One of our first posts, published Sept. 9, 2010, was, “What do words mean?” We’ve just learned two new ones and our translation will help you, we hope, get through the gobbledegook of the Bernank and other central bankers.
We had this insight while browsing the website of the Bank for International Settlements, the BIS, here.
Hat tip for the illustration above to http://www.gonzotimes.com, a wordy website that appears to be written by anarcho-communists, but we could be wrong.
We wrote a paper on this bank back in 1971 or 1972 while finishing up our degree at Michigan State University. We got to choose our own topic for the paper, to our delight and the professor’s astonishment that a student had even heard of the little-known, but key institution with a fascinating history. The course was International Economics. Great topic, no?
The function and structure of the Basel, CH-based BIS has changed significantly, but they still publish fabulous stuff, kind of like the St. Louis Fed used to do.
The present enlightening find at the BIS website was in a paper presented just this year by an official of the Swiss National Bank discussing global and Swiss economies. In his discussion of macroeconomic theory (he doesn’t say whose theory), he identifies “…two key variables, the interest rate and output (or GDP). Economic equilibrium is represented by the intersection of the IS and LM curves. The first corresponds to the interest rate and GDP levels that balance savings and investment…”
We’ll omit the LM curve for now, but the IS is based on government central banking activity. Savings means what normal people mean by the word, but investment means debt!
Debt and interest rates run counter to each other – more debt runs up interest rates. More money runs interest rates down. That’s where the Fed is right now. The Bernank is flooding the market (not the economy) with liquidity, or money, to allow debt to rise while keeping interest rates down.
We know that when US government people talk about investment they mean government spending on salaries and public infrastructure like roads, bridges, government buildings, etc. Today, the word is synonymous with debt. Maybe it always has been, since most infrastructure is paid for by selling bonds, i.e., public debt.
We’ll post a Part 3 if we run across any more new meanings for old words in this paper. It’s a tough slog, but we’re doing it for you, dear readers, and for ourselves.