Courtesy of Hugo Salinas Price @ New Austrian.org:
Professor Antal E. Fekete has made a remarkable discovery in the field of Economics: artificially lowered interest rates – the fundamental instrument of economic intervention in all the developed countries, practiced in the US by the Federal Reserve – are detrimental to Labor, whether Manual Labor or Management Labor, i.e., detrimental to both the working class and the middle class.
So far as I know, Professor Fekete is the first thinker to point out this particular consequence of an artificially and rapidly lowered interest rate.
The “Developed World” goes along with the Keynesian proposition of lowering interest rates drastically, to juice economies that are re-adjusting to previous juicing through credit expansion not based on previous accumulated savings. Accordingly, the slowest rates of increasing employment (if indeed there is any increase at all, since the statistics are universally doctored to look good and justify Central Bank intervention) are presented by the countries of the Developed World, which are suffering incredibly low rates of interest.
On the other hand, the “Emerging Markets” which have not applied QE and suppression of the interest rate so vigorously, are showing higher rates of employment than the “Developed World”.
In a video on the Internet recently, viewers got a look at social conditions in Dhaka, the capital of Bangladesh. The number of humans is appalling. At the end of the period of fasting of Ramadan, incredible swarms of humans cram into the trains and climb up in hordes upon the roofs of the railroad cars.
The activity of boats on the massive river that goes through Dhaka is amazing; hundreds of boats are seen scampering over the river in constant activity.
There is no question of unemployment in Bangladesh, in spite of the fact that Dhaka is one of the most populated cities on the planet. Why? Because in Bangladesh, if you don’t work, you don’t eat. The economy of Bangladesh, left to itself, provides the maximum output possible for the massive population. Any intervention – and I do suppose they have some government intervention in their economy – must be minimal, because anything more than that would mean death for hundreds of thousands living at the very margin of sustainable life.
There is only one sort of economics in this world, because there is only one sort of human nature. Economics is simply one branch of the study of human nature: the study of the human being as an entity that acts, which is the same as saying that the human being chooses. Other species of living beings may exhibit a limited capacity for choosing, but the human being is entirely dependent on choosing – and making the right choices – for the sustenance of his life. The animal kingdom relies on instinct; the human being relies on his choices, which are not instinctive.
I mention this, because it appears that this fact escapes the high and mighty planners of national economies, known to us as “Keynesians”.
When the planners proceed to lower interest rates in the economy, their decision affects not just some sectors, but all the people in one way or another.
Up to now, it has not been perceived that those who are most adversely affected are those who sell their work. Some of them will be manual workers, others will be better paid employees; some of them will lose their jobs as a result of rapidly lowered interest rates effected by the diktat of the Keynesian manipulators, and others will find that their wages do not increase, but either stagnate or even fall.
We must credit Professor Fekete for discovering the reason for this phenomenon.
Enterprises engage in production by combining Capital goods with Labor.
When the interest rate is forcibly lowered, the managements of enterprises receive a signal that tells them that Capital is abundant and suddenly much easier to acquire, by means of cheaper additional debt, than previously.
The manager examines his cash flow and makes a comparison between a) the amount of his cash flow that might go to acquiring additional Capital goods through debt, to apply in production, and b) the amount of his cash flow that goes to overall Labor costs. The cash flow that goes to Labor costs has not diminished, whereas the cash flow that could be applied to obtaining Capital goods through debt is now relatively smaller. Labor has become more expensive, relative to Capital goods obtainable through debt.
The entirely natural consequence of this comparison is that management will seek to reduce relatively more expensive Labor by taking on debt to acquire Capital goods to replace overall Labor costs. In other words, the “terms of trade” for manual laborers and employees are now set up against them.
The violent reduction of the interest rate has thus caused a set of responses by management that are adverse to Labor:
1. If laborers and employees can be substituted with Capital goods financed with ultra-low interest debt in order to automate the enterprise, the marginal laborers and employees will be laid off.
2. New enterprises that cannot command debt will be at a competitive disadvantage with larger enterprises which can take on debt and reduce costs by laying off some workers and employees. Small enterprises, the backbone of the economies of the Developed Countries, are adversely affected.
3. The relatively low cost of acquiring Capital goods, by means of taking on ultra-low interest-bearing debt, leads to the installation of enterprises massively capitalized with machinery; such enterprises employ few workers and employees. Modern auto manufacturing plants are an example.
4. Further, the relatively low cash flow required to finance the use of Capital goods, leads to the installation of enterprises massively capitalized with machinery to produce the technologically advanced Capital goods now in great demand, which will be used in other enterprises to lay off or reduce the need for manual labor: the technological boom is set off and robots and computer systematizations proliferate to the detriment of marginal manual labor and employees.
5. If we consider the work of the manual laborer and the ability of the employee as the “Capital” which they offer on the market, the return on their personal “Capital” has not been reduced; therefore, the wages which they obtained before the violent reduction of the interest rate can be sustained only precariously. They face either stagnant wages, or lower wages, or unemployment. The marginal worker and the marginal employee are laid off.
6. The middle class, which has worked to accumulate sufficient Capital on which to retire, now finds that the interest on their invested Capital is now insufficient to provide sustenance; the middle class goes into debt in an attempt to maintain their standard of living. The middle class delay their retirement and younger people do not find vacancies available.
7. With income for the mass of workers and the huge middle class stagnating, consumption must fall. The vision of Henry Ford was apt, when he said that he wanted his workers to have an income that would make them able to purchase the cars they manufactured. Stagnant wages and unemployment produce stagnant consumption. Empty shopping malls.
During the Industrial Revolution in England, the “Luddites” objected to the destruction of their jobs by newly-invented machinery. However, the reorganization of production along industrial lines eventually elevated the standard of living of the English by producing masses of much cheaper goods for the population. No greater advance in general prosperity has equaled that which took place in the 19th century and which was due to the use of machinery – Capital goods – in production. This was a natural development of the economies of the nations of the West.
The arbitrary and violent reduction of interest rates by the Keynesians in charge of the Central Banks of the West is no natural development. the arbitrary interventions of the Keynesians in reducing interest rates violently has acted to the great disadvantage of the class of people who must work for wages, whether manual laborers or employees.
Neither the Keynesian at the Central Banks, which carry out the policy of reducing the interest rate in order to stimulate their economies, nor the numerous critics of Zero Interest Rate Policy have been aware of the chain of causation between ZIRP and the plight of manual labor and employees.
Professor Fekete has contributed importantly to Economics by pointing out the adverse effects of interest rate manipulation upon workers and employees.