The Price of Everything and the Value of Nothing

The title of this piece is The Price of Everything and the Value of Nothing.  The subtitle is Why Your Bread Is Going to Cost More.  I connect these two in reflecting on my recent podcast with David Collum, in which he stated that our money has no value and that this fact is distorting everything.

What he meant was, if you take your money to the bank to deposit it, the bank offers no interest on that money, implying that money has no value to them.  If they valued it or had a legitimate use for it, they would offer you something for its use.  Obviously, money doesn't have zero value to the banks; they can place it on deposit with the Fed for 0.25% yearly interest.  But by any historical measure, money has no value right now.

That's just what happens when any commodity – which money happens to be – becomes too abundant.  It drops in price.  What 0% rates on money tell us is that there's just an enormous amount of it sloshing around – and that, my dear friends, distorts everything else.

As I have said many times, when you misprice money itself, everything else becomes mispriced, too. 

When money itself is priced at zero, what sorts of effects can we predict or anticipate?  For starters, risk itself gets distorted as yield-hungry economic participants, such as retirees and pension funds, are forced to accept a choice between 1) low risk and a zero rate of return, or 2) much higher risk and a rate of return that begins to approach the rate of inflation.  Some choice.

The next effect is that those with debts who can renegotiate their loans to take advantage of the low rates on money get to pay a lot less in interest payments.  Recently I read that somewhere in the vicinity of $1 trillion in lower payments have resulted from the reduced rates.  Bernanke even noted the stimulative effect this has.

Totally ignored by Bernanke, of course, was the other side of this coin, made up of all the savers who have lost out on roughly $1 trillion in interest payments. So the net effect on the economy was zero from a stimulative standpoint.  But from a social fairness standpoint, the difference could not be more stark. 

Without consulting anyone or being debated in an open forum, the Federal Reserve unilaterally decided to transfer over a trillion dollars of spending power from savers to debtors. 

What sort of a message does that send, do you suppose?