let them eat cake.' In 2019, the Reserve Bank tells us to eat 'cheap money.’

A piece of excrement called Adrian Orr
[pic of Herald hard copy]

Many savers live off their savings. In order to maintain their capital, many -- older, retired folk, especially -- live off the interest on their savings.

Mr. Adrian Orr has just told all those people, every single one of them, to get stuffed.

Mr. Adrian Orr is the governor of the New Zealand Reserve Bank.

This makes him, by virtue of the Official Cash Rate, which he dictates, the person who sets the level of New Zealand's interest rates.

Without any special inflationary pressure on him (controlling which purports to be the purpose of his job), Mr. Adrian Orr announced this week that he intends to savage savers. Not in those words, naturally. What he did was announce a savage and unprecedented cut to the make the OCR the lowest it has ever been in history, while telling savers to suck it up: Savers, he said, "might have to think about investing in other assets if you want to get higher than what you consider the lowest-risk nominal returns."

In other words, savers who wish to stay afloat need to seek out all those forms of risky too-good-to-be-true investments that collapsed so spectacularly just over a decade ago.

Mr Orr is considered a prudent manager of the country's interest rates.

Clearly however, by his subsequent (and frankly stupid) comments about the "need" at this dangerous time for govt spending, for greater borrowing and spending, and to flush out cash from under pillows, he is a student of John Maynard Keynes -- who famously called for interest rates to be driven to zero in order to bring about "the euthanasia of the rentier." That is, to euthanase all those folk, like all those retirees, all those rentiers, as he labelled them, who live off the interest on their savings.

In what world would you call that "prudence"?

Every student of Keynes is aware of Keynes's ambition here. Because this was not just one of My Keynes's many idle remarks. This was

a linchpin of his basic political programme, the “euthanasia of the rentier” class: that is, the state’s expanding the quantity of money enough so as to drive down the rate of interest to zero, thereby at last wiping out the hated creditors. It should be noted that Keynes did not want to wipe out investment: on the contrary, he maintained that savings and investment were separate phenomena. Thus, he could advocate driving down the rate of the interest to zero as a means of maximising investment while minimising (if not eradicating) savings.

The basic message to savers being, as from Mr Orr, to get stuffed. This cheap money policy is here to stay, Keynes wished for and Orr now seems to say, and the "class of savers" seeking should simply suck it up and get used to it. As with others, like the FT's Martin Wolf, who have similarly invoked Keynes's methodology

What makes [this] conclusion so tainted is that he understands the consequences of this policy... the ruination of people who earn interest on their savings.
    He sees the problem as insufficient aggregate demand...
    This is classic Keynesian logic: solve the problems of debt and monetary expansion by engaging in more debt and monetary expansion. With governments reluctant to expand spending further he concludes that we are stuck with the second-best solution of a cheap money policy consisting of ultra-low interest rates and quantitative easing.

Besides, as we have observed, Mr. Orr believes the cautious "rentier" no longer serves a useful purpose.

Mr. Orr's comments are of a piece with other we might declare as an "unabashed mouthpiece for the ruling power elite." Because as Mark Thornton points out about the FT's Martin Wolf when he openly advocated (in a piece titled “Wipe out Rentiers with Cheap Money,”) what Mr Orr now clearly implies:

He clearly and correctly [observes] what this policy actually accomplishes — cheap monetary policy hurts most people in the economy, particularly workers and savers and redistributes wealth to the ruling elites. The losers from easy credit policy include the broad categories of insurance, pensions, and households. This long known result was confirmed in a [2014] study ... by the McKinsey Global Institute.

