The document discusses why global economies have become increasingly dependent on central bank monetary stimulus to boost economic growth. It argues that a variety of imbalances, such as globalization, debt levels, environmental regulations, and aging populations, have reduced the productivity of capital. To counteract these imbalances, governments and central banks have lowered interest rates, enacted quantitative easing programs, and reduced banking regulations to increase the amount of money and credit in the economy. However, relying too heavily on monetary policy to stimulate growth risks creating larger economic distortions over the long run. Addressing the underlying imbalances through productive economic and social policies could help reduce the need for continual monetary stimulus.

1. It’s Only Money
September 2015
Just recently the Federal Reserve held off on increasing interest rates. It had been highly anticipated
that at this last Fed meeting they would finally start increasing rates. But then the Chinese stock market
tumbled, causing disruptions around the world, including in the US equities market. Fearing a rate
increase would fuel the fire of turmoil, the Fed decided to wait.
As most of us know, in recent years interest rates have dropped to historic lows in not just the US, but
also all over the world. In addition, numerous sovereign central banks have embarked on quantitative
easing programs that, to date, have injected trillions of dollars into the world’s economies. Further
supporting our economic systems during times of fragility has been more favorable bank regulatory
policy to reduce the potential of failures and/or increase the likelihood of more borrowing.
Finance always has been and always will be a service function within economy. It serves to reduce the
“friction” between economic parties, to make it easier for production and consumption activity to
happen. But when finance has become too large within an economy, it shows that we have created
imbalances in other parts of our economy.
For some reason or reasons, it seems the only way to manage through our imbalances today is
to…increase capital’s productivity. In essence, we are increasing money’s influence over economy.
How do we increase capital’s productivity? We do so by: lowering the regulatory burden on financial
institutions to make it easier for them to lend more money; by reducing interest rates to make it easier
for countries, companies and people to borrow more money; and by quantitative easing, where central
banks inject (add) more money into an economy.
Each of these tools to increase capital’s productivity has been exercised often and significantly over
the last twenty or so years, starting with Japan in the 1990s, then the US after the 2001/2002 recession
and then with increasing intensity all over the world since the 2008/2009 near global economic
meltdown.
Why has the world become so dependent on central bank efforts to continue increasing capital’s
productivity? Let’s look at the imbalances influencing our situation.
Globalization: Globalization has provided us a cornucopia of consumption choices and made many
things cheaper. But the consequence of globalization is that our global interconnectivity has made us
much more interdependent. Imbalances in other parts of the world now have a greater influence on
individual economies. In order to reduce the negative effect of imbalances in other parts of the world,
we turn to local governments to “fix” our local problems. The easiest way for governments to
counterbalance the butterfly effect of global economic risk is to increase capital’s productivity.
Innovation: The advancement of telecommunications and computer capability enabled the growth of
globalization. In addition to increasing economic contagion risk, globalization has allowed companies
to arbitrage labor costs globally, leading to jobs being exported to cheaper labor markets around the
world. Telecommunication and computer systems also seem to be replacing more and more labor with
robotic and information management systems. Job exporting and job replacement by technology have
Armchair Economics
Perspectives from an economic everyman

