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by Adrian Sobers
“This rap game ain’t what it seem/Artists get cream, turn fiend, selling people a dream.” – (Sunz of Man, Illusions)
What Sunz of Man said about the rap game in 1998 holds true for both the rap and retirement games in 2022.
The retirement version might read, “Politicians get cream, remain fiend, selling people a dream.” People are being sold an illusion that “ain’t what it seem”. This all reminds me of The Upside Down alternate dimension in Netflix’s Stranger Things.
The current state of our political economy is an upside down multiverse of economic madness. The destiny of this generation, more so than previous ones, will be determined in large part by demographics and discography. It is also being determined by the muddleheaded macro models of mainstream monetary authorities (and the prolonged artificial suppression of rates).
Since interest rates were too low for too long, stranger things have been happening. As economist Larry Summers asked on Twitter in 2019, will central bankers “not consider the possibility that ultra-low nominal yields might actually reduce aggregate demand while breeding financial instability, bank failure, ‘zombification’ and reduced economic dynamism?”
Monetary authorities bent over backwards trying to justify tampering the fabric of reality (yield curve). The effects of their tampering continues to hurt the most economically vulnerable. It was well said that, “Never in the field of monetary policy was so much gained by so few at the expense of so many.” (Remember that when you wonder “How tings get so dear”.)
We are literally paying the price for ignoring Nassim Taleb’s point in The Black Swan, “The economics establishment (universities, regulators, central bankers, government officials, various organizations staffed with economists) lost its legitimacy with the failure of the system in 2008. It is irresponsible and foolish to put our trust in their ability to get us out of this mess.”
Yet here we are.
Our monetary illusionists conjured up a great inflation of paper wealth. Edward Chancellor (The Price of Time) explains, “The trouble is that soaring asset prices don’t make a nation any richer. They only produce the illusion of wealth. Investors enjoy capital gains when asset prices rise, but any immediate gains are offset by lower investment returns going forward.”
After the global financial crisis, the finance sector in the U.S. economy grew to roughly three times its historic average. Practically this looks like companies using debt to buy back their shares rather than investing in real assets. As one commenter put it, “We’ve substituted finance for industry as the locomotive of economic growth. In GDP terms, it looks terrific [on paper]. But it is neither enduring nor real.”
In a word: illusion.
One of the stranger things the prolonged artificial suppression of rates gave birth to is the fallout in the pension industry. An industry that is fully (and painfully) aware of the implications of the monetary experiment. A Bank of England study found that the increase in pension deficits was due to the decline in interest rates. Mr. Chancellor explains why the pension industry is not prone to this illusion.
“Actuaries must consider the present value of a pension fund’s liabilities when assessing whether it has sufficient assets to meet its obligations. To value those pension liabilities, the actuary applies a discount rate to the plan’s expected future cash outlays. The discount rate is taken from the yield on government bonds. After the financial crisis, the decline in long-term interest rates made existing pension commitments far more expensive and, in many
cases, unaffordable.”
Two headlines from the UK’s higher education context resonate in other contexts: “Why are UK University Lecturers Going On Strike?” (Financial Times, 24 November 2019); “Thousands of UK university staff strike over pension cuts” (The Guardian, 14 February 2022). These headlines are rooted in the biggest failed monetary policy experiment in human history.
The powers that be will have a lot of angry people on their hands. And rightfully so. As economist Tyler Cowen explains, “Over the last few decades, we [central bankers and politicians really] have been conducting a large-scale social experiment with ultralow savings rates, without a strong safety net beneath the high-wire act.”
Hedge fund manager Michael Burry puts it bluntly, “The zero interest-rate policy broke the social contract for generations of hardworking Americans who saved for retirement, only to find their savings are not nearly enough.” We cannot afford to continue ignoring Taleb’s advice.
One can never be too careful in Babylon. The illusions (and outright lies). As Capleton said on These Streets Know My Name, “Babylon say independent and then pen them up.” No lies detected. Richard John Neuhaus (American Babylon) aptly described the tension faced by exiles in Babylon as “our awkward duality of citizenship”.
His reflection on the dualities we face is worth quoting in full, but having overstayed my welcome, I leave you with the latter bit.
“We are not transparent to one another. We are not transparent to ourselves. Community is communication, and our communication is clouded by deception and pretense, so that we do not know as we yearn to know, even about ourselves, what is true and what is false. We await the
One who is the truth and who promised that the truth will make us free.”
Until then, we navigate, as best we can, the Illusions of Grandeur in the upside down multiverse of economic madness, helping legitimate cases of need to the best of our ability.
Adrian Sobers is a prolific letter writer and commentator on matters of social interest.
