Borrowing by the Hour
Today, only a starry-eyed gambler will lend to the Sands Casino company for more than an hour. On the Las Vegas strip you could always find talent who rented by the hour. Now its CFOs must borrow by the hour.
Even if the Fed Funds and UK base rates scrape along near O%, commercial credit suffers. While I am concerned about people paying back current debts, I am just as worried about a refusal to loan to businesses for new endeavors. A world-class company like AT&T should not have to pay 9% to borrow when government debt earns just 3%.
I heard US House Ways and Means Chairman Charles Rangel joke that at his age (78), he doesn’t buy green bananas. Rangel is fast becoming a symbol of the entire world economy, and not just because he doesn’t understand his tax returns.
What can we do, when time horizons shrink? How can President Obama, Prime Minister Gordon Brown, the Federal Reserve, and the Bank of England (BoE) stretch them? It is damn tricky. They have two avenues. The populist route has the government simply guaranteeing private debts, paying for people’s mortgages and car loans, and even paying for unions to make cars that nobody wants to buy. While this will save some hides, it will not stir the “animal spirits” and arouse new activity.
Pigou’s Last Chance
The second avenue brings us to Arthur Cecil Pigou. Pigou has been dead 50 years, and this is his last chance.
During the Great Depression, this Cambridge professor was kicked about by his former pupil, John Maynard Keynes. To Keynes, Pigou was just another fuddy-duddy who would not revise his economic models even though Britain was being ripped apart in the economic equivalent of Gallipoli. This was trench warfare, and Pigou looked too genteel for the job.
Poor Pigou just could not rebut the dazzling intellect of Keynes, and turned into a kind of straight man for Keynes’s bon mots. Scroll ahead 75 years, and now the world is tackling a new economic monster, grown from Wall Street banks and homebuyers drunk on leverage and equipped with all the logic and foresight of a palm reader at a circus tent.
Today our headlines blare with stories about falling oil and food prices, after a blistering run-up in 2007 and the first half of 2008. Many economists warn that this could bring on a Greater Depression. After all, the world suffered slumping commodity prices then.
Pigou had another take. He argued that falling prices can make us feel wealthier. And that if, when we go shopping, we feel as if we have more buying power, consumers can lead the country out of recession. Today, you might feel a little better when you swerve into your local gasoline station and see a price starting with a US$2 instead of a US$4, for example.
Unfortunately, this “Pigou Effect” flopped in the early 1930s. Keynes declared the free market is dead, and Pigou’s theory slumped into a corner of our dusty textbooks.
But why did the Pigou Effect fail? Because central bankers yanked the electrical cord out of their printing presses and sat on their hands. The Pigou Effect basically takes the money supply and divides it by the price level. But during the 1930s, both the money supply and the price level dove into a sinkhole. In the US, the money supply sank by 30%, as 40% of banks bolted their doors shut.
Now, A.C. Pigou and Ben Bernanke have a second chance. If the Federal Reserve Board can stomp on the money supply accelerator, the Pigou fraction can climb, and the economy can find some hope. The latest readings show the US M2 money supply rising at a 13.8% pace (up from 7.7% this summer). But even more must be done, because the vicious de-leveraging among banks and hedge funds has ignited a destructive bonfire of capital.
Still, collapsing gasoline and home heating oil prices should pump over US$300 billion into the pockets of Americans, roughly US$300 per month for a typical family. In the UK, a tank of petrol costs almost £20 less than in the summer of 2008. Cheaper turkeys and chickens are flocking their way to the supermarket, too. Amazon.com keeps emailing me about “free shipping” (and all I wanted for Christmas was to clear my office of the stuff they sent free last year). Last week, I saw a burly guy outside Costco apparently trying to fold a huge bargain-priced flat-screen TV into the back of his Toyota Prius.