2. Armchair Economic Perspective
It’s Only Money
September 2015
led to wage stagnation in developed economies for several years. If wages can’t grow, then economy
needs a boost by increasing capital’s productivity.
The Euro: Whatever the motivation behind the European Union and the Euro, the result has put a
number of European countries in economic jail. A good many countries in Europe are way over
leveraged because “someone” helped them borrow more money than they could ever pay back. Poor
demographics, too much government, giant social programs all combined with too much debt will
challenge these economies for many years. With these economies stuck in the economic penalty box
for a very long time the “solution” to their woes is to increase capital’s productivity.
Too much government: Government is not production. Government is administration. Government
serves as the referee and rule-maker overseeing economy. So long as GDP is growing faster than
government, then an economy can be in relative balance. But if the cost of government grows faster
than GDP, then too much capital is being sucked out of the private sector, reducing economy’s
potential to grow. Since government never stops growing, an economy that doesn’t grow fast enough
loses more and more available capital. To counterbalance the drag of too-much-government’s need for
more and more capital, we must increase capital’s productivity.
Too many rules: Too many rules, of course, come from too much government. The more rules we
have, the more time and capital must be allocated to following those rules and reporting back to
government that we are doing so. Too many rules decrease the productivity of our private sector labor,
processes and capital. When we have too many rules reducing our productive capability, then we must
increase capital’s productivity.
Too much debt: As an economy grows debt, it is increasing the need for more capital to service that
debt. More capital used to service debt leaves less capital to create productive economic activity. Gross
debt is less important than debt to GDP. If you are growing GDP faster than debt, then you are creating
more economic value that can be used to pay interest on your growing debt. But in economies all over
the world, particularly the developed economies, debt has been growing faster than GDP. To offset this
imbalance, we must increase capital’s productivity.
Too much leisure and maintenance: Every economy can be divided into three categories: productive
activity, leisure and maintenance. It takes productive activity to be able to afford one’s leisure and
maintenance. If there’s not enough productive activity to do so, then an economy must increase
capital’s productivity in order to afford leisure and maintenance.
Environmental hysteria: All developing economies live by the saying “it is easier to ask for
forgiveness than permission.” In essence, they focus more on increasing the production of economy
and less on the waste that production creates. At some point, waste becomes so great it gets everyone’s
attention. This has already happened in developed economies like the US and Europe. It is now
happening in China. But too much focus on environment reduces economic activity. Government
requires too many “permission slips” before economic activity can take place. This reduces economic
output while driving up the cost of everything. Costs rising while incomes are stagnant produces an
imbalance. To deal with this imbalance, we must increase capital’s productivity.
Not enough personal savings: If costs are rising while incomes stagnate and if economic policy
rewards consumption over savings, then there is not enough capital in our system to put towards

3. Armchair Economic Perspective
It’s Only Money
September 2015
productive activity. Not enough savings is an imbalance that requires us to increase capital’s
productivity to fund investment.
Aging populations: Older people buy less stuff because they need less stuff. As a greater percent of
the population becomes older, consumption declines—not good for economies driven by consumption.
In addition, the more people who pass the period of their productive economic value, the more a
society must allocate capital to support them, especially if there is not enough savings. Every single
developed economy is seeing a growth in the percent of older people in their population. In order to
offset the economic drag of an aging population, we must increase capital’s productivity.
Shrinking populations: Today we have shrinking populations in Japan and certain parts of Europe. As
a population grows, an economy needs to produce more stuff—more houses, cars, telephones, TVs,
food, clothing, etc. But if a population starts to decline, all of a sudden you have too much stuff. Too
much stuff drives down the value of that stuff (deflation). If a lot of debt has been used to produce and
purchase lots of stuff and the value of that stuff declines, the result will be a banking and monetary
crisis. To prevent a such a crisis, we have to increase capital’s productivity.
Lower efficiency of capital: Developed economies are developed. This means they possess
reasonably mature infrastructure. It means that the needs required to create productive economy have
been ubiquitously met. But once infrastructure is reasonably mature, then economy has captured a
great deal of its potential productivity. Economy then shifts from providing needs to providing wants.
Wants don’t increase productivity. At the very best they maintain productivity that’s already been
captured. When we use more and more capital on wants, we are reducing capital’s productivity. To
address this decline we have to use other means to increase capital’s productivity.
The shift of compassion: In a developing economy, a population’s compassion rests with the greater
good, the effort to ensure needs are ubiquitously met within a population. But in a developed economy
where needs have already been met, then the focus of compassion shifts from the greater good to the
individual. This shift increases demands on an economy to satisfy all manner of individuals and
constituencies banging the drum of inequality. Spreading capital’s focus on a few important goals to
thousands of smaller goals reduces its productivity. To address this decline we have to use other means
to increase capital’s productivity.
As we can see, there are a great many influences that have made more and more economies dependent
on monetary stimulus. Resolving some of these imbalances can be done through more productive
economic and social policy, but it takes the will of voters and political leaders to do so. And
measurable productive change is not likely to occur over a short period of time.
So for now, we must get comfortable living with ever more and cheaper money being required to
sustain us. But the longer money remains the most important economic input, the larger our
imbalances will likely grow. We would be wise to keep in mind what a loan shark might suggest:
“You’re going to pay me now or you’re going to pay me later. But the longer you take to pay me, the
more broken bones and missing fingers you will have.”

4. Armchair Economic Perspective
It’s Only Money
September 2015
Douglas A. Leyendecker
713-862-3030
doug@armchaireco.com