Imagine buying a washing machine for $800.  Then a month later you see Sears Roebuck advertising the same model for $400.  You know you can’t take it back.  You’ve used it.  Is the new price low enough to warrant buying another?  And if you did, what would you do with it?  In the real world when you have too much of something, you don’t want more.  But isn’t that what the Federal Reserve has been offering us?   A product we have too much of – debt - at a lowered price.  Yes, the new price helped us survive the debt crisis.  But it doesn’t help grow an economy especially when the growth issues are structural not fiscal.  By structural I’m referring to current government tax and regulatory policy.  Both are too onerous. 

Currently, there is more than $13 trillion of global government debt (German, Japanese, and Swiss) at a price of less than 0%.  Less than 0% is a first in history.  The economic rationale for this policy is that it will eventually prove stimulative as citizens are dis-incented to save and incented to spend.  But this rests on the assumption that, when it comes to money, individuals will always act in a rational way.  It is what economists – beginning with Adam Smith – have always believed and taught.  It sounds reasonable but it just isn’t true.  People are always emotional when it comes to money.  They are not rational the way economists assume them to be.  Money in our modern world is a metaphor for food.  If you have enough money you know you and your family will never go hungry.  The problem with traditional economics is that, because of this reality, the rational economic person does not exist.

Psychologists, relative recently, created a subset in economics now called Behavioral Economics.  This subset gained social legitimacy when an Israeli psychologist, Daniel Kahneman, was awarded the Nobel Prize in economics in 2002.  Behavioral Economics is now taught throughout the country at universities such as Harvard, MIT and the University of Chicago.  The underlining idea in this new form of economic thought is how a given situation is “framed” (presented) will determine human behavior.  One of my favorite examples of framing is this hypothesis put to a study group.  “Imagine you bought two tickets for a $100 each to a Broadway show.  The night of the show you park your car and walk to the theater.   On arriving, you open your wallet and discover that you have lost $200.  Would you still go to the show?”  Overwhelmingly, the response is yes.  If the question is framed by saying, “You get to the theater and discover you lost your tickets but have $200. Would you be willing to buy new tickets? “The response is overwhelmingly, no. To see the show it’s the same dollar amount but a different perception.  

This is also true of the $800 washer subsequently offered at $400 and now – let’s say - cut to $200.  Would you buy it?  If you did, you know it would be eight-ten years before you would need it.  This is roughly the economic time frame we have been in since 2008.  So in the future would you want more debt at a lower price such as 0%?  Or would you rather have structural change and the resulting growth?  After all, what really grows an economy is creating new products or services that did not exist before.

-Francis Patrick Boland