    Insurance is far more important than most people think. Insurance protects us against the loss of life (life insurance), our health (medical insurance), our homes (home, flood, and fire insurance), and our vehicles (car insurance). There is also general liability insurance and various types of business insurance. Insurance companies even offer incentives to be better drivers, to maintain safer homes, and to live healthier lifestyles, and they strive to eliminate moral hazard. Insurance companies are hurt by cheap money policies because their interest return on investments are now lower than required to meet their payout obligations. This hurts the companies and their policyholders because it requires higher premiums and raises the possibility of bankrupting insurance companies.
    Pensions and retirement savings accounts are also hurt by easy credit policies. These institutions arose to address the problems associated with increased longevity brought about by increased prosperity. By saving during your working career you provide income for your retirement. Cheap money policy and low interest rates discourage saving and also makes it more difficult for pensions to earn returns on their investments necessary to make future payouts to retirees. The same is true for individuals who have retirement savings accounts.
    In order to achieve higher returns, pension funds and people saving for retirement have been forced into more risky investments. Savings accounts, money market mutual funds, certificates of deposit, and short-term government bonds earn less than 1 percent, and after taxes and inflation they are losing purchasing power. Hence, central banks have been forcing these people to invest in the stock markets and junk bonds and the possibility of large losses in the future.

This is precisely and specifically what Mr Orr demands of householders, to "stop suffering money illusion and if that's still too low a return then push your bank or investment advisers for alternatives." The unspoken adjective here being "riskier" alternatives.

    The class labeled 'households' [who are the losers here] is basically everyone except the small number of people who benefit from cheap money policy. Households are harmed in a variety of ways, including the weak job market, declining real wages, and the negative impact on savings. It has also harmed them by encouraging households to take on extremely high amounts of debt, much of which comes with much higher interest rates.

    The winners from cheap money policy are the government, large corporations, and large banks in the US. Low interest rates clearly benefit borrowers with lower interest rates and governments, banks, and corporations are the biggest borrowers. In general, artificially low interest rates benefit capital and hurt labor. Cheap money policy by central banks helps banks, like subsidized flour policies would help bakeries. Banks are also helped by most forms of government bailouts.
    The easy money policy makes it easy for large corporations to borrow large amounts of credit at very low interest rates. It also forces stock prices up as alternative forms of savings, such as certificates of deposits, yield a real negative return. It has also made it very cheap for corporations to buy back their stock and to leverage their balance sheets. The stock market bubble is the direct effect of the cheap money policy of the central bank.
    Mr. Wolf and central bankers around the world [like Mr. Orr still] have the idea that cheap money policies can increase stock prices and that this will lead to sustainable increases in investment, consumer spending, and increased aggregate demand. In reality, cheap money policies cause economic bubbles that are inherently unstable and subject to crash. It should be obvious that harming the workers and savers of society to benefit the wealthy ruling class is no way to get the economy back on track. Therefore, cheap money policy is a scam of gigantic global proportions.

    Achieving economic recovery and growth requires first knowing what caused the problem in the first place. A lack of aggregate demand is the effect, not the cause. A lack of aggregate demand is the crisis, not the cause of it. The cause of the crisis is easy money policy and runaway government spending and debt. Continued easy money policy and government spending will only make the negative consequences of the crisis even worse.
    The solution consists of: 

1. Central banks should have no monetary policy and they should not interfere with interest rates.
2. Government budgets should be balanced and reduced over time.
3. Government regulations, subsidies, and taxes should be eliminated.
4. Land, labour, and capital should be transferred from the public sector to the private sector. And,
5. Programmes that burden future generations should be ended.

The horrible irony here is that when Keynes wrote approvingly of the euthanasia of the rentier class, he was speaking of a powerful class of monopoly capitalists and aristocrats. When [Mr. Orr implies] the euthanasia of the rentier he is actually targeting insurance, pensions, and households, with a policy that has enormous financial benefits to the class of people that Keynes was targeting for extinction!
    In 1789 Marie Antoinette said 'let them eat cake.' In [2019, Mr. Orr] tells us to eat 'cheap money.'

[Note: The text quoted above comes from a 2014 post by Mark Thornton critiquing the Financial Times's Martin Wolf. That it could have been written yesterday, and directed at Adrian Orr, is reason enough to quote it in full, with permission, here.]

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