It has already been a few years, but I wrote a very brief post about how the Theory of Constraints seems to hold when thinking about the economy. My point as stated was the economy seems to shamble along and grow until it hits some form of constraint.
I wasn’t very clear in the post, didn’t really go into how different constraints might work or play out within the economy.
Monetary policy is based around an entirely different view of the economy. In this view, all constraints facing the economy can be overcome or strengthened by changing the price of money. In this view, any possible constraint facing a decision to borrow money can be influenced by the price of money- in short, there is always some price at which banks will lend out there money, always some price where businesses will want to borrow money.
But this doesn’t seem to be realistic at all – many businesses will not borrow money to expand no matter what the price of money is, where real estate lending is extremely sensitive to changes in the interest rate. In addition, for many mid-sized businesses, their willingness to expand their footprint and do real estate deals is very sensitive to their medium and long term business expectations.
So we have a few constraints operating within just the realm of monetary policy operating at the micro level. Some of these roll up to the macro level and can be summed up across an economy, but there seems to be other emergent behavior for the economy as a whole which is not driven by individual businesses.
For example, people are debating negative interest rates right now. As Steve Randy Waldman pointed out, debt is the stickiest price, as it is a nominal price and doesn’t change for long periods by contract. What happens under negative rates is lenders pay borrowers to borrow money from them. You can talk around this basic fact, but in the end, you have lenders paying out money to borrowers over time.
There is no way this can make sense across an entire economy, unless there is some constraint which is outside of the normal constraints facing businesses. “Hey borrow this $10 from me, and then I’ll give you $.50 a year, and then pay me back in 5 years” is something no rational person ever thinks. People who are offered deals like this would take this deal. Bankers offering this deal would be insane.
Yet, people are not borrowing, and bankers are trying to lend at terrible rates. This means they are both insane.
In my experience, some people will act insane some of the time. But in general, bankers and entrepreneurs as a group will not act insane in their business transactions. So the constraint on lending can’t really be a constraint related to borrowing and lending money, it has to be some other part of the economy saying “No, this doesn’t work”.
Is the constraint related to balance sheet effects? Is the constraint related to lack of business prospects? In any case, we can be relatively certain there is no real level of monetary policy moves we can do which would solve the constraint.