Move Over Entrepreneurs, Make Way for Speculation!

by | Sep 3, 2015

Central bank apologists assert that zero interest will help the economy. It hasn’t yet, and it never will. However, the main concern by both Fed defenders and foes alike is the worry that prices might rise. Well, prices aren’t rising now. So the former are smug and the latter are frustrated. They miss the real harm of zero interest.

Once upon a time, before banks and before even private lending, there was only one way to prepare for retirement. People had to hoard something durable. Every week, they would set aside part of their wages to buy salt (later, it was silver). Assuming it didn’t get wet, the salt accumulated until they couldn’t work any longer. Then, they would begin selling it off to buy groceries.

This was the best they could do. By modern standards, it wasn’t a very good method. Stockpiling a commodity does not finance business growth, so the hoarder contributed no capital to the economy. And, it carries a very big risk: what if you run out before you die?

The development of lending was a revolutionary breakthrough. Lending allowed the retiree to do business with the entrepreneur. The retiree has wealth, but no income. The entrepreneur is the opposite, with income but not wealth. The retiree lets the entrepreneur use his wealth, in exchange for an income. The entrepreneur is happy to pay interest, in order to grow his business and increase profits.

At times throughout the centuries, governments prohibited lending at interest. They called it a pejorative name—usury. Sometimes, people could work around the law, but when they had to obey lending ceased. No one will risk his wealth, or even forego possession of it, without getting something in return.

Today lending is not illegal, but the Fed has been driving down interest for over three decades. Its administered short-term rate is basically zero. Central bank apologists assert that this will help the economy. It hasn’t yet, and it never will. However, the main concern by both Fed defenders and foes alike is the worry that prices might rise. Well, prices aren’t rising now. So the former are smug and the latter are frustrated.

They miss the real harm of zero interest.

The Fed can force the rate to zero, but it cannot change economic law. As it chokes off interest, the sacred relationship between the saver and entrepreneur is breaking down. Lending to entrepreneurs is dying, and with it growth, opportunities, jobs, and new products. Our horribly weak economy is not in spite of the Fed’s policy. It is because of it. Leaches never cured a fever, and zero interest is not curing the global financial crisis.

If an exchange of wealth and income is not possible, what’s left? It’s replaced with the conversion of wealth to income. Move over, entrepreneur. We don’t need you anymore. Make way for the speculator. Instead of financing productive business, speculation is now the best way to make a profit.

The successful speculator receives someone else’s nest egg. He does not get this as a loan which has to be repaid. He gets it as income, as a profit on his winning trades. He can spend and consume that precious capital, something its previous owner would never do.

It’s a perverse outcome, replacing lending with speculation. However, zero interest makes it necessary, desirable, and easy to bet on asset prices. Without adequate compensation, credit flows to Treasury bonds and major corporations who are performing financial arbitrages like share buybacks. There is always a credit gradient between a large corporation and a small business. However, the lower the interest rate, the steeper the gradient becomes.

Speculation has become very desirable. People need bigger returns than they can get in normal lending. Speculation seemingly offers great returns. I don’t blame the player, I blame the Fed’s perverse game.

Speculation has become too easy. A falling yield is equivalent to rising asset prices, so speculators are simply betting on the Fed’s trend. If I had a penny for every financially unsophisticated person who earnestly told me that I don’t understand the market, well, then I would be richer than most speculators.

Whole generations now believe they will be able to speculate their way to a golden retirement. This is impossible, because they are not investing but consuming.

 

This article is from Keith Weiner’s weekly column, called The Gold Standard, at the Swiss National Bank and Swiss Franc Blog SNBCHF.com.

Keither Weiner is the founder of the Gold Standard Institute USA in Phoenix, Arizona, and CEO of precious metals fund manager Monetary Metals. He created DiamondWare, a technology company which he sold to Nortel Networks in 2008. He writes about money, credit and gold. Visit his site at monetary-metals.com

The views expressed above represent those of the author and do not necessarily represent the views of the editors and publishers of Capitalism Magazine. Capitalism Magazine sometimes publishes articles we disagree with because we think the article provides information, or a contrasting point of view, that may be of value to our readers.

4 Comments

  1. Great article.

    Raising capital is at the heart of entrepreneurial capitalism.

    As a point of interest, the Nazis forbade the loaning of money for interest – usury – being the national socialists that they were.

  2. Speculation is an honest trade. Like arbitrage, it provides a valuable service toward the efficiency of voluntary exchange. The environment described here is theft, not speculation. This “lowering of rates” is a euphemism and evasion for identifying its only possible cause: Counterfeiting.

    Again and as always, counterfeiting is not the imitation of the medium of exchange. Counterfeiting is the imitation of the productive work required to make any medium of exchange necessary at all. This easing of the rates no matter by what mechanism can only be done by introducing new currency into the existing pool of currency. This is not the exchange of value for value but instead the extraction of value by the imitation of value.

    That Aristotle correctly identifies that money was introduced naturally as the means to equalize the disproportionate value of productive work and then says that money is created by law is a contradiction. That Mises correctly identifies that money naturally came to be a medium of exchange represented by any specific species of commodites and then says that there is money by decree or money by credit is a contradiction. That Hazlitt correctly identifies that in order for money to exist, for a demand for another value to be objectified, then there first must be a supply, a value produced to bring to the exchange to represent the demand, and then to say that money can also exist by decree is a contradiction.

    The same contradiction exists here in this article. The correction is to say that Speculation which comes from money is honest and good. Speculation which comes from counterfeiting is dishonest and bad. The context of the environment is not about a conversion of wealth to income. It is about fraud and theft.

  3. Good point. However, in human action and the several other Mises works I’ve read, he seems pretty clear that the fiat money substitutes are fraud when not 100% backed by real money, and always immediately exchangeable. He points out the fraud of what governments do, but I have not read him identifying that as real money.

  4. Theory of Money and Credit. Mises categorizes three types of money: Commodity, Fiat, and Credit. Commodity-Money is a redundancy and the second two are not money, but counterfeit.
    Human Action. Mises exclaims that “Money is a medium of exchange and nothing else!” This cannot be true because counterfeit is a medium of exchange too. Therefore, money must be something else.
    Money represents productive work and it mediates the exchange of value for value.
    Counterfeit represents the imitation of productive work and it mediates the exchange of no value for value.

Submit a Comment

Your email address will not be published.

Help Capitalism Magazine get the pro-capitalist message out.

With over 9,000 articles online Capitalism Magazine is completely free. We rely on the generosity of our readers to keep us going. So if you already donate to us, thank you! And if you don’t, please consider making a donation today. One-off donations – or better yet, monthly donations – are hugely appreciated. You can find out more here. Thank you!

Pin It on Pinterest