Stealth Jubilee

Central banks have been blowing a lot of air – should I say life? – into western economies. The U.S. and European central banks have used their fiat power to print trillions of dollars and euros, bailing out the banks here, and both banks and sovereigns there.

We can call this period a jubilee. Not a party for the Queen, but rather, I mean, the Biblical, once-in-fifty-year release of debtors from their obligations. With a modern twist: this is a stealth jubilee, low-grade and gradual. Short-term interest rates are being kept at the lower bound of zero, while inflation is around 2% per year. So the real rate of return to savers, at least savers with money in the bank or Treasury Bills, is negative. They earn about zero in nominal terms, and about negative 2% after taking account of inflation. Normally, T-bills would beat inflation.

This is a slow transfer of wealth from creditors to debtors, taking place through monetary policy rather than a rewriting of contracts. In theory, the same result could be achieved legislatively or judicially. We could just keep interest rates at natural (i.e. higher) levels, and then have all creditors pay 2% of the face value of the notes and bank deposits they hold into a pool, to be distributed pro-rata to debtors.

But we are doing it by Federal Reserve policy, instead. A jubilee via committee -- the Federal Open Market Committee, to be precise.

Is our stealthy, slow-mo jubilee a good thing, or a bad thing? The degree of jubilation this policy induces for you will likely depend on your politics, and what you think the world would look like if we did not do it.

At the risk of sounding too calculating: when I am thinking as an investor, rather than as a citizen, I just take a cue from Nietzsche and regard it as beyond good and evil. Either way, it is useful to see that it is happening.